Balancing Justice and Consistency

Recent insolvency case law has demonstrated that the English legal system seeks to achieve both justice and consistency. The trouble is, those principles can, on occasion, pull in opposite directions.

Consistency is achieved largely through the doctrine of judicial precedent. Just about any law student can tell you this means lower courts must follow the decisions of higher courts when faced with similar cases. But what if that produces an unfair outcome?

From that question, others arise, including:
How do you determine whether an outcome is unfair or unjust? Unfair to whom? When does a case resemble a previous one closely enough to invoke precedent? Conversely, which facts are "material" and when do they differ sufficiently to warrant distinguishing a case and reaching a different conclusion?

Add to this the difficulties of interpretation of statute and you have a complex set of questions which delight legal scholars and infuriate just about everyone else.

Case in point: exceptional circumstances
Consider the trustee in bankruptcy seeking possession and sale of a matrimonial home, or former matrimonial home. Section 335A(3) of the Insolvency Act 1986 provides that after the end of one year following the first vesting of the bankrupt’s estate in a trustee, the interests of the bankrupt’s creditors outweigh all other considerations unless the circumstances of the case are exceptional.

An obvious question – what qualifies as “exceptional”? Unfortunately, there is no definition or even guidance in section 335 on that. So, we turn to judicial precedent, to see whether that helps. In Re Citro [1991] (Ch) 142, Lord Justice Nourse said the circumstances have to be outside the usual “melancholy consequences of debt and improvidence” to be deemed exceptional.

In the line of cases that followed, most of those in which the courts found there to be exceptional circumstances involved severe or terminal illnesses, often where the home had been adapted as a consequence.

Then in Re Gudmundsson [2024] EWHC 759 the court found the circumstances were exceptional where misconduct of the bankrupt had frustrated the effect of a property adjustment order made in the family court whereby the bankrupt’s wife would have become entitled to the former matrimonial home.

That was just one of the effects of the bankrupt’s misconduct, but how could the trustees in bankruptcy have known these features would qualify as exceptional circumstances? The simple answer is they couldn’t.

Interpretation rules
More generally, how do you know how a court will interpret the wording of a statute? The starting point is the literal rule which says that words should be given their ordinary and natural meaning … but in context (you see where this is going). Then there’s the golden rule and the mischief rule, but let’s keep it simple.

Just one example: section 1157 of the Companies Act 2006 gives a defence to directors or auditors who are or may be liable for negligence, default, breach of duty or breach of trust where they acted “honestly and reasonably and ought fairly to be excused”.

There shouldn’t be any real doubt as to the ordinary and natural meaning of “honestly”, whatever the context, but what amounts to acting reasonably? And how does a court decide when it is fair to excuse, for example, a director who has breached his duty to the company to consider and act in its best interests or his duty to exercise reasonable (there’s that word again) care, skill and diligence? No, we don’t know.

The message is that you can never be sure how a court will decide a case, even where the facts are undisputed, particularly when statute itself allows for the court’s discretion - which is why, when litigating, a solid, reliable indemnity is your lifeline.

Neil Stewart
Associate Director for the South

Q&A

Mena Halton
Managing Director

What is your legal background?
I qualified as a solicitor in 1985 and started my legal career in the city at Wilde Sapte (now Dentons). I later joined Nick O’Reilly and his IP colleagues at Rothman Pantall conducting insolvency litigation as an in house solicitor, a novel concept at the time requiring special permission from the Law Society.

How long have you been at Manolete?
I joined Manolete in March 2014.

What have been your main impressions?
When I joined Manolete I was impressed by the business model which enabled realisations to be made from claims which otherwise would not see the light of day. The purchase and funding agreements drafted by the late Gabriel Moss QC were perfection and the potential to combine finance and legal skills to maximise returns whilst achieving fairness to all stakeholders was clear. The year after I joined we were very excited to have signed 100 cases. We are now at over 1,300 signed cases and this is due to the hard work and dedication of my colleagues in the legal team which has grown from one lawyer (me) to 18.

What are the other highlights?
The IPO in 2018 was a milestone and being involved in that process and investor roadshows was an amazing experience. Building the legal team which comprises a very talented group of lawyers with strong insolvency litigation skills and who are great fun to work with. Working and building strong relationships with many fantastic IPs and external lawyers and getting to know them, often at mediations when waiting for the other side to make offers leaves lots of talking time!

What do you do outside of work?
The great outdoors, walking in the Bucks countryside, coast path in Cornwall or mountains in Ireland. Shopping trips to Bicester Village where I am encouraged by my daughters to spend too much.

Stephen Baister writes
Snap!

I suppose it should not come as a surprise that the Civil Procedure Rules should continue to grow, providing increasingly minute guidance on every corner of procedure. In doing so, they threaten to reduce a set of rules that were intended to serve fairness and justice to a sort of game. To take just one arbitrary example that struck me at the time, the decision in Preston v Beaumont [2022] EWHC 440 (Ch) graphically illustrates how too much prescription can lead to what might be perceived as injustice.

In spite of having handed down a fair number of judgments over the years, until I read Preston v Beaumont I had not been aware of the full implications of Practice Direction 40E – Reserved Judgments. I bet I am not alone: most matters that follow the handing down of a reserved judgment proceed pretty smoothly without reference to it. But watch out for para 4.4. This provides that where a party wishes to apply for an order consequential on the judgment, the application must be made by filing written submissions with the clerk to the judge (or presiding judge) by 12 noon on the working day before handing down. In Preston v Beaumont the appellant took the point that no application for costs had been made by that time so, under the terms of PD 40E, it was too late to do so at the handing down itself. The respondent gallantly raised a number of arguments in opposition to that contention but lost, the deputy judge holding that the respondent could not recover costs by reason of his failure to comply with the PD where there was no application for relief from sanction – in spite of winning the appeal.

The deputy judge appears to have been correct in his interpretation of the provision, but many will think it unfair that such a situation should arise. The unsuccessful party to the appeal cannot have been taken by surprise by an application to pay the successful party’s costs, so cannot possibly have suffered any prejudice by not getting a day’s notice of it. An application for relief from sanction would plainly have been disproportionate. But the perverse effect of the rules is that no costs were awarded.

A zealous adherence to the rules was what, I think, Lord Denning was deploring in his Court of Appeal judgment in the 1978 case of Firman v Ellis. Solicitors in three cases had failed to renew a writ on time, and the limitation period had expired. They applied for relief. Lord Denning said:

“In each of the three cases there were negotiations for a settlement, but the plaintiff’s solicitors, by the merest slip, allowed time to run out. They failed to renew the writ in time. This slip did not prejudice the defendant or his insurers in the least. Yet as soon as the insurers discovered it, they cried ‘snap’ and broke off the negotiations. They said to the plaintiff: ‘You are statute-barred. We are not liable. You sue your own solicitors for negligence. Make their insurers pay. And not us.’ All of the judges rejected this submission. Each of the judges exercised his discretion in favour of the plaintiff. I think they were quite right. As a matter of simple justice, it is the defendant’s insurers who should pay the plaintiff’s claim. They have received the premium to cover the risk of these accidents. They should not be allowed to foist their liability on to the plaintiff’s solicitors or their insurers by calling ‘snap’ as if it were a game of cards.”

I know that times have changed, but I am on Denning’s side. Justice should be merciful in the face of a mere slip. Rules should not be allowed to trump it where the other side has suffered no prejudice.

That said, if the situation arises, I know I must apply the law as it is, not as I would like it to be.

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