Gwinnutt v George: vesting of non-contractual

fees of bankrupt barristers

Claire Staddon

[2019] EWCA Civ 656

Court of Appeal

Newey, Singh, Baker LJJ

12th April 2019

Despite the “impressive and erudite judgment” of His Honour Judge Davis-White below, the Court of Appeal upheld this appeal on the basis that bankrupt barristers’ fees arising pursuant to an honorarium rather than pursuant to a contract vest in their trustee in bankruptcy as “property” within the meaning of section 436 of the Insolvency Act 1986. The issue The Court of Appeal was concerned with the following preliminary issue: "whether any expectation of the First Defendant to receive fees arising out of work carried out by him on a non-contractual basis before his bankruptcy ('Pre-Bankruptcy Work'), or any

Insolvency View June 2019

INSOLVENCY VIEW

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Contents

p1 Gwinnutt v George: vesting

of non-contractual fees of

bankrupt barristers

Claire Staddon

p3 Hunt v Winkler: trustees-in-

bankruptcy and default

costs

James Davies

p5 Re Bailey (as foreign

representatives of Sturgeon

Central Asia Balanced Fund

Ltd): foreign winding-up of a

solvent company recognised

under CBIR

Kristina Lukacova

p6 Green v SCL Group Ltd:

data, insolvency, and

Cambridge Analytica

James McKean

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payment received by the First Defendant after the date of his bankruptcy in respect of Pre-Contractual Work, automatically vests in his trustee in bankruptcy pursuant to s.306 IA 86". Background At the date of his bankruptcy a barrister had unpaid fees outstanding for work already completed, most of which had been expressly carried out on a non-contractual, honorarium basis. His trustee in bankruptcy, having learnt that some such outstanding fees had subsequently been paid to the barrister and not accounted for to the trustee, commenced claims against the barrister and the practice manager of the chambers from which he practised, seeking to recover the outstanding fees. The claims were defended on the basis that, given that the barrister had no contractual entitlement to receive the fees, there was no “property” relating to such fees within the following definition in section 436:

"'property' includes money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property".

Accordingly there was nothing to form part of the "bankrupt's estate" within the relevant part of the definition in section 283(1), namely, "all property belonging to or vested in the bankrupt at the commencement of the bankruptcy" which could vest in the trustee pursuant to section 306 of the 1986 Act.

Court of Appeal’s reasoning Newey LJ, with whom the rest of the Court

agreed, found the following factors material: The mere fact that a barrister could not sue

for non-contractual fees was far from determinative.

The fact that something can be realised or

turned to account does not invariably make it “property”, but seemed to point in that direction.

"Property" is explained in the widest of

terms in section 436 but even that definition is inclusive rather than comprehensive.

"Property" goes far beyond choses in action

and the mere fact that you cannot sue for a thing does not make it not “property".

Barristers’ expectation of payment of their

outstanding fees is not founded on mere hope or morality but reflects the unique nature of non-contractual barristers' fees.

The law recognises that, notwithstanding

the absence of a contract, payment of an outstanding fee is not to be regarded as voluntary. The practical reality is that, even before 2013 (when barristers were allowed to decline to accept instructions other than on standard terms of work), a solicitor would consider that there was more than just a moral obligation to pay a fee and, sooner or later, would nearly always pay.

Although they could not bring legal

proceedings, barristers could if necessary invoke the Bar Council's "Withdrawal of Credit Scheme".

A solicitor's failure to pay a fee could

potentially amount to professional misconduct.

If counsel has not been paid in advance and

the solicitor has not been put in funds and the lay client refuses to pay, it is true that counsel cannot sue; but the solicitor can -

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Insolvency View June 2019

per Salmon LJ in Rondel v Worsley [1967] 1 QB 443 , at 521-522.

Where counsel’s fees are as yet unpaid

and there is no contract between solicitor and barrister, the absence of contractual liability to the barrister should not be thought to mean that the client can revoke the solicitor's authority to pay the fees and deny any liability in respect of them. The lay client could not revoke the solicitor's authority to pay counsel's fees and that the solicitor could claim reimbursement in that respect. It was still "proper” for a solicitor “to discharge” a barrister's fee “even though it could not be legally enforced" (the Court using words from Bowstead & Reynolds on Agency (at paragraph 10-010)), and there continued to be imperatives requiring the solicitor to do so.

Finally, it would be entirely anomalous if

barristers' fees were not viewed as "property". Were any other professionals to become bankrupt, their aged debt would vest in their trustee, and so should a barrister's. The statutory objective is that subject to certain specific exceptions, all a debtor's property capable of realisation should be vested in the trustee for the trustee to realise and distribute the proceeds among the creditors. And unpaid fees, regardless of whether they are contractual, are capable of realisation.

Conclusion In the circumstances, a barrister's fees, even when non-contractual, were held to be "property" for the purposes of the 1986 Act and so vest in the trustee in bankruptcy. Ramifications In successive bankruptcy and insolvency statutes the definition of “property” has been progressively extended. Although barristers' non-contractual fees were here noted to be of a highly unusual character and unique in nature, so the decision was to that extent fact-

specific, the Court of Appeal’s conclusions may be more generally indicative of a wider approach to future questions of what vests in trustees in bankruptcy. A further issue in the case concerned Article 1 of the First Protocol to the European Convention on Human Rights, guaranteeing the right to peaceful enjoyment of possessions and protecting not only property rights in the conventional sense but also “legitimate expectations”. Singh LJ alone mentioned what he regarded as a potentially important issue of human rights law, namely that there is thus no dichotomy between insolvency law and human rights law and it was at least strongly arguable that a barrister's aged debts before 2013 should be regarded as legitimate expectations even if there was strictly no legal right to them. The human rights aspect not having not been fully argued, it has been left for another day.

Hunt v Winkler: trustees-in-bankruptcy and default costs

James Davies [2019] EWHC 931 (Ch) High Court of Justice Chancery Division David Halpern QC (Sitting as a Deputy Judge of the Chancery Division) 26th March 2019

The Trustee had commenced proceedings in 2012 which came to trial in 2016. The Respondent had not attended. It had been ordered that she held shares in a company on trust initially for the bankrupt and thereafter for his Trustee. The Trustee then commenced detailed assessment procedures, serving two bills of costs, one against the Respondent as trustee and one against her in a personal capacity. The Trustee obtained default costs certificates.

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Insolvency View June 2019

The Respondent issued an application which was heard on 12 April 2018. She applied to set aside the order that was made at trial but that application was dismissed. She also applied to set aside the default costs certificates. The only ground on which she had succeeded was that there had been double counting. It had only become apparent to the judge hearing that application, and counsel for the Trustee, that the double-charging point was being taken at the hearing. Counsel for the Trustee accepted that there was double-counting but that it was not possible to quantify at that stage. The judge went on set aside one of the default costs certificates in order that it could be assessed to ensure there was no double-counting. The Trustee’s solicitors then served a notice of intention to commence a detailed assessment. The Respondent sought an extension of time from the Trustee for filing points of dispute which was refused. It was then, in September 2018, that the Trustee’s solicitors raised making an application under CPR 3.1(7). The Respondent’s solicitors managed to file the points within time in any event. The Trustee’s application under 3.1(7) was issued in January 2019 and came before David Halpern QC. It was by then clear and accepted that in fact there was no double-counting. The Respondent’s counsel stated

that the bills had been prepared in a very confusing way, and this was not seriously challenged. The court’s approach to the application under CPR 3.1(7) applied Tibbles v SIG Plc [2012] 1 WLR 2591. The court’s discretion on such an application would only be appropriately exercised where either i) there had been a material change in circumstances or ii) where the facts on which the original decision was based had been (innocently or otherwise) misstated. It was only ii) which was relevant to the application before the court. Tibbles also stressed that the interests of justice and finality of court orders required something out of the ordinary to justify the exercising its discretion. The Judge concluded that the April 2018 judgment was an interim order and that the original judge had been unintentionally misled. This established that the court had jurisdiction under 3.1(7) but there remained the “very heavy burden” on the Trustee, as the applicant. It weighed in favour of the application that the Judge would not have made the order had he not been unintentionally misled. That misleading had arisen, in good faith, from the Respondent. However, there was also fault on the Trustee in drawing the bill in such a way that it was confusing and accepting an element of double-counting when an adjournment could have been sought. More seriously there was no explanation for delay in making the application, firstly in respect of the period to September 2018 and then from September 2018 until the application was made. The judge identified an element of gamesmanship in the Trustee’s approach. The Trustee had refused an extension of time and then, on realising the time limit would be complied with, said that an application would be made under 3.1(7). The Judge also referred to the overriding objective. In particular the application was

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disproportionate in circumstances where the Trustee had already recommenced detailed assessment. It had caused considerable delay and further expense and taken up the best part of a court day. The Trustee’s application was dismissed. The decision highlights a number of practical issues for office holders, both generally under 3.1(7) and in the specific context of costs. CPR 3.1(7) carries a high burden. An office holder seeking to rely on it will need to set out a clear case which takes the situation away from the normal. Any delay in pursuing the application will need to be convincingly explained in the evidence in support. The failure to address it may be fatal to an application. In particular, where the application relies on change in circumstances or the fact that the court was misled, an explanation of when the change occurred or how the error came to light, why it could not have been anticipated or detected earlier, would assist. If there was a need to take advice, or to consult creditors, this should be explained and related to any delay. The approach which office holders take to a case or application may change over time. The office holder should consider whether those changes need to be explained and justified to avoid suggestions of gamesmanship, or to justify any delay. The principle of finality carries considerable weight with the court and there may be a point where delay simply will not be able to be justified to the court’s satisfaction. It is not uncommon in insolvency applications for a respondent to be a party in a representative capacity or for there to be multiple respondents. Clarity as to how costs have been allocated, and duplication avoided, is essential at all stages in the assessment process. It will maximise the potential recoveries on assessment and counter the frequently made complaint of duplication.

Re Bailey (as foreign representatives of Sturgeon Central Asia Balanced Fund Ltd): foreign winding-up of a solvent company recognised under CBIR Kristina Lukacova

[2019] EWHC 1215 (Ch) In the High Court of Justice Business and Property Courts Insolvency and Companies List (ChD) Falk J 17 May 2019

Solvency of a foreign company wound up on just and equitable grounds was held to be no bar to recognition under CBIR. Background Sturgeon Central Asia Balanced Fund Ltd (“the Company”) was incorporated in Bermuda. One of its shareholders successfully petitioned for the Company’s winding up on just and equitable grounds under s.161 of the Bermuda Companies Act 1981 (“BCA 1981”). The winding-up order was made on the basis that various events had led to a justifiable lack of confidence in the management of the Company’s affairs. It was never suggested that the Company was insolvent. The (provisional) liquidators of the Company sought recognition of the Company’s liquidation as a “foreign main proceeding” under the Cross-Border Insolvency Regulations 2006 (“CBIR”). The key issue was whether the Bermudian winding up procedure was a “foreign proceeding” for the purposes of CBIR, i.e. “a collective judicial or administrative proceeding in a foreign State, including an interim proceeding, pursuant to a

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law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganisation or liquidation.” (Schedule 1, Art. 2(i) CBIR) Decision The Court noted that one of the aims of the Model Law on Cross-Border Insolvency, to which CBIR gives effect, was to develop streamlined procedures conducive to prompt resolution of applications for recognition of foreign proceedings. The Court further noted that, in the context of businesses which are said to be financially troubled, recognition is not prevented by the fact that the recognising court does not know whether the business is in fact insolvent (for instance where there has not yet been a finding about the entity’s financial position in the foreign State at the time when recognition is sough). The Court held that s.161 BCA 1981 qualifies as “a law relating to insolvency”. A winding up on just and equitable basis plainly qualifies for recognition where the entity in question is insolvent, and the Court said that it would be “artificial, and quite wrong, to distinguish between [...] different reasons why a winding up order might be ordered on just and equitable grounds”. To do so would involve the sort of factual enquiry during the recognition process which the Model Law is intended to avoid. The Court then considered the other requirements of a “foreign proceeding” and held that these were also met. The proceedings were collective (i.e. they dealt with creditors generally), judicial/administrative in nature, the assets and affairs of the Company were subject to control or supervision of the foreign court, and the process was for the purpose of reorganisation or liquidation. Accordingly, the Court granted recognition of the winding up proceedings in Bermuda as a foreign main proceeding.

Green v SCL Group Ltd: data, insolvency, and Cambridge Analytica James McKean

[2019] EWHC 954 (Ch) High Court of Justice Business and Property Courts of England and Wales Insolvency and Companies List Norris J 17th April 2019

In the aftermath of the Cambridge Analytica data-harvesting scandal, the associated corporate group (‘the Companies’) entered administration. However, trading proved to be impossible, as the Information Commissioners’ Office (‘the ICO’) had seized servers and laptops belonging to the Companies, on suspicion of breach of data protection laws. Mr Green and Mr Newman (‘the Administrators’) moved to be appointed the Companies’ liquidators. One dissatisfied (and in part crowd-funded) creditor opposed their appointment. A number of complaints were raised and rejected by Norris J. Particularly interesting is how the Administrators’ use of data and interaction with the ICO was assessed. Facts The creditor, David Carroll, was an American professor with expertise in online behavioural advertising. It is fair to say that he was no ordinary litigant, being a campaigner ‘to establish the principle that companies cannot use personal data in any way they see fit’ [paragraph 15]. In January 2017, he submitted a Subject Access Request to one of the Companies, demanding to know whether it held his data, and on what basis. This request escalated into a compensation claim for

Insolvency View June 2019

exceptional case) he or she is not before appointment bound to seek out every piece of litigation in which the company is involved and to consider the impact of a statutory moratorium upon it’ [41].

Equally, the Administrators’ failure initially to mention that their pre-appointment fees had been underwritten by the Companies’ holding company was a ‘misjudgement’ but not a failure of candour [44 – 45]. Professional incompetence It was also suggested that the Administrators, in certifying that there was a reasonable prospect of achieving the purpose of the administration, were incompetent. Although this argument had ‘some weight’, Norris J warned against the danger of hindsight and found that the Administrators were entitled to their view that putting the Companies into administration had a reasonable prospect of offering a better return to creditors than liquidation, that view not being perverse, irrational, or outside the range of views a reasonably competent office-holder might take [48 – 52]. Bias against Professor Carroll Professor Carroll further accused the Administrators of bias towards him. One ground was that they had failed to provide him with documents from the Companies’ administration application. Professor Carroll, as an unsecured creditor, compared his position to that of a respondent in a without notice application. Yet, importantly he had made no offer to pay the reasonable costs of satisfying the request (and so threw that burden onto the general body of creditors)’ [54]. The Administrators had to ‘balance the need to proceed with the administration in the interests of creditors as a whole against the desirability of responding to legitimate enquiries from individual creditors’ [55]. In practice, this meant that they should have provided Professor Carroll with pre-appointment certificates, estimated

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breach of the Data Protection Act 1998, tortious misuse of information, and breach of confidence. The Companies had access to ‘some 700 terabytes of data (the equivalent of 52 billion pages of information)’ [3]. The use of this data to target adverts, and particularly political messages, was a subject of controversy that hit fever-pitch in March 2018 [7]. The ICO then raided the Companies [8]. Administration applications came before Hildyard J in a two-day hearing in May 2018. The (proposed) Administrators sought appointment on the basis that urgent action might salvage the business, which possessed intellectual property of some value. With hesitation, the Court decided the balance came down ‘just’ for administration over liquidation [25]. Soon after appointment, the Administrators realised that the Companies could not trade without access to the servers that had been seized by the ICO, and that immediate liquidation presented a better return than administration [28]. The Administrators now sought to be appointed liquidators. It was their suitability for office which Professor Carroll opposed. Lack of candour Professor Carroll’s first objection was that the Administrators had failed in their duty of candour when applying to Hildyard J to be appointed as administrators. They had not informed the Judge of Professor Carroll’s claim against one of the Companies. Although the Administrators were unaware the claim existed, Professor Carroll’s counsel tried to draw a parallel with ex parte injunction proceedings and alleged a duty to make reasonable inquiries. Norris J rejected this; a proposed administrator was:

‘under no duty to make himself as fully informed about the company's general affairs as is the applicant for the order. In general (there is always the possibility of an

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outcome statements, and their counsel’s skeleton arguments, this being easy and cheap to do. They did not, which was ‘plainly wrong’ but did not amount to bias [56]. The Administrators were also within their rights to describe Professor Carroll as a contingent creditor, and in so doing they did not belittle his claim [89]. Data protection Professor Carroll alleged implicitly a general duty incumbent on the Administrators to ‘investigate "data breaches" occurring before their appointment’. This was rejected; an administrator’s duty was achieving the objects of the administration as effectively as possible, not ‘investigating the company’s compliance with data protection laws’ [62]. An administrator would need to investigate potential breaches by the directors to the company or creditors, but breaches to third parties were a matter for external regulators. If external regulators did investigate, they would have to assist, insofar as this did not interfere with the administration [63 – 64]. Norris J also considered the Administrators’ response to a notice served by the ICO on one of the Companies requiring better answers to Professor Carroll’s questions about data compliance (‘the Enforcement Notice’). It was established in Re Southern Pacific Personal Loans Ltd [2014] Ch 426 ‘that where a company holds and processes data then it is the company alone (and not the company and its directors together) which is the data controller’ [71]. The Administrators therefore took the view that they were not data controllers, and that the cost of the company complying with the Enforcement Notice would be disproportionate and damage the interests of creditors. Although Norris J felt the Administrators were entitled to act as they did, they had asked the wrong question. They had asked themselves how, as administrators, they should meet their obligations under the Enforcement Notice.

The correct question was: ‘What does [the company] have to do to meet its obligations under the Enforcement Notice? What can we, within our powers of management as administrators, do to enable [the company] to meet those obligations? Is it in the interests of the creditors as a whole that we should bring about those actions?’ [73]. Practical implications This decision contains a fairly exhaustive ‘check-list’ of the varied and sometimes creative complaints that might be made against an administrator. Anyone considering such a claim might have recourse to it for inspiration, and equally, an administrator will see useful guidance as to the proper response. But it is in its discussion of data protection that Norris J’s judgment is particularly distinctive. The Cambridge Analytica scandal, like all good scandals1, has done its bit to develop the law of insolvency. The data protection issues raised were ‘a novel situation in a developing area of the law’ [78]. Norris J’s guidance is to be added to Re Southern Pacific Personal Loans as required reading for any insolvency practitioner facing claims involving data protection, the GDPR, or the ICO. Undoubtedly, there is a whole body of law here that is only starting to be fleshed out. The principle laid down by Norris J seems an eminently sensible first step into that void. Administrators are not substitutes for regulators nor are they public guardians of data. Their governing principle is ‘more prosaic’ [78]: the interests of creditors and the objects of the administration. A commercial decision to advance those interests may well justify a company’s non-compliance with the data protection régime.

_____________________________________ 1 South Sea Bubble, Railway Mania, Barings, Madoff, Lehman Brothers, BHS…

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