Money spinner

Behind an individual's bankruptcy often lies a personal tragedy. Television and radio adverts promising an easy route to a debt-free future in one year are frequent in these hard times. The same advertising break may also feature the much parodied adverts encouraging those who have 'suffered an injury which wasn't their fault' to seek compensation.

People who are short of funds as a result of an injury may well find themselves falling into the target audience of both advertisers. However, potential claimants may not know that by using bankruptcy as a means to become debt free, they may find themselves (largely) 'compensation free' as well.

Effect of bankruptcy

A claim for personal injury is a cause of action which forms part of a bankrupt's estate (see sections 283 and 436 of the Insolvency Act 1986 (IA)). For the purposes of bankruptcy and personal injury claims, causes of action can be divided into three different types:

• Purely personal claims '“ such asdefamation or general damages for pain, suffering and loss of amenity. These remain vested in the bankrupt.
• Claims for purely financial losses '“ such as special damages or breach of contract. These form part of the bankrupt's estate which vest in the trustee in bankruptcy (TIB) as soon as his appointment takes effect (see sections 293 and 306 IA).
• Hybrid claims '“ where a claim involves a mix of personal and financial elements.

Almost all personal injury claims fall into the hybrid category. The ramifications of this are significant. Like financial claims, hybrid claims vest in the TIB. The practical effect is that a bankrupt claimant who tries to sue on a hybrid claim is likely to be met with the argument that he has nothing to sue on '“ the right to sue belongs to the TIB once his appointment takes effect. If the claimant wishes to recover damages for a hybrid claim, the cooperation of a TIB will therefore be needed.

If the hybrid claim settles or judgment is obtained, any damages recovered for personal claims (either by way of compromise or judgment) are held by the TIB under a constructive trust for personal benefit of the bankrupt. All other sums recovered form part of the estate that is made available for the benefit of the bankrupt's creditors.

This result follows from the fact that the claim for personal injury is a single cause of action. In Ord v Upton [2000] Ch 352 Aldous LJ said, perhaps optimistically, that the law could deal with any 'practical difficulties' this gave rise to by pointing out that a TIB who did not wish to pursue a claim could assign the cause of action back to a claim.

Obtaining a discharge from bankruptcy does not re-vest the cause of action back in the bankrupt. If a hybrid claim is brought by the claimant before the TIB assigning the claim, it will be prone to being struck out as an abuse of proceeding.

Pickthall v Hill Dickinson LLP and Ors [2009] EWCA Civ 54 is a recent example. Mr Pickthall was aware that his hybrid claim vested in the TIB, after receiving counsel's advice that he would need an assignment. Nonetheless he issued the claim and began proceedings.

The Court of Appeal struck his claim out as an abuse. Mann J said: 'In the present case the claimant is the wrong person to assert the cause of action, and knows that he is. The proceedings could immediately be subject to an irresistible application to strike out, precisely for that reason. If those are the only facts, the conclusion that the proceedings are an abuse is inevitable.'

Remedies

The claimant's knowledge may be important. Mann J said: 'The position would be likely to be otherwise if the claimant does not know, or is uncertain, as to whether he has title to the relevant cause of action. In those circumstances, at least until it is authoritatively determined that the claimant does not own the cause of action, it may well not be appropriate to characterise the proceedings as an abuse.'

Exactly how far Mann J's obiter comments in Pickthall can be taken is not yet clear. There is a potential argument that, for example, a claim started in ignorance of the effect of bankruptcy might lead to service being validly affected within time, so that a claimant and/or the TIB should be allowed to continue the claim, using CPR 19.2(4).

On a strict legal analysis it is hard to see why the legally ignorant should be better protected than the informed, but, as set out below, courts have shown a tendency to be more flexible where genuine injustice, rather than 'flouting', is perceived.

What about a claimant who, on becoming bankrupt, is willing to forego any claim for financial loss? In Khan v Trident Safeguards Ltd [2004] EWCA Civ 624, an order was made declaring the claimant bankrupt. Mr Khan duly limited his claim in the employment tribunal to one for a declaration of discriminatory conduct on the grounds of race and compensation for injured feelings. Arden LJ held that the 'present claim would clearly encompass a claim for a declaration and for compensation for injured feelings only. In my judgment, Mr Khan should in principle be permitted to limit his claim for relief to those items. If he does so, the claim ceases, in my judgment, to be a 'hybrid' one.'

Arden and Buxton LJJ (Wall LJ dissenting) pointed to three broad factors in support of this conclusion: (1) appeals should be dealt with on the merits if possible; (2) the TIB was not prejudiced as he did not want to pursue Mr Khan's claims in the bankruptcy; and (3) the high public interest in claims relating to 'the evil of racism' being fully examined.

Khan attracted adverse comment in insolvency practitioners and academics. For example, it was said, how can a claimant sue using a cause of action which statute has said must vest with the TIB? Racism is an evil thing, but so are other matters which can give rise to a personal claim (claims arising from sexual abuse, serious assault or other criminal acts, for example). How can the fact that TIB did not ultimately object to the claim continuing serve to retrospectively give the claimant the right to bring an action he didn't own?

However, Khan is a pragmatic decision. The justice of it in Mr Khan's case was clear. Facilitating the exposure and removal of racism is an obviously meritorious aim, especially where Mr Khan's TIB had no interest in claiming and so no action would have been brought. Where, it might be said, is the prejudice in allowing Mr Khan's claim to continue (save the prejudice which follows from the loss of a windfall defence)?

Khan was preceded by Grady v Prison Service [2003] EWCA Civ 527. Sedley LJ, giving the judgment of the court, said there 'was no bright line' on 'the borderline' between personal claims and hybrid claims. He went on to find that a claim for unfair dismissal was a personal vesting in the claimant as the 'purpose and effect'¦ can fairly be said to be the recognition of a vested interest in a job'.

This perhaps led the editors of the 4th edition of Schaw-Miller and Bailey: Personal Insolvency Law and Practice to hedge their bets by following criticism of Khan with the comment that 'it appears that the bankrupt can avoid losing the ability to pursue even a hybrid claim by restricting the remedy sought to a remedy relating only to the part of the claim which is personal to the bankrupt'.

Claimants who are willing to limit their claims can draw support from these authorities, especially in a case where the TIB has no objection to the claim proceeding and making the assignment required. As is the case witha limitation defence, courts are less inclined to permit windfall defences than they once were.

If a court refuses to save an action, or stay the claim while the claimant (and potentially the defendant) negotiates with the TIB to gain an assignment of the cause of action, there is a potential argument to forestall any judgment over who should pay the costs of the action. A claimant wishing to run such a point would probably have to demonstrate that it will manage to reinstate the action without difficulty and without any waste of the costs. They should gain the prior agreement of the TIB to assign and have any section 33 arguments at the ready, showing why the strike out will serve no practical purpose.

The argument is strengthened if a court can be persuaded that the need for re-service of statements of case, medical reports, witness statements, etc. can all be dispensed with in the fresh action.

However, a second action raises an argument that the second proceedings could themselves be found to be an abuse as the claimant is in effect trying to have a second bite of the cherry.

In Arbuthnot Latham Bank Ltd v Trafalgar Holding Ltd [1998] 1 WLR 1426, followed in Collins v CPS Fuels [2001] EWCA 1597 and Securum Finance Ltd v Ashton [2001] Ch 291, Lord Woolf MR said that a special reason has to be identified to justify a second action being allowed to proceed.

In contrast, in Richardson v Watson and Anr [2006] EWCA Civ 1662, the claimant was allowed to bring a second action after the MIB had taken a technical point on service in relation to the first action, as this caused no prejudice to the MIB. In allowing the claimant an extension of primary limitation, Phillips CJ also observed that it might be said that MIB, in taking a technical point, had brought the delay on itself.

The Court of Appeal has reserved its judgment as to which is the correct approach, having heard argument in Dixie v British Polythene Ltd back in March 2010. With ever more pressure on dwindling court resources, could the lords be awaiting the results of the spending review before deciding whether to support second actions?

Uncertain ground

Much uncertainty remains in this area of law, which is surprising given how long both personal injury and bankruptcy have been around. The ability of a personal injury claimant to rely on the reasoning of Khan has yet to be tested at appellate level.

If the judge's strike out of a second action in Dixie is upheld, claimants will find themselves with much to play for, and may end up relying on the argument that the first action was a nonentity (as used to be the case in limitation claims involving Walkley). With the effects of the credit crunch still being felt, opportunities to resolve these questions are likely to arise sooner rather than later.