Nelson v Nelson

A bankrupt may retain solicitors and authorise proceedings in the bankrupt’s own name, even where the claim concerns property vested in the trustee under Insolvency Act 1986, section 306. The claim may be stayed or struck out because the bankrupt has no effective interest in that property, but the retainer is not thereby ineffective.

A solicitor who commences proceedings warrants that an existing client of the named identity has authorised them. The solicitor does not warrant that the client has a good cause of action, owns the asserted right, or is solvent. On the findings that the solicitors were innocent and not negligent, the court’s inherent jurisdiction did not justify an adverse costs order.

An undischarged bankrupt instructed solicitors to protect his claimed interest in land. Without knowing of the bankruptcy, the solicitors obtained a Mareva injunction. The bankruptcy emerged on the return date and the injunction was discharged.

His Honour Judge Marr-Johnson found that the solicitors had acted with ordinary diligence, were not negligent, and had been grossly misled by their client. He nevertheless ordered them to pay the defendants’ costs on an indemnity basis, reasoning that they had acted without authority because the property claim had vested in the trustee in bankruptcy.

The solicitors appealed. The central issue was whether the bankrupt’s lack of an effective property claim also meant that he lacked capacity to retain solicitors and authorise proceedings.

1. Appeal allowed unanimously. Lords Justices McCowan, Peter Gibson and Waller held that the costs order against the appellant solicitors could not stand. There was no order as to the costs of the appeal.

2. Section 306 of the Insolvency Act 1986 vested the bankrupt’s claimed interest in the land in his trustee. The proceedings concerning that property were therefore liable to be stayed or struck out unless the trustee took them over. They were not a nullity, and the vesting did not remove the bankrupt’s legal capacity to engage solicitors.

3. The court distinguished an effective retainer from an effective cause of action. A solicitor who starts proceedings warrants that there is an existing client, bearing the name of the party, who has authorised the proceedings. The solicitor does not warrant that the client has a good claim, owns the right asserted, or is solvent. The bankrupt had authorised these solicitors, so they had not acted without authority.

4. Lord Justice Waller explained that the court’s power to order costs against a solicitor acting without authority is an exercise of its inherent supervisory jurisdiction. The court ultimately retains a discretion. The relevant warranty by analogy is not a warranty that the named claimant is entitled to enforce the substantive right, but that the claimant exists and has authorised the proceedings.

5. The trial judge’s findings excluded improper, unreasonable or negligent conduct. They also demonstrated that the solicitors were wholly innocent. There was consequently no breach of duty to the court and no proper basis for indemnity costs.

• Court of Appeal (Civil Division): Allowed the solicitors’ appeal and set aside the costs order made against them.
• High Court (His Honour Judge Marr-Johnson): On 16 May 1995, ordered the claimant’s solicitors to pay the costs of the Mareva injunction application, including the return-date hearing, on an indemnity basis.