Norglen Ltd v Reeds Rains Prudential Ltd
| Jurisdiction | UK Non-devolved |
| Judge | LORD BROWNE-WILKINSON,LORD LLOYD OF BERWICK,LORD NOLAN,LORD HOFFMANN,LORD CLYDE |
| Judgment Date | 27 November 1997 |
| Judgment citation (vLex) | [1997] UKHL J1127-2 |
| Date | 27 November 1997 |
| Court | House of Lords |
and Another
and Others (A.P.) (In Liquidation)
and Others
[1997] UKHL J1127-2
Lord Browne Wilkinson
Lord Lloyd of Berwick
Lord Nolan
Lord Hoffmann
Lord Clyde
HOUSE OF LORDS
My Lords,
I have had the advantage of reading in draft the speech to be delivered by my noble and learned friend, Lord Hoffmann. For the reasons which he gives, I would dismiss both of these appeals.
My Lords,
I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Hoffmann. For the reasons he has given, I would dismiss these appeals.
My Lords,
I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Hoffmann. For the reasons he gives, I would dismiss these appeals.
My Lords,
1. Companies and legal aid
The cost of obtaining justice in England, only too often prohibitive, is a current social problem which goes to the roots of civil society. The provision of a system of justice to resolve disputes between citizens is one of the most ancient and important duties of the state. But the cost of litigation is today so high that the majority of people are in practice unable to seek redress for the wrongs they have suffered. This applies not only to individuals but also to companies with modest resources. The position of a defendant, particularly when opposed by a legally aided or impecunious plaintiff, is equally unenviable. These two appeals both concern companies which went into insolvent liquidation while pursuing claims in legal proceedings and could not afford to continue. Individuals who lack means are in principle entitled to legal aid. But since its inception in 1949, the legal aid scheme has altogether excluded companies from its scope. Section 2 of the Legal Aid and Advice Act 1949 said that legal aid was to be available to "any person whose disposable income does not exceed four hundred and twenty pounds a year." (The limit is now set by regulations made under section 34 of the Legal Aid Act 1988.) But section 17(1) of the Act of 1949 provides:
"The expression 'person' does not include a body of persons corporate or incorporate so as to authorise legal aid or advice to be given to such a body."
That remains the position today: see section 2(10) of the Legal Aid Act 1988.
2. The two cases
I start by summarising the history of the two cases.
Mr. and Mrs. Rodgers and Mrs. Rodgers's parents, Mr. and Mrs. Franks, acquired Norglen Ltd. as an off-the-shelf company in 1984. It was capitalised at £1,000, at first shared equally between the Rodgers and the Franks and later transferred to Mr. and Mrs. Rodgers in equal shares. The sole purpose of the company was to undertake a single speculation in property. It has not otherwise traded. With the aid of a loan from a bank it bought a large house near Manchester Airport called Heald Green House, together with some surrounding land, for £65,000. It then converted the property into 12 self-contained flats and sold them on long leases. The venture was not a great success. The cost of the land and conversion was about £783,000 and the sale of the flats brought in £726,000. This left the company owing some debts, including £80,000 to the Manchester City Council by way of repayment of building grants, but without any assets except the retained freehold of Heald Green House, subject to the leases, and about 1.8 acres of surrounding land which was surplus to needs.
Mr. Rodgers instructed Prudential Property Services ("Prudential") advise him on the prospects of obtaining planning permission for the development of the surplus land, a matter which was critical to its value, and to act as sole selling agents. The director of Prudential with whom he dealt was a Mr. Jonathan Sharp. Mr. Rodgers says that Mr. Sharp told him that the prospects of obtaining planning permission were remote and introduced him to a Mr. Richardson, who said he wanted to use the land to graze his children's ponies. Mr. Richardson offered £10,000 for the land with a covenant not to erect any structure on the land without the consent of Norglen, as owners of the freehold of Heald Green House, but subject to a right to the release of the covenant on payment of a third of the increased value if planning permission for development was obtained at any future date. Mr. Rodgers says that on the advice of Mr. Sharp he accepted this offer and sold the land to Mr. Richardson on 12 May 1988.
Mr. Richardson immediately transferred the land to Metier Property Holdings Ltd. ("Metier"), a company which he controlled and which was engaged in putting together a large-scale development on adjoining land later acquired from the Manchester City Council for £400,000 an acre. Mr. Rodgers says that Norglen was the victim of a fraud to which Mr. Sharp and Mr. Richardson were parties. He claims that they told him lies about the potential use and value of the land. He says that in fact, whether itself developed or not, it was valuable as giving access to the proposed development site. In November 1991 Norglen commenced proceedings against Prudential, Mr. Sharp, Mr. Richardson and Metier, claiming rescission of the sale of the land and damages for fraudulent misrepresentation and conspiracy. The allegations are strenuously denied but there is no suggestion that the action is not brought in good faith.
In May 1992 the defendants applied to for an order that Norglen give security for costs. On 9 October 1992 District Judge Fish held that the defendants were entitled to security under section 726 of the Companies Act 1985, but ordered that it should take the form of an undertaking by Mr. and Mrs. Rodgers to be personally liable for any costs of the defendants which the company might be ordered to pay. The defendants appealed, saying that the assets of Mr. and Mrs. Rodgers were insufficient to constitute adequate security. But before the appeal was heard, Norglen was compulsorily wound up on a creditor's petition. After a meeting of creditors, Norglen acting by its liquidator assigned to Mr. Rodgers the legal and beneficial interest in the company's cause of action against the defendants. The consideration was an undertaking to apply the proceeds of the action to paying the company's creditors and the costs of the liquidation and then accounting to the company for half the balance.
Mr. Rodgers applied for and was granted legal aid to apply to be substituted as plaintiff instead of Norglen and, if successful, to prosecute the action. His summons came before Morritt J. at the same time as the defendant's appeal against the order for security made by the District Judge. The judge held, following the decision of the Court of Appeal in Advanced Technology Structures Ltd. v. Cray Valley Products Ltd. [1993] B.C.L.C. 723, that the assignment of the cause of action should not be recognised or given effect because it was a "sham," on the ground that the sole or main purpose of the assignment was to enable the action to be carried on for the benefit of the company with the legal aid available to Mr. and Mrs. Rodgers as individuals. The application for substitution was therefore dismissed and the learned judge went on to allow the defendants' appeal against the security for costs order and ordered Norglen to provide security in a total sum of £74,000. The question of whether Norglen could provide this sum was complicated by the fact that on 7 June 1989 Norglen had purported to transfer its only asset, the freehold of Heald Green House with the benefit of the restrictive covenant over the land sold to Mr. Richardson, to Mrs. Rodgers. At the suggestion of the learned judge, Mrs. Rodgers executed a declaration that she held the property in trust for Norglen and Mr. Rodgers executed an assignment of the cause of action to himself and Mrs. Rodgers jointly. On the basis that Norglen was beneficial owner of the land and covenant, he found that it had substantial value (figures in the region of £200,000 had been mentioned) and that the order for security would not necessarily stifle the action.
Norglen appealed to the Court of Appeal (Sir Thomas Bingham M.R., Hobhouse and Aldous L.JJ) which allowed its appeal and made the order substituting Mr. and Mrs. Rodgers as plaintiffs. It distinguished the Advanced Technology Structures case on its facts and held that an assignment of a cause of action was not invalid solely on the ground that its purpose was to enable the action to be prosecuted on terms that the company would benefit from success. The court also held that there was no jurisdiction to make an order for security for costs against Mr. and Mrs. Rodgers and that it would not in the circumstances be right to make an order against Norglen, which was dropping out of the action. Against these orders the defendants appeal to your Lordships' House.
(b) Circuit Systems Ltd. v. Zuken-Redac (U.K.) Ltd.
I can deal more shortly with these proceedings, since the only point at issue is the validity of the assignment by the plaintiff company to its former managing director, Mr. Basten. The company was formed by Mr. Basten in 1983 to carry on the business of designing and supplying printed circuit boards. It used computer aided design hardware and software supplied by the defendant company, then known as Racal-Redac (U.K.) Ltd ("Racal"). After being modestly profitable until 1985, the company suffered heavy losses and in 1988 ceased to trade. Mr. Basten says...
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