Mulkerrins v PricewaterhouseCoopers

The House of Lords held that an unappealed order of the bankruptcy court which declared that the bankrupt's cause of action against her former insolvency advisers was not an asset of the bankrupt estate bound the trustee and, through him, the creditors. As between the bankrupt and her trustee the cause of action remained vested in the bankrupt and she was at liberty to pursue it in her own name. The court emphasised the distinction between the binding effect of a judicial order as between the parties to it and the position of a non‑party (here the defendant advisers) who was not bound but had no legitimate interest to challenge the bankruptcy court proceedings.

The decision dealt with issues arising under the Insolvency Act 1986 (notably sections dealing with vesting of the bankrupt's estate and the court's supervisory jurisdiction under section 303) and with the treatment of so‑called "hybrid" causes of action partly for personal wrongs and partly for financial loss. The Lords declined to lay down a final rule on whether such hybrid claims generally vest in the trustee, leaving that wider question open for future determination.

Background and factual matrix.

• Ms Mulkerrins ran a small nursing home which, considered alone, was viable. She faced a separate indebtedness which exposed her to a bankruptcy petition. On the advice of licensed insolvency practitioners (Coopers & Lybrand, now PwC) she sought an individual voluntary arrangement (IVA) to avoid bankruptcy.
• Procedural failures occurred: the nominee's report was not placed before the court and the interim order was discharged, leading to Ms Mulkerrins being adjudicated bankrupt and the Official Receiver closing the nursing home. She claimed that PwC's negligence caused the bankruptcy and resultant financial loss, including loss of the business.

Procedural history.

• A contested hearing in the bankruptcy proceedings before District Judge Henson (3 February 1999) resulted in an order declaring that the trustee had no interest in Ms Mulkerrins' cause of action against PwC.
• The trustee and Ms Mulkerrins disputed entitlement to prosecute the claim; the deputy judge in the High Court ([2000] BPIR 506) reached a different view on legal title while recognising the district judge's effect between the parties. The Court of Appeal ([2001] BPIR 106) allowed an appeal and struck out Ms Mulkerrins' action.
• The case reached the House of Lords on appeal.

Nature of the claim and relief sought.

Ms Mulkerrins sought damages against PwC for negligence and breach of contract for failing to prevent her becoming bankrupt, claiming both personal injury/reputation loss and large financial loss (a "hybrid" claim). She sought to pursue the claim in her own name.

Issues framed by the court.

• Whether the cause of action vested in the trustee in bankruptcy on adjudication or remained the bankrupt's property for her sole benefit.
• What was the legal effect of the bankruptcy‑court order of 3 February 1999 that the trustee had no interest in the claim.
• Whether PwC, as a non‑party to that bankruptcy hearing, could ignore or challenge the order in subsequent litigation.
• The broader question whether hybrid claims of this character normally vest in the trustee.

Reasoning and disposition.

• The Lords held that, whether or not the district judge was right on the law, her unappealed order bound the trustee and the creditors; as between the bankrupt and the trustee the claim did not form part of the bankrupt estate and the bankrupt could sue in her own name.
• PwC, not being a party to the bankruptcy hearing, were not bound by that order but had no legitimate interest in the question decided and therefore could not challenge it in the bankruptcy forum; their right to complain about costs or practical consequences did not give them standing to be heard in that forum.
• The House declined to pronounce finally on the wider question of the general treatment of hybrid claims and left that issue open for future cases.

Appeal allowed. The House of Lords held that the district judge's unappealed order in the bankruptcy proceedings, which declared that the trustee had no interest in the cause of action, bound the trustee and the creditors so that the cause of action did not form part of the bankrupt estate; the appellant was therefore entitled to pursue the claim in her own name. The court further held that the defendant, not being a party to the bankruptcy hearing, was not bound by that order but lacked a legitimate interest to challenge the bankruptcy proceedings; the broader legal question whether hybrid claims generally vest in the trustee was left open.

Reading County Court (Bankruptcy) — District Judge Henson order of 3 February 1999 (declaring the trustee had no interest); High Court (deputy judge) [2000] BPIR 506 (different view on legal title); Court of Appeal [2001] BPIR 106 (allowed appeal and struck out Ms Mulkerrins' action); House of Lords [2003] UKHL 41 (allowing the appeal).