[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback]
	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> McGowan v Chadwick & Anor [2002] EWCA Civ 1758 (05 December 2002) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2002/1758.html Cite as: [2002] EWCA Civ 1758

[New search] [Printable RTF version] [Help]

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
CHANCERY DIVISION (Mr Justice Burton)

		Royal Courts of Justice Strand, London, WC2A 2LL
		5 December 2002

Lord Justice Jonathan Parker :

INTRODUCTION

1. Before the court is an appeal by Mr Newton Grant OBE ("the Receiver") against an order made by Burton J on 10 December 2001 allowing in part the appeal of Mr Michael Chadwick, the defendant in a partnership action brought by his co-partner Mr John McGowan, against an order made by Deputy Master Lloyd on 2 August 2001. Limited permission to appeal to the Court of Appeal was granted by Arden LJ on the papers on 18 February 2002.
2. Also before the court is a cross-appeal by Mr Chadwick. Permission to cross-appeal was granted by Robert Walker LJ (as he then was) on the papers on 16 April 2002.
3. The appeal and cross-appeal arise in this way. On 22 April 1999, on Mr McGowan's application, the Receiver was appointed receiver and manager of the partnership business. In about July 2001 Mr Chadwick applied to the court for permission to commence proceedings against the Receiver for damages for alleged breaches of duty in discharging his functions as receiver. By his order dated 2 August 2001 Deputy Master Lloyd refused permission and dismissed his application. Mr Chadwick appealed to the High Court. By his order dated 10 December 2001, Burton J granted him permission to proceed with part of his claim, on terms to which I shall refer in due course.

BACKGROUND

The factual history

4. Mr Chadwick is a Chartered Accountant, practising as Chadwick & Co, in Ashton-under-Lyne. In late 1997 he entered into a partnership at will with Mr McGowan to acquire and carry on the business of a Chinese restaurant known as The Lee Garden, in Kensington High Street, London W8. Profits and losses were to be shared equally. They bought the business (including the leasehold premises in which it operated) for £250,000. The purchase price was funded as to £200,000 by a bank loan and as to the balance by Mr Chadwick. The bank loan was secured on other properties owned solely by Mr Chadwick.
5. It was envisaged that Mr McGowan would be in charge of the day-to-day running of the business, with Mr Chadwick providing all necessary accountancy services.
6. Trading began in about April 1998, but unfortunately the partners soon fell out (the reasons for this are not material for present purposes).
7. On 20 April 1999 Mr McGowan commenced a partnership action seeking the dissolution and winding up of the partnership, and he applied by way of interlocutory relief in that action for the appointment of a receiver and manager of the partnership business. In his evidence in support of his application, Mr McGowan put forward the Receiver as an appropriate person to be appointed as receiver and manager. The Receiver is a Chartered Accountant, and a partner in the firm of Pridie Brewster & Co. Mr Chadwick put forward an alternative candidate, but by an order dated 22 April 1999 Neuberger J appointed the Receiver to be receiver and manager of the business. The order gave the Receiver power to collect and get in the property of the partnership; power to sell the business; power to manage the business pending sale; and power to appoint agents.
8. Following his appointment, the Receiver appointed Mr McGowan as his agent in managing the business.
9. It is common ground on this appeal (as it was before the courts below) that Mr McGowan was at not any material time in a financial position to purchase the business.
10. In the early stages of the receivership, Mr Chadwick made a number of offers to purchase the business, none of which was accepted by the Receiver.
11. The first such offer ("the May 1999 offer") was made in a letter dated 4 May 1999 from Mr Chadwick to the Receiver. In that letter Mr Chadwick confirmed his willingness to take over all the assets and liabilities of the partnership in exchange for a payment of £10,000 to Mr McGowan and the writing off of a debt of £12,000 owed to the partnership by Mr McGowan, plus a sum of £5,000 in respect of the costs of receivership. In that letter, Mr Chadwick said that he was not convinced that the business was trading profitably, or that it was solvent. He quantified the outstanding liability of the partnership to the bank as at that date at £194,000. That offer not having been accepted, on 7 June 1999 he made a further offer to purchase the business for £250,000, the price to be satisfied by his assuming sole liability for the entirety of the bank loan (which then stood at £194,000) with the balance of £54,000 being paid in cash. On 20 August 1999 he made a further offer of £250,000 (the liability to the bank stood at some £183,574 at that date). In September 1999 he made a further offer of £250,000 of which £150,000 was to be in cash, and the balance was to be represented by his assuming sole liability for £100,000 of the bank loan. The Receiver applied to the court for directions. At the hearing of the application, Lightman J (by his order dated 17 September 1999) directed that unless an unconditional offer in the total sum of £270,000 were to be received by 15 October 1999 the Receiver should be at liberty to sell the business to Mr Chadwick for £250,000. Lightman J further ordered that all parties (including the Receiver) should bear their own costs of the application.
12. Mr Chadwick made further offers along the same lines in October 1999. As I have said, none of the offers was accepted by the Receiver.
13. In due course Mr Chadwick applied to the court. By this application he sought an order that he purchase the business for £250,000, to be satisfied by his assuming sole liability for £175,000 of the bank loan and paying the balance of £75,000 in cash. Mr Chadwick states that this offer was made notwithstanding that the business was running at a substantial loss and had declined substantially in value since the commencement of the receivership, and that he made the offer in order to bring the receivership to an end, and thereby to avoid still further losses.
14. The application was heard by Mr Michel Kallipetis QC, sitting as a deputy High Court Judge, on 7 March 2000. In the course of the hearing, in response to comments from the deputy judge, Mr Chadwick varied the terms of the offer by increasing the cash payment to £90,000 (so as to enable the Receiver to discharge outstanding liabilities incurred during the receivership), and by reducing the amount of the bank loan for which he was to assume sole liability by a corresponding amount. By his order of 7 March 2000 Mr Kallipetis QC directed that the sale proceed on those varied terms.
15. Pursuant to that order, by an Agreement dated 18 April 2000 and made between the Receiver as vendor and Mr Chadwick as purchaser, Mr Chadwick agreed to purchase the assets of the business, including goodwill, for £250,000. The price was apportioned as to £160,000 to the leasehold property, as to £88,000 to loose plant, as to £1 for goodwill, as to a further £1 to third party rights and the books and records, and as to the balance of £1998 to stock. The sale was completed on 29 June 2000.
16. Thereafter, as indicated earlier, Mr Chadwick sought permission to commence proceedings against the Receiver for damages for breaches of duty allegedly committed by him during the course of the receivership. Essentially, Mr Chadwick's complaints are (a) that the Receiver was in breach of duty in failing to accept the May 1999 offer; and (b) that, by his agent Mr McGowan, he mismanaged the business.

THE HEARING BEFORE DEPUTY MASTER LLOYD

17. The application for permission was heard at first instance by Deputy Master Lloyd. In support of his application, Mr Chadwick (represented then, as he has been throughout, by Mr Clive Freedman QC) presented to the court a draft pleading, setting out his case against the Receiver. I will refer to this pleading as "the first pleading".
18. The first pleading named the Receiver, Mr McGowan, and Messrs Pridie Brewster & Co (the Receiver's firm) as defendants, but made it clear that no substantive relief was sought against Mr McGowan.
19. Paragraph 5 of the first pleading alleged that the Receiver owed duties in equity to the partners, and that those duties included: a duty "having regard to the losses which the business was making during the receivership .... to bring to an end the management of the business at the earliest opportunity"; a duty to take all reasonable steps to procure that the partnership business be sold at the earliest opportunity "having regard to the damage to the business by the continuation of the receivership"; and a duty to prevent waste. Paragraph 5(e) pleaded a further duty in the following terms:

"Having regard to the fact that the only realistic possibility would be the sale of the business by way of the purchase by one of the partners of the interest of the other, not to damage the business in the meantime to the disadvantage of the partner upon such purchase."

20. The first pleading went on to plead the various offers made by Mr Chadwick, to which I have already referred.
21. Paragraph 31 of the first pleading pleaded that the business was carried on by the Receiver at a substantial loss.
22. Paragraph 47 of the first pleading pleaded breaches of duty by the Receiver. These included allegations that he ought to have accepted the May 1999 offer, and that he mismanaged the business during the receivership.
23. The first pleading went on to plead (further or in the alternative) that the Receiver breached his fiduciary duty to act impartially between the partners by preferring the interests of Mr McGowan over those of Mr Chadwick, and (further or in the further alternative) that he breached that duty by preferring his own interests over those of Mr Chadwick.
24. Paragraph 52 of the first pleading alleged that notwithstanding Lightman J's order that the Receiver bear his own costs of the September 1999 application, the Receiver had attempted to recover those costs by requiring a sum to be paid by Mr Chadwick on the purchase of the business which would include such costs.
25. Paragraph 56 of the first pleading contained the pleading of loss and damage caused by the alleged breaches of fiduciary duty. It is on this paragraph that the argument both before the Deputy Master and before the judge was focussed.
26. The particulars of loss and damage pleaded in paragraph 56 comprised eight subparagraphs, as follows:

(1) failure to account for assets of the partnership taken over at the commencement of the receivership, specific assets being listed;

(2) depreciation of fixed assets during the period of the receivership (calculations being set out):

(3) damage to the goodwill (particulars being given);

(4) "The cash element of the purchase price, namely £90,000. In the event that the business had been sold to [Mr Chadwick] at or shortly after the inception of the receivership, [Mr Chadwick] would not have had to pay the cash sum of £90,000. He had no alternative other than to pay the said sum in order to acquire the business in March 2000, and had he not done so, his losses would or might have been greater than the losses particularised ....";

(5) pre-receivership liabilities which Mr Chadwick had had to discharge which he would not have had to discharge but for the Receiver's breaches of duty (no particulars being given);

(6) loss of profits caused by mismanagement and/or the prolonged period of the receivership, including (in subparagraph b.) the effect of delays and/or the unnecessary continuation of the receivership (subparagraph c. under this head pleaded as follows (so far as material):

"The effect of the foregoing is likely to affect the business after the receivership. It is likely to take years for the business to recover from the foregoing ....");

(7) receivership losses (in the event, this head of loss was not pursued); and

(8) Mr Chadwick's legal costs (including litigation costs) incurred "[i]n order to mitigate his losses", it being alleged that had the May 1999 offer been accepted, such costs would not have been incurred.

27. The Receiver was represented before the Deputy Master, as he has been throughout, by Mr Christopher Pymont QC and Mr James Aldridge.
28. I turn next to the Deputy Master's judgment. At p.3D-E of the transcript of his judgment, the Deputy Master said this:

"Mr Pymont, who appears for the receiver, accepts that I should give leave, unless either I am satisfied .... that there is no reasonable cause of action for significant damage or I am left in significant doubt as to whether or not there is a reasonable cause of action for significant damage."

29. The Deputy Master went on to record Mr Pymont's principal submission that a distinction had to be drawn between losses claimed by Mr Chadwick which he suffered in his capacity as a disappointed purchaser (which were not recoverable in law), and losses which he suffered in his capacity as a partner (which would be recoverable in law, if proved). The Deputy Master then recorded Mr Freedman's submission that Mr Chadwick was, from the outset of the receivership, in the position of having to salvage what he could from the wreckage caused by the receivership and that he was accordingly entitled to recover damages representing the difference between the position he in fact found himself in, having had to pay £90,000 to cover receivership liabilities as part of the consideration for his purchase of the business, and the position he would have been in had the May 1999 offer been accepted.
30. Confessing that he did not find the dispute an easy one to resolve, the Deputy Master expressed himself as not satisfied, on the basis of the first pleading, that any shortcomings on the part of the Receiver resulted in any substantial loss to Mr Chadwick in his capacity as a partner. He accordingly refused Mr Chadwick permission to commence the proposed proceedings.
31. Mr Chadwick appealed against the Deputy Master's decision. The appeal was heard by Burton J.

THE HEARING BEFORE BURTON J

32. Before Burton J it was common ground (as it is on this appeal):

(a) that a party seeking to commence proceedings against a court-appointed receiver in respect of the conduct of the receivership must first obtain the permission of the court which appointed the receiver to do so (see Re Maidstone Palace Varieties Ltd [1909] 2 Ch 283, at 286 per Nevill J); and

(b) that, the case having been argued by reference to the first pleading, the test for the granting of permission in the instant case was whether (and if so to what extent) the first pleading disclosed an arguable claim.

33. The battle-lines before the judge were essentially the same as they had been before the Deputy Master, save that (subject only to the submission mentioned in paragraph 38 below) Mr Pymont abandoned his initial contention that the evidence did not disclose any arguable case on liability. Before the judge, Mr Pymont confined his attack on the first pleading to the contention that, assuming the pleaded facts to be established, none of the various heads of loss pleaded in paragraph 56 of the first pleading was recoverable.
34. The matter was, however, complicated by the fact that in the course of his submissions in reply Mr Freedman orally amended paragraph 56 of the first pleading in a number of respects. So far as material, those amendments were as follows:

As to (1): Substitute "Loss of the assets ...." for "Failure to account for the assets ...".

As to (3): Add a paragraph in the terms of (6)c. (quoted above).

As to (4): Add, after the first sentence:

"This [sc. the £90,000] should have been available for the partners, but has been used for costs and expenses unnecessarily incurred. Alternatively, in the event ...."

At the end of paragraph 56, add:

"For the avoidance of doubt, the losses of [Mr Chadwick] for the partnership are (1), (2), (3), (4), (5) and (6)b. above. Further or alternatively, the losses of [Mr Chadwick] for himself are (1), (2), (3), (4), (5), (6)b. and (8) above."

THE JUDGMENT OF BURTON J

35. The judge based his judgment on the first pleading as orally amended by Mr Freedman in course of oral argument. I will refer hereafter to the first pleading as so amended as "the second pleading".
36. The judge began his judgment by concluding (in paragraph 4) that the Deputy Master had expressed the applicable test in an "overly-complicated way, and one which seems to impose too heavy a burden on the applicant". The judge accordingly concluded that he was entitled to look again at the whole matter.
37. The judge went on (in paragraph 5 of his judgment) to identify the issue before him as being "whether, assuming the facts and allegations set out in [the second pleading] .... to be established, [Mr Chadwick] can establish and recover against the Receiver the loss he alleges or any loss".
38. The judge then turned to the submission made by Mr Pymont that none of the pleaded heads of loss was recoverable. He first addressed, and rejected, a submission made by Mr Pymont (not repeated in this court) that the Receiver, having complied with the directions given by Lightman J, could not in any event be sued for breach of duty.
39. Then, having referred at length to the allegations in the second pleading, the judge summarised Mr Chadwick's case against the Receiver as follows (in paragraph 13 of his judgment):

"The primary pleaded claim relates to the loss inevitably resulting from an unnecessary and overly extended receivership, whose [sic] sale was delayed in breach of duty: only subsidiarily is it then alleged that in addition there was incompetent management."

40. Then, in paragraph 14 of his judgment, under the heading "The Legal Context", the judge set out a number of propositions of law relating to the duties of a receiver. In so doing, he referred to an observation made by Sir Richard Scott V-C in Medforth v. Blake [2000] Ch 86 at 102f that "a receiver managing mortgaged properties owes duties to the mortgagor and anyone else with an interest in the equity of redemption", noting in this connection Mr Pymont's submission that that observation is a clear indicator of the limited scope of the receiver's duties. The judge concluded paragraph 14 of his judgment by saying (at subparagraph (v)(f)):

"There is, as just foreshadowed, no duty, at any rate as found persuasively by the Ontario Court of Appeal in [Skyepharma v. Hyal Pharmaceutical Corporation [2001] BPIR 163] relied on by Mr Pymont QC, owed to a disappointed prospective purchaser or unsuccessful bidder: "a prospective purchaser has no legal or proprietary right in the property being sold .... a commercial interest is not sufficient" (168-9)."

41. The judge then turned to paragraph 56 of the second pleading (i.e. the paragraph as amended in course of argument before him), setting the amended paragraph out in extenso and noting that head (7) (receivership losses) was no longer pursued.
42. Having summarised the arguments of Mr Freedman and Mr Pymont, the judge returned to the issue before him, saying this (in paragraph 25 of his judgment):

"The issue is whether [Mr Chadwick's] claim in respect of all or any of the heads set out in paragraph 56 as proposed to be amended is arguable or whether, as Mr Pymont QC asserts, each such claim is hopeless. It seems to me that, at least for the purposes of arguability, the battleground over the claim of the disappointed purchaser has been evacuated, and the questions are whether any or all the heads can be recovered:

i) as a loss allegedly suffered by the partnership, i.e. by the partners jointly, which [Mr Chadwick], being the partner actually suffering the losses, and/or in any event having joined Mr McGowan as a party as required, can claim to recover in these proceedings, or alternatively

ii) as being a loss suffered by him as one of the partners, being recoverably consequential upon a breach upon a breach of an equitable or fiduciary duty owed to him by the Receiver."

43. The judge then turned to the various heads of loss particularised in paragraph 56 of the second pleading. In relation to each of heads (1) to (5) he expressed his conclusion as to the recoverability of such loss under two headings: (a) "Loss to the partnership" and (b) "Loss to the Applicant as a partner".
44. As to head (1) (pre-receivership assets) he concluded (under (a)) that but for the Receiver's (assumed) negligence the partnership would or might have been left with pre-receivership assets which would or might not have been wasted in receivership expenses and disbursements; and (under (b)) that if the Receiver had sold the business to Mr Chadwick in May 1999, Mr Chadwick would or might have received a business which included some part of the value of those assets.
45. As to head (2) (depreciation of fixed assets), he concluded (under (a)) that no sum could be claimed since, notwithstanding depreciation, more or less the same price was paid for the business in April 2000 as would have been paid had the Receiver accepted the May 1999 offer; and (under (b)) that when Mr Chadwick eventually purchased the business, he received assets which were depreciated, and hence he received less value for the price which he paid.
46. As to head (3) (damage to goodwill), the judge reached essentially the same conclusions as he had reached in relation to head (2).
47. As to head (4) (the £90,000 cash element in the purchase price) he concluded (under (a)) that the partnership could not claim the £90,000 as a loss since if the business had been sold in May 1999 the partnership would not have received the £90,000; and (under (b)) that the claim to recover the £90,000 as a loss was "duplicative of the claim in respect of the depreciation in value and/or goodwill".
48. As to head (5) (pre-receivership liabilities) he concluded (under (a)) that the liabilities "would have been met by way of the purchase price"; and (under (b)) that as a result of the Receiver's (assumed) breaches of duty Mr Chadwick had lost the opportunity to meet pre-receivership liabilities out of the continuing receipts of the business. However he commented that both those ways of putting the claim were speculative.
49. As to head (6) (loss of profits), he concluded that this loss was irrecoverable whether as a loss to the partnership or as a loss to Mr Chadwick as a partner, commenting that a claim that had Mr Chadwick acquired the business earlier he would have run it at a profit could only be advanced by Mr Chadwick in his capacity as a disappointed purchaser and was accordingly not arguable.
50. As to head (8) (legal costs), he recognised that these costs represented a loss to Mr Chadwick personally, and not a loss to the partnership, but he concluded that part of such costs might be recoverable.
51. The judge accordingly concluded that heads (1), (2), (3), (5) and (8) were arguable (head (5) being "just" arguable), and granted permission for the commencement of proceedings against the Receiver for the recovery of those heads of loss. The grant of permission was, however, subject to a number of conditions, which are set out in paragraph 29 of the judgment, as follows:

"(i) Re-pleading of the mismanagement case, so as to accord with the submissions which Mr Freedman QC made, and to give the best particulars available to the Applicant at the moment and prior to disclosure.

(ii) The abandonment of the claim in paragraph 56(6), after transfer of subparagraph (c), as discussed above, and of the now unnecessary (7).

(iii) Re-pleading paragraph 56 generally so as to make clear .... which sums are claimed upon which basis.

(iv) Proper particularisation of the [pre-receivership] liabilities ....

(v) Either the abandonment, or a fresh pleading as part of a repleaded mismanagement claim, of the claim presently in paragraph 56(4) for the £90,000 or any part of it."

52. The judge's order dated 10 December 2001 provided (by paragraph 1) that the order of the Deputy Master be set aside, and (by paragraph 2) that Mr Chadwick have permission to commence proceedings against the Receiver on condition that by 4pm on 14 January 2002 he comply with the conditions set out above. Paragraph 3 of the order gave Mr Chadwick liberty to apply for permission to claim the £90,000 on condition that notice of the application, together with a draft pleading, be served by 4pm on 14 January 2002.

THE THIRD PLEADING

53. Mr Chadwick complied with the conditions imposed by the judge to the extent that within the time allowed he served a further draft pleading ("the third pleading"), containing a number of additions and amendments.
54. The material differences between the second pleading and the third pleading are as follows. In the first place the third pleading contains an additional paragraph 47A, in which further allegations of mismanagement are made. The primary allegation of mismanagement (which is pleaded in subparagraph a. of paragraph 47A) is that the Receiver:

"…. caused and/or permitted the business to trade at a loss and notwithstanding the above mentioned offers of the Claimant he continued to manage the receivership and/or the business at a loss instead of bringing the receivership to an end". (Emphasis supplied).

55. In other words, the primary allegation of mismanagement is that the Receiver ought to have accepted the May 1999 offer.
56. In the second place, paragraph 56 is substantially recast. In addition to the inclusion of further particulars in relation to specific items (including pre-receivership liabilities), the surviving heads of loss (i.e. excluding the claims for loss of profits and in respect of receivership losses) are pleaded on alternative bases. The nature of the distinction which is sought to be made between the two types of loss appears from a new paragraph introducing the particulars pleaded under paragraph 56, which reads as follows:

"In the losses referred to below, they are of two principal kinds. The first kind is where the Claimant seeks to recover a loss to the partnership where the breaches of duties of the First Defendant have caused loss to the partnership as a whole. The second kind is where the losses have been suffered to the Claimant himself consequential upon the aforementioned breaches of duty and/or in an attempt to mitigate the losses of himself and/or the partnership. The offers to buy the business by the Claimant were so as to mitigate the liabilities of the partnership which he would have to bear and/or thereafter to mitigate the losses which the breaches of duty of the First Defendant caused to the partnership and to him. In respect of each head of loss, the kind of claim is identified."

57. The third pleading then sets out the surviving heads of loss. Head (1) (loss of fixed assets) is claimed on both the above bases. The loss to the partnership is said to be that the assets in question have been wasted by the Receiver. The loss to Mr Chadwick is described in this way:

"In the event that the First Defendant had in accordance with his obligations sold the restaurant business in May 1999 or at an early stage, he would have sold the same to the Claimant, who would or may have received a business with the benefit of the said assets."

58. Head (2) (depreciation) is pleaded solely as a "Loss to the claimant" type of loss, as opposed to a "Loss to the partnership" type of loss. Under the heading "Loss to the Claimant, the third pleading pleads as follows:

"The same is a loss of the Claimant in that when he purchased as a partner in March 2000, he attempted to mitigate his loss as a partner. As part of the mitigation of loss, he had no alternative or he reasonably believed that he had no alternative other than to pay the price which he did in order to achieve the purchase: without the purchase, his losses would or might have been greater than the losses particularised herein. However, he received for the said price an interest in the lease and in fixed assets which had depreciated between the time when the First Defendant ought to have sold to the Claimant and the time of the actual sale."

59. Head (3) (damage to goodwill) is also pleaded solely as a "Loss to Claimant" type of loss, along the same lines as head (2).
60. Head (4) (loss of the cash element of the purchase price, i.e. £90,000) is pleaded as a loss to the partnership, the allegation being that but for the mismanagement the £90,000 would have reverted to the partners instead of having to be applied in satisfying outstanding liabilities incurred during receivership. The inclusion of this claim is the subject of Mr Chadwick' cross-appeal.
61. Head (5) (pre-receivership liabilities) is pleaded both as a "Loss to the partnership" and as a "Loss to the Claimant". Under the latter rubric it is alleged that the delay in selling the business to Mr Chadwick resulted in his being unable to discharge the pre-receivership liabilities (including the bank loan) out of the continuing trading receipts of the business.
62. Finally, the claim for legal costs is now to be found in head (6). This head of loss is claimed only as a "Loss to the Claimant" type of loss. In effect, Mr Chadwick claims his legal costs as having been incurred in the course of taking reasonable steps to "mitigate his loss as a partner" by bringing the receivership to an early end. He also claims under this head to recover as damages his costs of the applications to Lightman J and Mr Kallipetis QC (no orders having been made in relation to those costs).

THE COMMENCEMENT OF PROCEEDINGS

63. On 8 February 2002, pursuant to the judge's order, Mr Chadwick commenced the proposed proceedings against the Receiver, joining Mr McGowan and the Receiver's firm as additional defendants (as foreshadowed in the first pleading and the second pleading). In due course, Particulars of Claim were served in the form of the third pleading.

THE APPEAL NOTICES

64. In the meantime, by his Appellant's Notice dated 27 December 2001, the Receiver seeks to challenge the judge's decision on the ground that the judge ought to have held (1) that the Receiver's duties to Mr Chadwick were owed to him only in his capacity as a partner; (2), as a corollary of (1), that the Receiver had no duty to protect Mr Chadwick from losses suffered by him in his capacity as a disappointed purchaser; (3) that Mr Chadwick's case in relation to pre-receivership liabilities was not sufficiently pleaded, and that Mr Chadwick should not have been permitted to proceed with it; and (4) that the same consideration applied to the allegation of mismanagement. On 18 February 2002 Arden LJ granted permission to appeal in respect of (1) and (2) but refused permission in respect of (3) and (4).
65. By his Respondent's Notice dated 12 March 2002 Mr Chadwick cross-appeals for permission to claim the sum of £90,000 "both as a loss to the partnership and on his own behalf as a mitigating partner". Mr Chadwick contends, by his grounds of appeal, that the judge was in error when he, in effect, equated the May 1999 offer with the terms of the eventual purchase in April 2000, and concluded that the claim for £90,000 was "duplicative of the claim in respect of the depreciation in value and/or goodwill" (see paragraph 26(iv)(b) of the judgment). It is contended that although the overall price was more or less the same, under the terms of purchase Mr Chadwick was required to make a cash payment of £90,000 whereas the May 1999 offer, if accepted, would have required him to make a cash payment of only £15,000; and that had the May 1999 offer been accepted, Mr Chadwick would have paid £75,000 less cash and would have received a business which had not suffered depreciation in value and/or goodwill.

THE ARGUMENTS ON THE APPEAL AND CROSS-APPEAL

66. Mr Pymont submits (citing passages from the speech of Lord Hoffmann in South Australia Asset Management Corp v. York Montague Ltd [1997] AC 191 ("SAAMCO")), that the first step in analysing and appraising the pleaded claim must be to establish the nature and extent of the Receiver's duties towards Mr Chadwick. As to that, he repeats the submission which he made below that the Receiver owed no duty to Mr Chadwick other than qua partner, relying once again on the Canadian case of Skyepharma.
67. He accepts that the Receiver owed a duty to both Mr Chadwick and Mr McGowan, as partners, to act reasonably in getting in the assets of the partnership and in realising them for the best price reasonably obtainable, from whatever source, and that in so far as he breached that duty he would be liable to compensate them for losses which fall within the scope of the duty: i.e. for losses suffered by Mr Chadwick as a partner. As to that, he submits that on the basis of the facts as set out in his own witness statement Mr Chadwick suffered no loss in that capacity, save in relation to the pre-receivership liabilities which he has particularised for the first time in the third pleading, being liabilities for which, following the purchase, he remains liable as a partner. In respect of those liabilities, which amount to some £42,000, he accepts that on the assumed facts Mr Chadwick has a good claim. But that, he submits, is the limit of the Receiver's (assumed) liability to Mr Chadwick as a partner. He submits that all other heads of losses claimed by Mr Chadwick are losses suffered by him (if at all) as a disappointed purchaser.
68. In any event, as to the claim in respect of pre-receivership liabilities, Mr Pymont points out that the Receiver has himself discharged some £67,000 worth of pre-receivership liabilities, in respect of which he would prima facie have a restitutionary claim against the partners, subject to any issue as to breach of duty. He tells us that the attitude which the Receiver has adopted thus far is that if permission for Mr Chadwick to commence proceedings against him is refused, he will waive that claim; but that if permission is granted and proceedings are commenced, he will counterclaim for restitutionary relief in respect of the pre-receivership liabilities which he has discharged.
69. Turning to the remaining heads of claim, apart from the claim in respect of receivership liabilities, Mr Pymont submits that the judge was right to characterise the mismanagement claim as being subsidiary to the primary claim that the Receiver ought to have accepted the May 1999 offer. Underpinning all his detailed submissions on the remaining heads of loss pleaded in paragraph 56 of the third pleading lies the fact that had the May 1999 offer been accepted, the partners would have been in a "nil position" in the sense that they would have been left with no assets and no liabilities. That, he submits, effectively puts a cap on any loss flowing from the Receiver's assumed breach of duty in failing to accept the May 1999 offer, since it would be inconsistent with the allegation that he ought to have accepted the May 1999 offer (as well as being inconsistent with the whole tenor of the third pleading) to allege that he ought thereafter to have carried on the business at a profit. On that footing, the maximum sum that can be recovered by way of compensation for the Receiver's assumed breaches of duty is such sum as will put the partners in a "nil position" following the sale to Mr Chadwick. And that, he submits, brings one back to the claim of some £42,000 relating to pre-receivership liabilities. Only in that respect and to that extent, he submits, did Mr Chadwick fall short of being in a "nil position".
70. As to the allegations of mismanagement, Mr Pymont accepts for present purposes that the Receiver was under a duty to manage the partnership business as a reasonable man of business, and that he would be liable to the partners, qua partners, for any loss resulting from a breach of that duty. However, he submits that the mismanagement claim adds nothing to the primary claim of failure to accept the May 1999 offer. Even if there was mismanagement during the receivership, he submits, one still comes back to the question: To what extent were the partners (in effect, Mr Chadwick) in any worse position than a "nil position" following the sale to Mr Chadwick? He submits that once any such shortfall has been made good, as it will be once Mr Chadwick has been compensated in respect of pre-receivership liabilities, it becomes pointless to investigate whether there has been mismanagement.
71. Mr Pymont submits that the judge failed to make clear on what basis he drew the distinction between "Loss to partnership" and "Loss to the Applicant as a partner", or, for that matter, the nature of that distinction. At all events, he submits that it is only the loss to the partnership which is recoverable.
72. As to the specific heads of loss claimed, Mr Pymont submits as follows:

In relation to head (1), loss of fixed assets, he submits that the judge was wrong to conclude that it was arguable that that sum would have been available for distribution, since had the May 1999 offer been accepted the assets would have been transferred to Mr Chadwick, as purchaser; and that the partners are in no worse position in that respect by reason of what actually happened. He submits that on a true analysis the loss claimed was suffered by Mr Chadwick (if at all) in his capacity as disappointed purchaser.

As to heads (2) and (3) depreciation and damage to goodwill, he submits that the Receiver was under no duty to assist an individual partner to reduce his partnership losses: his duty was to turn the assets to good account. In any event, he submits, what in fact took place was a real purchase by Mr Chadwick as a special purchaser, and Mr Chadwick cannot be heard to say that he paid more for the assets in order to mitigate his loss. It was for Mr Chadwick to decide whether to offer to purchase the business on the terms incorporated in the order of Mr Kallipetis QC; there was no obligation on him to make any offer at all. In the event, the value of the assets was the price which Mr Chadwick was prepared to pay for them. As to goodwill, Mr Pymont submits that it is impossible to see what goodwill there could have been at the beginning of the receivership, apart from the fact that Mr Chadwick might be prepared to pay over the odds for the business. In this connection, Mr Pymont referred to the terms of the letter in which the May 1999 offer was made.

In relation to head (4), the £90,000, Mr Pymont submits that this claim (which is the subject of the cross-appeal), in so far as it assumes that the Receiver should have continued to run the business, contradicts that primary claim that the Receiver should have accepted the May 1999 offer.

As to head (6), legal costs, Mr Pymont submits, relying on Berry v. British Transport Commission [1962] 1 QB 306 that Mr Chadwick's litigation costs cannot be recovered as damages. As to the remaining, "non-litigation", costs, he submits that such costs should be regarded as being in effect pre-litigation costs. In any event, he submits, the "non-litigation costs" were incurred by Mr Chadwick in his capacity not as a partner but as a disappointed purchaser.

73. Mr Freedman submits that the distinction drawn by the judge, and emphasised in the third pleading, between on the one hand losses suffered by the partnership and on the other hand losses suffered by Mr Chadwick as a partner is a valid distinction in the context of the instant case. He accepts that Mr Chadwick cannot recover losses suffered by him qua purchaser, but he submits (as he has pleaded) that the losses in question were suffered by him "as a partner seeking to mitigate his loss". He stresses that the instant case does not involve the rights of a third party purchaser at arms' length; the instant case, he submits, is about a displaced owner or a part owner trying to mitigate his loss. He submits that none of the losses claimed are those of a disappointed purchaser, but rather that the losses which are specific to Mr Chadwick (that is to say "Loss to the Claimant" type of losses, to use the language of the third pleading) are consequential upon the Receiver's breaches of duty towards the partners. This, he submits, is entirely consistent with the broad nature of the equitable duty of care. He submits that the court should approach the purchase of the business by Mr Chadwick on the footing that he purchased it so as to mitigate his financial loss as a partner by staunching the flow of trading losses resulting from the Receiver's breaches of duty and by putting himself in the position where he could employ the former partnership assets towards discharging partnership liabilities. He submits that that is all consequential upon the Receiver's breaches of duty. He disclaims, as he did before the judge, any intention to claim to recover losses suffered by Mr Chadwick as a disappointed purchaser.
74. As to the particular heads of loss pleaded, Mr Freedman makes the general submission that it is appropriate to divide the recoverable loss into, in effect, separate compartments, since although the true measure of the loss arising from the Receiver's mismanagement is the diminution in the value of the business as a whole, in the instant case that measure is represented by the sum of the various heads of loss claimed.
75. As to heads (1), (2) and (3), loss of fixed assets, depreciation, and damage to goodwill, Mr Freedman submits that those heads taken together represent the diminution in the value of the business caused by the Receiver's mismanagement. As to head (4), the £90,000, he submits that the claim should be allowed to proceed for the reasons set out in the Respondent's Notice. As to head (6), legal costs, he submits that Mr Chadwick's litigation costs are properly recoverable in the new proceedings, and that there is nothing in the Berry decision to prevent such recovery. As to "non-litigation costs", he submits that they were incurred in an attempt to procure that the Receiver acted in accordance with his duties, and were accordingly caused by his failure to do so.

CONCLUSIONS

The application for permission

76. In Re Maidstone Palace of Varieties Ltd [1909] Ch 283, a receiver was appointed in a debenture-holder's action. A third party threatened to commence a separate action against the receiver claiming compensation for the use of its plant by the receiver. The receiver applied by summons in the debenture-holder's action for an order that the third party be restrained from commencing separate proceedings, and that he bring his claim in the debenture-holder's action. Granting the application, Nevill J said this (at p.286):

"It appears to me that a dispute of that kind is one which … the Court will deal with itself, and that it will not allow its officer to be subject to an action in another Court with reference to his conduct in the discharge of the duties of his office, whether right or wrong. The proper remedy for anyone aggrieved by his conduct is to apply to this Court in the action in which he was appointed. If any wrong has been done by the officer, the Court will no doubt see that justice is done, but no one has a right to sue such an officer in another Court without the sanction of this Court."

77. In the instant case it is common ground that it would be inappropriate for Mr Chadwick's claim against the Receiver to be tried out in the partnership action; a separate action is required. Hence the need to apply in the partnership action for permission to commence such an action.
78. As to the approach which the court should take to such an application, it is a matter for the court's discretion whether or not to give permission, and accordingly no hard and fast rules can be laid down as to the requirements which a prospective claimant must meet or as to the manner in which he brings forward his application. What can, in my judgment, safely be said is that permission will not be granted unless the applicant satisfies the court that his claim is a genuine one, in the sense that the allegations which he seeks to make are such as to call for an answer from the receiver. On the one hand, the receiver must not be subjected to vexatious or harassing claims; on the other hand, as Nevill J observed, the court must see that justice is done.
79. In the instant case, Mr Chadwick put before the court a draft pleading, and the court accordingly adjudicated on the application by reference to that pleading. In other cases a draft pleading may not be required; that will be a matter for court hearing the application. But where the court is faced with a draft pleading, it may well find it appropriate (as it has done in the instant case) to proceed as if the proposed action had already been commenced and an application had been made by the defendant to strike out the claim pursuant to CPR Pt 3 or for summary judgment under CPR Pt 24, if only because there can be no purpose in giving permission for the commencement of proceedings which will inevitably come to grief at the interlocutory stage.
80. In agreement with the Deputy Master and the judge, I would in any event have considered that to be the right approach to the application for permission in this case; but given that the action has in fact been commenced, and that the third pleading is no longer a draft pleading but a real pleading, there can no longer be any other approach.
81. Hence I proceed to consider whether (and if so in what respects) the claim as pleaded in the third pleading has a real prospect of success.

The substantive issue: real prospect of success?

82. As Lord Hoffmann said in SAAMCO (at page 211A-B):

"Before one can consider the principle on which one should calculate the damages to which a plaintiff is entitled as compensation for loss, it is necessary to decide for what kind of loss he is entitled to compensation."

83. In the instant case, that involves determining the scope of the Receiver's duties to Mr Chadwick.
84. As noted earlier, it is common ground between Mr Pymont and Mr Freedman (and rightly so, as Skyepharma demonstrates) that the Receiver owed no duties to Mr Chadwick as a disappointed purchaser, and accordingly that Mr Chadwick cannot recover in respect of loss which he has suffered in that capacity. To adapt the words of Lord Hoffmann in SAAMCO, loss suffered by Mr Chadwick as purchaser is not the kind of loss for which he is entitled to claim compensation from the Receiver.
85. So far so good, but Mr Pymont and Mr Freedman part company when Mr Freedman goes on to submit the heads of loss which Mr Chadwick claims in paragraph 56 of the third pleading are all losses which he has suffered not as a purchaser but as a partner. Mr Pymont contends that the only loss which (on the assumed facts) Mr Chadwick suffered as a partner is the loss pleaded in head (5): i.e. the loss in respect of pre-receivership liabilities, totalling (on the particulars now pleaded) some £42,000.
86. Those, then, are the battle-lines as drawn on this appeal and cross-appeal.
87. Turning to the judge's judgment, I confess that I do not find his distinction between on the one hand "Loss to partnership" and on the other hand "Loss to the Applicant as a Partner" a useful or indeed a meaningful distinction in the present context; the more so given that in paragraph 26(i) of his judgment the judge defines "Loss to the Applicant as a Partner" in terms which seem to refer to, or at least to include, loss suffered by Mr Chadwick as a purchaser. The true position, as I see it, is this. As between Mr Chadwick and Mr McGowan, Mr Chadwick, having bought out Mr McGowan, is (subject to any contrary claim by Mr McGowan) entitled to claim recovery of the entirety of any loss suffered by the partnership as a result of the Receiver's breaches of duty. But, for reasons already given, that is in my judgment the limit of his claim against the Receiver, since that is the maximum loss he can claim to have suffered as a partner. Any additional loss he may have suffered must have been suffered by him in some other capacity, e.g. as a purchaser. In particular, any diminution in the value of the business attributable to alleged mismanagement by the Receiver is not a loss suffered by Mr Chadwick as a partner except to the extent to which the purchase price for the business is correspondingly diminished. That, in my judgment, is the crucial distinction in the instant case.
88. On that footing, I turn to the pleaded heads of loss.
89. In the first place, the pleading of specific heads of loss seems to me to be misplaced in any event, since, as Mr Freedman himself accepts (see paragraph 55 of his written skeleton) "the loss to the business as a whole is the measure…". He goes on to submit that "the business value is usually the sum of its parts", but there is no pleading to that effect in paragraph 56. As I see it, whether the claim be put on the footing of failure to accept the May 1999 offer or of mismanagement during the receivership, one can only begin to evaluate the resulting loss by reference to the effect of the breach on the partnership business as a whole, rather than by reference to its effect on specific assets or liabilities.
90. In the second place, and just as fundamentally, account has to be taken of the position which the partners would have been in had the May 1999 offer been accepted; for, as the judge rightly observed, it is that failure which constitutes Mr Chadwick's primary claim. Had that happened, that is to say had the Receiver not breached his duty in failing to accept the May 1999 offer, the partners would, as Mr Pymont submitted, have been in a "nil" position, having no assets and being subject to no outstanding liabilities as partners. Nowhere is it alleged (nor could it sensibly be alleged) that on a subsequent disposal of the business by the Receiver the partners could or should have done better than that. So the question which has to be addressed is to what extent were the partners in a worse position than a "nil" position following the disposal of the business to Mr Chadwick in April 2000. And the answer to that question, as Mr Pymont submitted, is that (subject only to the question of Mr Chadwick's legal costs, which I shall address below) the partners as partners were only worse off by comparison with the terms of the May 1999 offer to the extent that (on the assumed facts) following Mr Chadwick's purchase there remained outstanding pre-receivership liabilities for which they were liable: in other words, the £42,000 or thereabouts claimed under head (5) in respect of pre-receivership liabilities which Mr Chadwick has discharged.
91. Subject to the question of Mr Chadwick's legal costs, all the other heads of loss relating to the partnership business can only have been suffered by Mr Chadwick as a purchaser. This applies also to Mr Chadwick's claim for, in effect, the recovery of his £90,000 cash payment. As Mr Pymont rightly says, there was no obligation on Mr Chadwick to put up that, or indeed any sum. There was, for that matter, no obligation upon him to purchase the business at all. He could, had he wished to do so, have simply stood back and left it to the Receiver to attempt to find a third party purchaser. In the event, he considered it to be in his commercial interest to purchase the business on the terms contained in the April 2000 Agreement, and by so doing he effectively set the value of the business at the price which he paid. I agree with Mr Pymont that he cannot be heard to say that he paid over the odds to protect his position. He was a special purchaser. The value of the business to the partnership was what he was prepared to pay for it.
92. Subject only to the question of legal costs, therefore, I conclude that the only claim made by Mr Chadwick which can be said to be arguable is his claim under head (5): pre-receivership liabilities.
93. Mr Pymont made a number of further criticisms of the pleading of the heads of loss. In the circumstances I do not find it necessary to consider those further criticisms, given what I regard as the fundamental flaws in the pleading to which I have already referred.
94. Since the conclusion of the oral argument, Mr Freedman has referred us to the recent decision of this court in Lloyds plc v. Cassidy [2002] EWCA Civ.1427, where the issue was whether a counterclaim against a bank and receivers should be dismissed under CPR Pt 24. Mr Freedman submits (in a written note) that the decision is of relevance to this appeal because of the emphasis placed on the need to examine the facts at trial before deciding whether a duty of care arguably exists (see paragraph 42 in the judgment of Mance LJ). Mr Freedman submits that although the focus of the instant appeal is on loss and damage, that in turn depends in part on the nature and extent of the duty of care. Mr Pymont (in a written note) does not take issue with the proposition that the court should not shut out a claimant from pursuing an arguable, if difficult, claim, especially where the relevant facts are in any case likely to have to be explored at trial. But he submits that the instant case is not such a case, and that the decision in Lloyds v. Cassidy adds nothing to the material already before the court on this appeal. I agree with Mr Pymont. I do not, for my part, derive any assistance from the decision in Lloyds v. Cassidy in addressing the issues which arise on this appeal.
95. I turn, then, to the claim under head (6): legal costs.
96. I consider first the claim for the recovery as damages of Mr Chadwick's costs of the applications before Lightman J and Mr Kallipetis QC, in respect of which no order was made.
97. In Berry, Devlin LJ referred (at p.319) to what he described as an old rule, to the effect that if costs were awarded, nothing in excess of the assessed sum could be recovered, and that if costs were expressly withheld, they could not be recovered as damages in another court. At page 320 he said that the reason for the rule was not that any costs in excess of the amount of costs as assessed were to be treated as unreasonable, but rather that the same question could not be gone into twice. As he put it at the top of page 322:

"…. the reason for the rule is that the law cannot permit a double adjudication upon the same point."

98. Devlin LJ went on to say (at p.322):

"I find it difficult to see why the law should not now recognise one standard of costs between litigants and another when those costs form a legitimate item of damage in a separate cause of action flowing from a different and additional wrong."

99. As I read those passages, Devlin LJ considered that a claim for costs in excess of the sum assessed would involve a double adjudication of the kind which the rule was designed to prevent. I do not read his judgment as in any way sanctioning a separate action for costs (including assessed costs) which have been expressly withheld by the court, following judicial consideration of the issue whether or not they should be withheld. That, as it seems to me, would plainly involve the kind of double adjudication which the rule was designed to prevent.
100. In the instant case, the issue of Mr Chadwick's costs was raised and adjudicated upon both before Lightman J and before Mr Kallipetis QC, and in each case the decision was that he should not be entitled to recover them. And that, it seems to me, must be that.
101. Mr Chadwick's "non-litigation costs" are, however, in an entirely different category, since they have not been the subject of any consideration or ruling by the court. The question in relation to those costs (as in relation to the other heads of loss) is whether they were incurred by Mr Chadwick as a partner. I consider that it is at least arguable that they were so incurred, on the basis that they would not have been incurred but for the Receiver's (assumed) breach of duty in failing to accept the May 1999 offer and that, at least to some extent, they were incurred on behalf of the partnership rather than on behalf of Mr Chadwick as a purchaser. It remains to be seen, however, whether (and if so to what extent) the claim for such costs will succeed at trial.

RESULT

102. In the result, therefore, I would allow this appeal in part, and refuse Mr Chadwick permission to proceed with his claims against the Receiver other than (a) the claim pleaded in head (5) in paragraph 56 of the third pleading (a claim which Mr Pymont accepts is arguable) and (b) the claim under head (6), but limited to legal costs which were not in issue before Lightman J or Mr Kallipetis QC; and I would dismiss the cross-appeal.

Mr Justice Pumfrey :

103. I agree.

Lord Justice Schiemann :

104. I also agree.