Pathania v Adedeji & Ors

A bankruptcy order does not itself divest a bankrupt of a cause of action. Until a trustee is appointed, the official receiver acts only as receiver and manager of the estate.

Knowingly pursuing a cause of action which has vested in another person is an abuse of process. Actual knowledge of the loss of title is required. An action continued after vesting does not abate automatically and may be regularised through joinder of the trustee or an assignment, subject to the court’s discretion and the interests of creditors.

Failure to disclose bankruptcy does not, without more, require an otherwise valid judgment to be set aside. The court must consider whether title had vested, the claimant’s knowledge, and the practical consequences of disclosure.

The respondent obtained judgment for repayment of money lent to the first appellant. A bankruptcy order had been made against the respondent after the action began but before trial. The bankruptcy was not disclosed to the judge. The first appellant did not challenge the judgment on its original merits, but argued that the bankruptcy deprived the respondent of capacity to continue the claim and vitiated the judgment.

The evidence did not establish that the official receiver had become trustee, and therefore acquired the cause of action, before judgment. A subsequently appointed trustee adopted the proceedings and later assigned any rights in the cause of action to the respondent. The central issues were whether the bankruptcy or non-disclosure justified setting aside the judgment and whether obtaining judgment was a void disposition under the Insolvency Act 1986.

1. Appeal dismissed. A bankruptcy order did not immediately transfer the respondent’s estate to the official receiver. Under sections 287, 293 and 306 of the Insolvency Act 1986, the official receiver initially became receiver and manager. The estate vested only when a trustee’s appointment took effect or the official receiver became trustee. The appellant failed to prove that either event occurred before judgment.

2. Knowingly commencing or pursuing a claim whose cause of action belongs to another person is an abuse of process. The abuse depends upon actual knowledge that title has been lost, rather than what the claimant ought to have known. Applying Pickthall v Hill Dickinson [2009] EWCA Civ 543, the appellant also had to prove that the respondent knew before judgment that the official receiver had become trustee and that the cause of action had vested in him. The uncertain evidence did not establish that knowledge.

3. An action continued after its cause of action has vested in a trustee does not abate. The defect may be regularised through joinder of the trustee or an assignment from him, although the court has a discretion and must consider the interests of creditors and others affected. Ordinarily, the action is likely to be stayed while the bankruptcy position is clarified.

4. Even assuming that the cause of action had vested before judgment, non-disclosure did not justify setting the judgment aside. Disclosure would probably have produced a stay and delay, rather than dismissal. The trustee’s later willingness to assign the claim strongly suggested that continuation would ultimately have been authorised. This was therefore unlike Pickthall, where the claimant could not have achieved his objective without abusing the court’s process.

5. The alternative allegation that merely continuing the action without disclosing the bankruptcy was an abuse was rejected. Although disclosure might have supported a stay, the omission was not sufficiently serious to justify setting aside the judgment.

6. Even if merger of the cause of action in the judgment constituted a disposition void under section 284(1), the court could consent to or ratify it. Given the benefit to creditors, the trustee’s adoption of the judgment and the later assignment, the court would ratify the judgment if necessary. The Bank’s unopposed application was allowed, requiring sums recovered under the judgment to be paid into court pending its claims.

1. Court of Appeal (Civil Division): The first appellant’s appeal was dismissed by [2014] EWCA Civ 681. The court ordered that sums recovered under the judgment be paid into court pending determination of the Bank’s claims.

2. High Court, Queen’s Bench Division: A deputy judge ordered the first appellant to pay the respondent £230,558.98, together with interest of £55,132.02. The decision was reported as [2010] EWHC 3085 (QB).