Kerry Underwood

ENFORCING AN AWARD AGAINST A BANKRUPT

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The matters dealt with in this piece are examined in great detail in my three volume, 1,300 page book Personal Injury Small Claims, Portals and Fixed Costs – price £50 and available from Underwoods Solicitors here.

Kerry Underwood offers consultancy services in relation to this and other matters and details are here.

These principles, and the whole issue of Qualified One-Way Costs Shifting, is dealt with in my book – Qualified One-Way Costs Shifting, Section 57 and Set-Off – Available from me here for £15.

In Chapter 23 of my book, Personal Injury Small Claims, Portals and Fixed Costs, I deal at length with the issue of when a bankrupt or discharged bankrupt can nevertheless personally receive damages, that is circumstances where damages do not vest in the trustee in bankruptcy.

Here I am dealing with the other side of the coin, that is the issue of when an award can be enforced against a bankrupt or discharged bankrupt.

It is well established that a bankrupt can still receive damages where:

“The damages are to be estimated by immediate reference to pain felt by the bankrupt in respect of his body, mind, or character, and without immediate rights of property.”

In

Heath v Tang [1993] 3 All ER 694

the Court of Appeal said:

“Actions for defamation and assault are obvious examples. The bankruptcy does not affect his ability to litigate such claims. But all other causes of action which were vested in the bankrupt at the commencement of the bankruptcy, whether for liquidated sums or unliquidated damages, vest in his trustee.”

The bankrupt cannot commence any proceedings based upon such a cause of action and, if the proceedings have already been commenced, he ceases to have sufficient interest to continue them.  Under the old system of pleadings, the defendant was entitled to plead the plaintiff’s supervening bankruptcy as a plea in abatement. 

Since the Supreme Court of Judicature Act 1875, the cause of action does not abate but the action will be stayed or dismissed unless the trustee is willing to be substituted as plaintiff:

see Jackson v North Eastern Railway Co (1877) LR 5 Ch D 844.

In

Ord v Upton [2000] 1 All ER 193, Ch 352

the Court of Appeal quoted the passage from Heath v Tang and said:

“Section 436 is not in truth a definition of the word “property”. It only sets out what is included. As will appear later from the cases that have been decided over many years, actions which relate to a bankrupt’s personal reputation or body have not been considered to be property and therefore they do not vest in anybody other than the bankrupt. They relate solely to his body, mind and character and any damages recovered are compensation for damage to his body, mind and character as opposed to other causes of action which have been considered to be a right of property. Thus causes of action to recover damages for pain and suffering have been held not to vest in the trustee. That has led to a number of oddities. For example, the parties agree that if at the time of the bankruptcy, the bankrupt had in his bank a sum which included money paid as damages for a libel, that sum would vest in his trustee because the right to the money formed part of his estate and therefore was available to pay off the bankrupt’s creditors. That was to be contrasted with an action personal to the bankrupt, such as a libel action, which was not settled before the end of the bankruptcy. In such circumstances the cause of action would remain with the bankrupt as would any damages awarded after discharge. If a cause of action is not personal to the bankrupt, it vests in the trustee and therefore any damages awarded whether before or after the discharge will be available to discharge the bankrupt’s liabilities.”

In Ord the claim was a negligence action for personal injury, including special damages, and the issue was whether the existence of the special damages claim took the case out of the exception, meaning that it vested in the trustee, or remained wholly within the exception, or could be severed so that the general damages claim remained with the bankrupt but the special damages claim vested in the trustee.

The Court of Appeal held that that was a single, indivisible action and therefore it either all remained with the bankrupt or all vested in the trustee, and that it was a hybrid claim, in part personal in part relating to property.

The Court of Appeal held that the action vested in the trustee and to fall within the exception a claim must relate only to a cause of action personal to the bankrupt, adding:

“All causes of action which seek to recover property vest in the trustee whether or not they contain other heads of damage to which the bankrupt is entitled.”

In

Beckham v Drake (1849) 11 HLC 1213

the Court of Exchequer Chamber repeatedly used the term “assignees” in relation to the passing of the action to the trustee, and the term was also used in Stanton v Collier (1854) 23 LJQB 116  and subsequent cases.

In Ord the Court of Appeal undertook an extensive review of the authorities and concluded that although the whole of the action vested in the trustee the actual general damages belonged to the bankrupt and did not form part of the trustee’s fund, and thus the damages must be split between the trustee and the bankrupt.

See my blog – BANKRUPTS AND CIVIL AND PERSONAL INJURY PROCEEDINGS

Provable Debts on Bankruptcy

There is no definition of a provable debt in the Insolvency Act 1986.

The general rule is that all debts are considered provable unless they come within the exceptions of non-provable debts.

A debt or liability to which the bankrupt is subject at the commencement of the bankruptcy is a provable debt.

Any debt or liability to which the bankrupt may become subject after the commencement of bankruptcy, including after discharge from bankruptcy, by reason of any obligation incurred before the commencement of bankruptcy, is a provable debt.

I have considered the various definitions of non-provable debts and none of them relates to a judgment of the court for damages for defamation.

This is the reverse for the situation set out above, which dealt with the ability of a bankrupt to conduct litigation, and receive the fruits of that litigation, in certain circumstances, one of which is damages for defamation.

Does that principle apply against a bankrupt?

In order words does the nature of the damages in defamation mean that a bankrupt or discharged bankrupt is still liable to pay those damages, even though he was a bankrupt at the time of the hearing and his bankruptcy has subsequently been discharged?

The relevant legislation is the Insolvency Act 1986, and in particular section 281 which is headed “Effect of Discharge”.

Section 281(5) reads:

“(5) Discharge does not, except to such extent and on such conditions as the court may direct, release the bankrupt from any bankruptcy debt which—

(a) consists in a liability to pay damages for negligence, nuisance or breach of a statutory, contractual or other duty, or to pay damages by virtue of Part 1 of the Consumer Protection Act 1987, being in either case damages in respect of personal injuries to any person, or

(b) arises under any order made in family proceedings or under a maintenance calculation made under the Child Support Act 1991.”

This subsection is terribly worded, but it appears to require there to be damages in respect of personal injuries, as that appears to be qualifying wording in relation to the damages for negligence, nuisance or breach of a statutory duty, contractual or other duty, that is that not only must there be a liability to pay damages under one of those heads, but the damages must also be in respect of personal injuries to any person.

The reference to “either” case is particularly confusing as there are six different types of action referred to, whereas the word “either” should only be used as a choice between two, and not six, options.

The words “or to pay damages by virtue of Part 1 of the Consumer Protection Act 1987”, being in either case, were inserted by the Consumer Protection Act 1987.

Doing my best to interpret this piece of legislation, I assume that the drafter of the Consumer Protection Act 1987 was some sort of consumer expert who was unaware of the law generally and treated the five types of case in the original wording as one, and therefore the word “either” is differentiating between that group of five on the one hand and the new insertion of damages under Part 1 of the Consumer Protection Act 1987, on the other hand.

To read it in any other way would mean that a bankrupt would continue to be liable for breach of contract, which is very clearly not the case.

Thus the exception in section 281(5) requires there to be personal injuries.

Are Injuries To Feelings A Species Of Personal Injury?

There is no doubt that the general damages element of an award for defamation includes an award for injury to feelings and I have quoted above the relevant section from the judgment in this case.

Section 281(8) of the Insolvency Act 1986 defines “personal injuries” as including death and any disease or other impairment of a person’s physical or mental condition.

That definition is used extensively in various legislation.

Injury to Feelings

Is injury to feelings species of personal injury? Does it involve impairment of a person’s mental condition?

Shorter Oxford English Dictionary

Impair

1. Make less effective or weaker; devalue, damage, injure.

2. Become less effective or weaker; deteriorate, suffer injury or loss.

Impaired

1. One that has been impaired.

2. Of the driver of a vehicle or driving; adversely affected by alcohol or narcotics.

Impairment

The action of impairing, or fact of being impaired; deterioration, injurious lessening or weakening.

Impair

To make worse, less valuable, or weaker; to lessen injuriously; to damage, injury.

Impaired

Rendered worse; injured in amount, quality or value; deteriorated, weakened, damaged.

Roget’s Thesaurus gives the following alternative for “impair”:

Damage, harm, diminish, reduce, weaken, lessen, decrease, blunt, impede, hinder, spoil, disable, undermine, compromise, threaten.

Roget’s Thesaurus gives the following alternatives for “impaired”:

Disabled, handicapped, incapacitated, debilitated, infirm, weak, weakened, enfeebled, paralysed, immobilised.

Roget’s Thesaurus gives the following alternatives for “impairment”:

Disability, handicap, abnormality, defect, deficiency, flaw, affliction, disadvantage, problem.

Those definitions seem to me to be potentially wide enough to cause injury to feelings to amount to an impairment of a person’s mental condition and thus to bring injury to feelings into the sphere of QOCS protection.

Injury to feelings awards are usually in the Employment Tribunal.  There costs do not follow the event and thus QOCS is of no application, for the reasons set out above.

However injury to feelings awards are also made in the County Court where costs do follow the event; discrimination in relation to the provision of services is a County Court, not an Employment Tribunal matter.

My view is that the court could legitimately decide the issue of whether injury to feelings is a species of personal injury either way, although it is significant that the word “injury” is used.

Employment Tribunals have the power to award damages for actual personal injuries arising out of the discrimination, including physical, but more typically, psychological injuries.

These are generally awarded under the “injury to feelings” ahead of damages.  The appellate courts have frequently said that there is no fine line between actual psychological injuries and injuries to feelings.

For example, in

Birmingham City Council v Jaddoo UKEAT/0448/04/LA

the Employment Appeal Tribunal referred to “the inevitable overlap between injury to feelings and psychiatric damages…..” (Paragraph 31).

In 

Vento v Chief Constable of West Yorkshire Police (No 2) IRLR 102 

the Court of Appeal said that tribunals should have “……regard…..to the overall magnitude of the sum total of the award for compensation for non-pecuniary loss made under the various headings of injury to feelings, psychiatric damage and aggravated damages” such that “in particular, double recovery should be avoided by taking appropriate account of the overlap between the individual heads of damage”.

In 

HM Prison Service v Salmon [2001] IRLR 425

the Employment Appeal Tribunal said that it is “necessary to stand back and consider the non-pecuniary award as a whole”.

On balance my view is that injury to feeling should be classed as a species of personal injury and that cases involving claims for injury to feelings should attract the protection of Qualified One Way Cost Shifting in the civil courts, but not in Employment Tribunals.

In 

Timothy James Consulting Ltd v Wilton [2015] IRLR 368 EAT

the Employment Appeal Tribunal overturned the decision of the Employment Tribunal that had made an award of £10,000.00 for injury to feelings but had then grossed it up to take into account income tax at the rate of 40% and thus awarded £16,666.00.

There was no dispute that £10,000.00 was the correct figure; the issue was whether it should be grossed up to take into account tax and thus the real issue was whether injury to feelings awards are taxable.

Historically it had always been assumed that such awards were free of income tax and the current legislation is the Income Tax (Earnings and Pensions) Act 2003 and section 406 provides:-

“This Chapter does not apply to a payment or other benefit provided—

(a)          in connection with the termination of employment by the death of an employee, or

(b)          on account of injury to, or disability of, an employee.”

This replaced, and is a similar wording to, section 148 of the Income and Corporation Taxes Act 1988.

Here the Employment Appeal Tribunal carried out an exhaustive analysis of the authorities.

The Employment Appeal Tribunal said that the reasoning of the Employment Appeal Tribunal in the case of 

Orthet Ltd v Vince-Cain [2004] IRLR 857 EAT

was persuasive and was preferable to a decision in the First Tier Tribunal (Tax Chamber) in 

Moorthy v Commissioners for HM Revenue and Customs [2015] IRLR 4 UKFTT

which had held that awards for injury to feelings were taxable.

Consequently the Employment Appeal Tribunal held that injury to feelings awards are not taxable and therefore reduced the award back to £10,000.00.

It was a necessary part of the reasoning here, and in the Orthet case, that “injury” could include the concept of injury to feelings.

This reasoning was necessary because of the wording of section 406 set out above which exempts payments made “on account of injury to, or disability of, an employee”.

There is no reference there to injury to feelings and therefore to come within that definition the Employment Appeal Tribunal here and in Orthet held that “injury” includes injury to feelings, or to put it another way injury to feelings is a species of personal injury itself.

Thus here the Employment Appeal Tribunal, at least equal in standing to the High Court, held that injury to feelings Is an injury.

However the feedback that I am getting from practitioners in discrimination cases in the civil courts is that those courts are not treating injury to feelings as personal injury and thus are not providing QOCS protection.

In 

Black v Arriva North East Limited [2014] EWCA Civ 1115

the Court of Appeal rejected an application for a costs capping order.

Here, the appellant appealed against a judgment in a disability discrimination case but had not taken out a sufficient level of After-the-Event insurance before such insurance became unrecoverable by virtue of the Legal Aid, Sentencing and Punishment of Offenders Act 2012.  Thus any fresh premium, to cover the increased level of cover required, would not be recoverable.

Consequently the appellant sought to have Arriva’s costs capped at £50,000.00.

The Court of Appeal pointed out that this would now apply to all new cases as a result of Parliament ending recoverability of After-the-Event insurance premiums by means of LASPO 2012.

“So the argument could be raised in any appeal brought in respect of a case under that Act.  Such a result is difficult to square with the indication in the Practice Direction that an order for costs capping should only be made in exceptional circumstances” (paragraph 12).

The Court of Appeal also pointed out that it is not a function of costs capping orders to remedy the problems of access to finance for litigation.  “If for instance, the respondent’s costs were agreed to be proportionate, it would not be possible to exercise any jurisdiction to make a costs capping order simply because without it the appeal would not continue to be financially viable.”

That is because CPR 3.19(5) (b) only allows a costs capping order if “there is a substantial risk that without such an order costs will be disproportionately incurred;”

There were other fact- specific reasons for refusing a costs capping order in this case but they do not establish any new legal principles.

Interestingly one of the submissions made in favour of a costs capping order, but rejected, was that there was a lacuna in the law in that Qualified One-Way Costs Shifting applied in personal injury cases but not Equality Act cases.  As this is a disability discrimination claim in relation to the provision of services one would expect damages for injuries to feelings to be available.  The issue as to whether such damages are in fact damages for personal injuries, and thus covered by QOCS, does not appear to have been considered in this case.

“Another factor was that the potential subject of the Costs Capping Order – Arriva – had already incurred vastly more costs than £50,000.00 prior to the application being made and therefore the Costs Capping Order would have been retrospective:-

“The effect of what I have described is that by the time of the application, the major part of the solicitor’s costs of the appeal had been incurred. The effect of the order sought would, therefore, be that the Respondents will have already spent what is, if the costs capping order is made, in substance a budget laid down by the court without knowing that it had to stick to that insofar as it sought to recover its costs. In principle, the person who is the subject of the costs capping order ought, so far as possible, to know the budget to which he must work in advance.” (Paragraph 25).

There are conflicting decisions in the employment field as to whether the injury to feelings is a form of personal injury.

However, there has been very recent guidance by the Court of Appeal.

In 

Moorthy v Revenue and Customs [2018] EWCA Civ 847

the Court of Appeal held that compensation for injury to feelings paid in accordance with the terms of a Settlement Agreement is not taxable, as it falls within the exclusion from taxation of payments on account of “injury”.

Section 406 of the Income Tax (Earnings and Pensions) Act 2003 provides that a payment or other benefit provided “on account of injury to… an employee” on the termination of a person’s employment is not subject to income tax.

The issue here was whether a settlement in reference to a claim for injury to feelings, amongst other things, was subject to income tax or was excluded as coming within the definition of “injury”.

In holding that injury to feelings is indeed a species of injury exempting that part of the payment from tax, the Court of Appeal has resolved differences of opinion in the lower courts on this point.

Broadly the Employment Appeal Tribunal had held that injury to feelings awards are in relation to “injury” and are tax free – see for example:

Orthet Ltd v Vince-Cain [2004] IRLR 857; and

Timothy James Consulting Ltd v Wilton [2015] IRLR 368

whereas the Tax Tribunals, as here, have held such payments liable to tax as not being in respect of an injury.

In relation to the tax treatment of such awards section 5(7) of the Finance (No.2) Act 2017 has inserted, with effect for the tax year 2018/19 onwards, a new subsection (2) to section 406 of the Income Tax (Earnings and Pensions) Act 2003 which reads:

“Although “injury” in subsection (1) includes psychiatric injury, it does not include injured feelings.”

This is in the context of tax, but the Court of Appeal gave this judgment after that amendment had been enacted, and therefore held that in relation to awards made before that date an award for injury to feelings is indeed a species of injury.

Thus my view is that very recent Court of Appeal decision shows that awards for injury to feelings are, or certainly were before the recent law change, and thus section 281(5) of the Insolvency Act 1986 applies.

I have set out in detail above the circumstances in which a bankrupt can still receive general damages, that is the circumstances in which the award does not go into the estate.

By parity of reasoning a court should be invited to find that the same logic applies to a person with a judgment against a bankrupt, and that in so far as possible the reasons of legal consistency and certainty the court should take the same view.

For the reasons set out in detail in this advice, and in particular the Moorthy case, the court is so able to do.

I am grateful to Dr Tracey Bell for permission to use some material from an advice I prepared for her.

See also Gordon Exall’s Civil Litigation Brief of 20 January 2019 – Civil Procedure: Back To Basics 24: The Bankrupt Claimant (Personal Injury Litigants In Particular)

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Written by kerryunderwood

February 25, 2019 at 7:37 am

Posted in Uncategorized

2 Responses

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  1. Good morning,

    Each time new cases are decided, how do you manage to get them into your book?

    I really want your book.

    Sent from my iPhone

    Ashiq Patel

    07974 150 777

    ashiq patel

    February 25, 2019 at 8:31 am

    • Hi Ashiq

      Did you ever buy the book? 🙂 I keep it up to date by blog posts related to it and newsletters to consultees 🙂

      Kerry

      kerryunderwood

      June 5, 2019 at 3:44 pm


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