Permission to Issue Second Claim after Discontinuing First Claim - Ward v Hutt

In: Bulletin Published: Monday 12 February 2018

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Ward (acting as liquidator of Brady Property Developments Ltd) v Hutt [2018] EWHC 77 (Ch)

The High Court has handed down an interesting decision on the application of CPR r.38.7 and the need to first obtain permission from the Court before issuing a second claim after the first claim is discontinued. As HHJ Matthews, sitting as a Judge of the High Court, says in his judgment, the case raises ‘…important matters of principle and practice, especially in relation to the effects of discontinuance.

In Ward v Hutt, the liquidator had issued a claim against two directors of the company in liquidation, seeking a declaration that the two respondents as company directors had breached certain provisions in the Insolvency Act 1986 and the Companies Act 2006, and for orders that the respondents pay certain sums to the company in respect of their breach of fiduciary duty. A preference clam advanced against the two respondents was withdrawn, but the liquidator continued with a claim that the respondents knew, or ought to have concluded, that at a certain date, there had been no reasonable prospect of the company avoiding liquidation. The sale of a property had been a ‘substantial property transaction’ requiring approval of the majority of shareholders, but in breach of section 190 of the Companies Act 2006 that approval was not given.

At trial, the liquidator abandoned the claim under section 235 of the Insolvency Act 1986, and then a claim for a transaction at an undervalue was withdrawn, as were allegations of misfeasance, before eventually a notice of discontinuance was filed. No indication was given on discontinuance, that any further proceedings were being contemplated by the liquidator.

The day after the discontinuance, the liquidator issued a new claim, against the original respondents and a third respondent, in their capacities as partners in a non-LLP partnership. In response, the original two respondents applied to strike out this new, second claim. Three grounds were put forward as to why the second claim should be struck out:

(1) CPR r.38.7 applies and had not been complied with, and permission should not be given retrospectively under that rule;

(2) Henderson v Henderson (1843) 3 Hare 100; and

(3) Abuse of process.

Grounds (1) and (3) succeeded. Ground (2) was found not to apply. Consequentially, the second claim was struck out.

Distinguishing between Person and Capacity

Selecting a few interesting points of note, the first is on the application of CPR r.38.7 ‘same defendant’ test, as between the first claim and the second claim. As readers will know, CPR r.38.7 reads:

A claimant who discontinues a claim needs the permission of the court to make another claim against the same defendant if –

(a) he discontinued the claim after the defendant filed a defence; and

(b) the other claim arises out of facts which are the same or substantially the same as those relating to the discontinued claim.’

A claim is brought against the ‘same defendant’ if the second claim is brought against the same natural (or legal) person(s) as the first claim. It matters not whether those same natural (or legal) person(s) are sued in different capacities. HHJ Matthews said, at paragraph 24:

‘The fact that the capacity in which the liability is alleged to arise is or may be different is nothing to the point. In both the original and the new claims, the same respondent/defendant is alleged to be personally liable to the applicant. Unlike a limited company, a partnership in English law is not a legal person distinct from the persons who are its members. A claimant who sues an English partnership sues, and sues only, the persons who at the material time are the partners, that is, are members of the partnership. So the legal persons who are alleged to be personally liable in the new claim are the same legal persons as were alleged to be liable in the original one. That is quite sufficient to satisfy the criterion of "the same defendant" within rule 38.7(a).

Second Claim issued without Permission is Irregular not Nullity

The second point of note relates to where a defence has been filed and the second claim arises out of the same or substantially the same facts. Here r.38.7 is engaged and the High Court found that, where the second claim is issued before permission to issue is granted by the Court, the second claim is not a nullity, but it is nonetheless an irregular. Consequentially, it is liable to be struck out under CPR r.3.4(2)(c) unless permission is granted retrospectively.

Whether permission should or should not be granted, and so whether the claim should be struck out or not, depends on a test left ‘not entirely clear’ in the law. In Ward v Hutt, assistance was drawn from Hague Plant Ltd v Hague [2014] EWCA Civ 1609, where the Court of Appeal discussed an analogy with CPR r.38.7, at paragraphs 60 and 61:

‘In my judgment there is indeed an analogy between the re-introduction of a claim previously abandoned in the same proceedings and the making of a fresh claim after discontinuance of a similar claim based on the same or substantially the same facts, as is controlled by Part 38.7. Both types of conduct, unless closely controlled by the court, tend to undermine the public interest in finality in litigation. But Part 38.7 imposes that control not in terms by the requirement to show special circumstances, but rather by the requirement that such fresh proceedings may only be brought with the Court's permission. In that respect they equate the bringing of fresh proceedings with the re-introduction of an abandoned claim by amendment, since amendment itself requires the court's permission. Beyond that, it seems to me that the rule leaves it to the court to decide whether to grant or refuse permission having regard, as I have said, to the public interest in finality.

It is true that the Notes to the current edition of the White Book use the phrase 'exceptional circumstances' as characteristic of the sort of explanation likely to be required in an application for permission under Part 38.7, but it is dangerous in my view to erect that as a test imposed by the rules, not least because of its inherent uncertainty. To that limited extent the judge may have mis-described the ambit of the court's discretion to give such permission. The real question for the judge was whether, having abandoned the de facto directorship claim in the light of Jean Angela's Defence (in which the other defendants precisely concurred) a sufficient explanation was offered for its re-introduction to overcome the court's natural disinclination to permit a party to re-introduce a claim which it had after careful consideration decided to abandon.’

Additional assistance was found in Kazakhstan Kagazy plc v Zhunus [2017] 1 WLR 467, where Leggatt J heard an application by claimants to re-amend their particulars of claim, to add back in, certain claims, known as the "Manx law claims", that had earlier been discontinued. He then set out rule 38.7, and said this, at paragraph 34:

'If there had been a material change of circumstances since the Manx law claims were discontinued and the claims were shown now to have a real prospect of success, then there would in principle be a basis for seeking the permission of the court to amend the particulars of claim again in order to put the Manx law claims back in….’

The High Court drew further guidance from the commentary in the notes to the CPR in the White Book; that said:

‘The court is likely to give permission, for example, where the claimant was misled or tricked by the defendant, where important new evidence has come to light or where there has been a retrospective change in the law (eg a Supreme Court case overruling a Court of Appeal decision which had led the claimant to discontinue). All these examples are, of course, unusual cases and assume that the limitation period has still not expired.’

Granting Permission to Bring Second Claim and Limitation

A third point considered in Ward v Hutt was how the decision to grant permission to bring a second claim retrospectively, was affected by limitation expiring on the cause of action in the second claim after the second claim was issued but before permission was granted. After discussing in detail, parallels between the test and circumstances for granting permission to add an additional cause of action to existing proceedings, after limitation on the cause of action has expired, and the absurdity and unjustness of permitting a claimant who breaks CPR r.38.7 rather than follows it being in a better position on limitation, the Court concluded, at paragraph 47:

‘…the claimant who has previously discontinued a sufficiently similar claim within CPR rule 38.7, and who then issues without permission before the limitation period has expired should not be treated more favourably than the claimant who does not issue first, but seeks permission only after the limitation period has expired. In both cases, permission should normally be refused.’

Abuse of Process and Process only Economically Beneficial to Liquidator

A fourth point of interest, in respect to insolvency law (so somewhat separate from the others) was addressed. The second claim in Ward v Hutt was found to be an abuse of process because the only economic benefit of the claim likely to accrue was to the liquidator himself. The Judge said, at paragraph 56:

‘This is because, if the claim is successful against the three respondents, and, even assuming that there were no outstanding costs and fees to be deducted from the sum so recovered by the applicant liquidator as the monies passed through his hands, the monies so recovered would be paid back to the three respondents, in part as to a repayment of the debt owed to the third respondent, but subject to that to the three respondents as members of the company.’

Pursuing such a claim by the liquidator was abusive, and so it was struck out for this reason also.

Lastly, and briefly, the Henderson v Henderson principle does not apply where the first claim is discontinued, rather than dismissed. There is no decision where the first claim is discontinued for cause of action estoppel or issue estoppel, and CPR r.38.7 marshals the pursuance of second claims, protecting against unjustified vexing of defendants (or ‘…sufficient protection for defendants facing a second bite at the cherry.’). The Henderson v Henderson principle adds no protection which CPR r.38.7 cannot provide.

SIMON HILL © 2018

BARRISTER

33 BEDFORD ROW 

NOTICE: This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.