HER MAJESTY'S SECRETARY OF STATE FOR BUSINESS ENTERPRISE AND REGULATORY REFORM FOR AN ORDER TO WIND UP UK BANKRUPTCY LIMITED v. , 31 March 2009, Lord Hodge

OUTER HOUSE, COURT OF SESSION

[2009] CSOH 50

P1975/08

OPINION OF LORD HODGE

in the Petition of

Her Majesty's Secretary of State for Business Enterprise and Regulatory Reform

Petitioner:

for

an order to wind up

UK Bankruptcy Limited

________________

SEE NOTE ATTACHED RE REPORT TO INNER HOUSE

Act: A. Stewart; Brodies LLP

Alt: Mr Sean Mason (a director of the Respondents)

27 March 2009

[1] This is an application by the Secretary of State for Business Enterprise and Regulatory Reform to wind up UK Bankruptcy Limited ("the company") under section 124A of the Insolvency Act 1986 on the ground of expediency in the public interest. In the petition the Secretary of State alleges inappropriate business practices, deficient financial management and failures to lodge accounts and annual returns. On 9 December 2008 the court appointed Mr William Cleghorn, CA, as provisional liquidator of the company. Mr Mason, who is one of two directors of the company and owns fifty per cent of its share capital, lodged answers to the petition on behalf of the company on 22 December 2008.

[2] Mr Mason then appeared in court at a By Order hearing on 19 February 2009 which was arranged to discuss future procedure. At that hearing I allowed a period of adjustment of the pleadings and appointed the cause to be put out By Order on 7 May 2009. I asked parties whether Mr Mason had the right to be heard in court proceedings on behalf of the company. In response, the petitioner's counsel undertook to intimate to Mr Mason within two weeks whether the petitioner challenged his right to address the court in his capacity as a director instead of opposing the application to wind up the company in his capacity as a shareholder. The petitioner's solicitors, having intimated to Mr Mason that they did not accept that he was entitled to defend the winding up petition on behalf of the company, arranged for the case to be put out By Order on 16 March 2009 to discuss the issue.

The parties' submissions
[3] Mr Stewart on behalf of the petitioner referred to Equity and Law Life Assurance Society v Tritonia Limited 1943 SC (HL) 88 in which the Lord Chancellor (Viscount Simon) stated:

"When an appeal is argued before the House of Lords, no one has any right of audience except counsel instructed on behalf of a party or (when the litigant is a natural person) the party himself. In the case of a corporation, inasmuch as the artificial entity cannot attend and argue personally, the right of audience is necessarily limited to counsel instructed on the corporation's behalf."

Mr Stewart submitted that this statement, albeit now encompassing solicitors with extended rights of audience, remained good law and was applied in the Scottish courts. He acknowledged that Mr Mason as a director had a residual power to act on behalf of the company to instruct solicitors and counsel to oppose the winding up petition and to appeal against the appointment of the provisional liquidator (In re Union Accident Insurance Co Ltd [1972] 1 WLR 640). But a director had no right to appear in court on behalf of the company.

[4] Mr Mason submitted that he had power to act as a litigant in person. He observed that the Equity and Law Life case was quite old authority and suggested that it had been superseded by legal developments. He was in an ideal position to act on behalf of the company as he had the detailed knowledge of its affairs. Secondly, he argued that the court and the petitioner were barred by acquiescence from challenging his right to appear on behalf of the company as the court had heard him without objection on 19 February 2009. That, he submitted, operated an estoppel. Thirdly, he submitted that under Article 6 of the European Convention on Human Rights the company had an inalienable right to be represented in court by one of its directors. He recognized that he might make mistakes and argue irrelevant matters as he had no legal training but his company was entitled to equality of arms which meant that he should represent it. Fourthly, he submitted that the winding up of the company would have serious effects on his business career as he would be likely to face proceedings to disqualify him from acting as a director. He personally did not have the financial resources to instruct counsel and therefore sought to act in his capacity as director.

Discussion

[5] While the House of Lords' decision in Equity and Law Life dates from 1943, it lays down the rule which governs the Scottish courts and is referred to in more recent text books. Thus Maxwell, "The Practice of the Court of Session" (at pp.24 and 600), Lord MacPhail, "Sheriff Court Practice" (3^rd ed) (at para 1.35) and Lord Hope of Craighead in the chapter on the House of Lords in Tottel's "Court of Session Practice" (at J[54]) refer to the case as authority. Lord Macphail also refers to two more recent cases in the sheriff court which have followed the Equity and Law Life case. Lord Hope states in the paragraph mentioned above:

"The right of audience before an Appellate Committee is restricted to counsel instructed on behalf of a party, or, where the party is a single individual, the party himself".

[6] The Rules of the Court of Session are framed on the basis that only lawyers with rights of audience and individual party litigants have a right to sign court documents and to appear in court. See Rule of Court 4.2. Thus documents such as answers to the petition should be signed by qualified lawyers if the party to a litigation is a legal person rather than a natural person. In my opinion, although the case on which the petitioner founds is not recent authority, it remains binding on this court. Accordingly Mr Mason has no right to represent the company in this court.

[7] I can deal briefly with Mr Mason's second submission, that the court is barred by acquiescence from challenging his right to appear. The short answer is (a) that there was no acquiescence as the issue of his entitlement to appear was raised and was reserved as mentioned above and (b) that, in any event, the court cannot by acquiescence empower itself to do something which is beyond its power. Just as in administrative law a person cannot have a legitimate expectation that a public body will act ultra vires (R v Attorney General ex p ICI plc [1990] 60 TC 1, at 64G-H; R v IRC ex p MFK Underwriting Agents Ltd [1990] 1 WLR 1545, at 1569B-C and 1573H), so also a public body by acquiescence cannot confer rights which it has no power to give.

[8] I can also deal briefly with Mr Mason's fourth submission. In so far as he seeks to protect his personal position, he is entitled to enter the process as an interested party in his capacity as a shareholder. It is understandable that he does not wish to do so as, if the Secretary of State were ultimately to succeed in the application, Mr Mason might be exposed to an award of expenses which could be substantial. But if he wishes to protect himself rather than the company from the consequences of a winding up, he has the means to do so by lodging answers as an interested party in these proceedings.

[9] I turn then to the human rights submission. Article 6 of the European Convention on Human Rights gives everyone a right to a fair trial. That right includes, in most circumstances, the right to attend a court hearing and participate effectively in the proceedings. Companies and other non-natural persons can be victims in terms of the Convention. But that does not necessarily mean that in relation to representation in court a company should be treated in precisely the same way as a party litigant. A company as a legal person is not the same as a natural person. Where a person chooses to obtain the benefits of limited liability by trading through the medium of a registered company, he has also to accept the disadvantages to which separate legal personality gives rise. Thus as a general rule I see no incompatibility between Article 6 and the requirement that a company be represented in court not by a director but by a suitably qualified legal representative who has responsibilities to the court and who is subject to professional discipline.

[10] I consider, nonetheless, that exceptional circumstances may arise in which the court has to take steps to allow a company or corporation to be represented in court in order to ensure a fair hearing under Article 6. The Rules of Court do not provide for such a circumstance but the court has an inherent power to regulate its own procedures which it can use in this context. It appears to me that there needs to be careful consideration of the circumstances in which the court may authorise a person who is not a lawyer with rights of audience to represent a company or corporation. Parties have not addressed me on this issue. It is likely to require the court to hear well thought out submissions from interested parties. I have therefore decided to report this issue to the Inner House for its opinion. I attach to this opinion a copy of my report.

[11] I have arranged for the case to be put out By Order before Lord Glennie on 2 April 2009. This is to allow parties to inform the court (a) of the financial circumstances of the company and (b) whether the company has authorised Mr Mason to represent it in court and the grounds on which he is authorised to resist the winding up application. If parties can provide this information in writing timeously, it may be possible, on their joint application, to avoid the expense of that hearing. In that event the next hearing in this case would be the By Order hearing on 7 May 2009 before Lord Glennie.

OUTER HOUSE, COURT OF SESSION

P1975/08

REPORT TO THE INNER HOUSE

in the Petition of

Her Majesty's Secretary of State for Business Enterprise and Regulatory Reform

Petitioner:

for

an order to wind up

UK Bankruptcy Limited

________________

Act: A. Stewart; Brodies LLP

Alt: Mr Paul Mason (a director of the Respondents)

27 March 2009

[2] On 9 December 2008 the court appointed Mr William Cleghorn, CA, as provisional liquidator of the company. Mr Mason, who is one of two directors of the company and owns fifty per cent of its share capital, lodged answers to the petition on behalf of the company on 22 December 2008.

[3] Mr Mason appeared in court at a By Order hearing on 19 February 2009 which was arranged to discuss future procedure. He appeared again at a By Order hearing on 16 March 2009 which was fixed to discuss whether he had a right to represent the respondent company. At that hearing he raised various points which I dealt with and have recorded in an opinion of the same date as this report. I attach a copy of that opinion to this report.

[4] Mr Mason raised a question under Article 6 of the European Convention on Human Rights which I have decided to report to your Lordships as it raises important questions of legal policy which have not been addressed in the Rules of the Court of Session.

[5] A company director has no right to represent his company in court as he is not a party litigant. In Equity and Law Life Assurance Society v Tritonia Limited (1943 SC (HL) 88) the Lord Chancellor (Viscount Simon) stated:

That dictum has been applied in Scotland in the Court of Session and in the sheriff court and is repeated as authority in the leading textbooks on procedure as set out in paragraph [5] of my opinion in this case.

[6] The Rules of the Court of Session are framed on the basis that only lawyers with rights of audience and individual party litigants have a right to sign court documents and to appear in court. See Rule of Court 4.2. There appears to be no provision within the Rules for a company to be represented in court by any person other than an advocate or a solicitor with extended rights of audience.

[7] Mr Mason sought to challenge the authority of Equity and Law Life and by implication the Rules of Court on the ground that they deprived the company of a right to a fair hearing if its directors were not in a position to arrange and fund legal representation. Article 6 of the European Convention on Human Rights gives everyone a right to a fair trial. That right includes, in most circumstances, the right to attend a court hearing and participate effectively in the proceedings.

[8] Companies and other non-natural persons have rights under Article 6(1) of the Convention (Stran Greek Refineries and Stratis Andreadis v Greece (1995) 19 EHRR 293 and Société Stenuit v France (1992) 14 EHRR 509). But a company as a legal person is not the same as a natural person and it is not clear that the Convention would treat it as such. In my opinion, it is relevant to recall that where a person or persons choose to obtain the benefits of limited liability by trading through the medium of a registered company, they have also to accept the disadvantages to which separate legal personality gives rise. See, for example, Woolfson v Strathclyde Regional Council (1978 SC (HL) 90). Thus, as a general rule I see no incompatibility between Article 6 and the requirement that a company be represented in court not by a director but by a suitably qualified legal representative who has responsibilities to the court and who is subject to professional discipline.

[9] Nonetheless, exceptional circumstances may arise in which the court has to take steps to allow a company or corporation to be represented in court in order to ensure a fair hearing under Article 6. The Rules of Court do not provide for such a circumstance but I consider that the court has an inherent power to regulate its own procedures which it can use in this context. The approach of the Extra Division in Tonner v Reiach & Hall (2008 SC 1, at paras 43-62 and 106) is consistent with this view. It appears to me that there needs to be careful consideration of the circumstances in which the court may authorise a person, who is not a lawyer with rights of audience, to represent a company or corporation. It will only be in exceptional circumstances that such authorisation may be appropriate as the court is entitled to require companies and corporations to engage qualified lawyers to represent them in order to promote the efficient use of court time. The parties have not addressed me on this issue. It is likely to require the court to hear prepared submissions from interested parties.

[10] The problem which has been raised in this application does not arise in the High Court in England and Wales as the 1998 Civil Procedure Rules removed the requirement that a company should act through a solicitor. For some time before that change of approach, the court exercised a power to permit a person to appear on behalf of a company. Thus in Charles P. Kinnell & Co Ltd v Harding Wace & Co Ltd ([1918] 1 KB 405), a case which concerned proceedings in the County Court, in which the judge had a discretion under s.72 of the County Courts Act 1888 to allow a person to be represented other than by a solicitor, Swinfen Eady LJ (at p.413) stated:

"As from its nature a company cannot appear in person, not having as a legal entity any visible person, it must appear by counsel or solicitor, or by leave of the judge some other person may be allowed to appear instead of the company to address the Court, which includes the examination of witnesses and generally conducting the case."

[11] There is also case law, predating the 1998 Civil Procedure Rules and the incorporation of the Human Rights Convention into domestic law, in which the High Court has considered the circumstances in which it would be prepared to authorise someone, who had no right to do so, to take steps in process. The court held that it might confer such a right in the exercise of its inherent power to regulate its proceedings. Thus, if the exceptional circumstances of the case so warranted, the court could grant a director the right to make an application on behalf of a company notwithstanding the rule, which then applied, that a company might take steps in an action only by a solicitor.

[12] For example, in A.L.I Finance Ltd v Havelet Leasing Ltd and Others ([1992] 1 WLR 455), Scott J allowed a director who was the fourth defendant in the action and who had no right of audience in relation to the company defendants to apply on behalf of two of those companies to vary the terms of certain injunctions.

[13] In Radford v Freeway Classics Ltd ([1994] 1 BCLC 445), the Court of Appeal held that the test in such cases was whether the exceptional circumstances of a case required the court in the interests of justice to allow a director to appear on behalf of his company. It held that the company's lack of means to instruct legal representation was not of itself an exceptional circumstance. Sir Thomas Bingham MR stated (at p.448f-h):

"A limited company, by virtue of the limitation of the liabilities of those who own it, is in a very privileged position because those who are owed money by it, or obtain orders against it, must go empty away if the corporate cupboard is bare. The assets of the directors and shareholders are not at risk. That is an enormous benefit to a limited company but it is a benefit bought at a price. Part of the price is that in certain circumstances security for costs can be obtained against a limited company in cases where it could not be obtained against an individual, and another part of the price is the rule that I have already referred to that a corporation cannot act without legal advisors. The sense of these rules plainly is that limited companies, which may not be able to compensate parties who litigate with them, should be subject to certain constraints in the interests of their potential creditors."

[14] Lord Woolf's report, "Access to Justice" (1996) recommended that the rules of court should no longer require a company to act by a solicitor and that the court should normally exercise its discretion to allow an employee of a company to take any steps on behalf of the company which a litigant in person could take (paras 61-72 and recommendations 152 and 153). Now Rule 39.6 of the Civil Procedure Rules 1998 provides:

"A company or other corporation may be represented at trial by an employee if-

(a) the employee has been authorised by the company or corporation to appear at trial on its behalf; and

(b) the court gives permission."

[15] The Practice Direction which relates to this rule requires the company to produce information about the intended representative in a written statement. The Practice Direction (at para 5.2) requires the production of a written statement vouching the identity, position and authority of the proposed representative and the authorisation by written authority from the managing director or by a board resolution. It also (at para 5.3) follows Lord Woolf's recommendation in stating that permission should be given unless there is some particular and sufficient reason why it should be withheld. It identifies as relevant, among other considerations, the complexity of the litigation and the experience of the proposed representative.

[16] The court has not adopted such proposals in this jurisdiction. I have some doubts as to whether the English approach could prudently be imported into our jurisdiction as the English courts have exercised more intensive case management, including the striking out of cases which have no prospects of success, than we have in Scotland. Without rigorous case management, there is a significant risk that unqualified representatives of companies and corporations could use up a considerable amount of court time and public funds while not conferring benefit on the entities which they represent.

[17] It appears to me that the issues, which Mr Mason's human rights challenge raises, are (i) whether in order to comply with Article 6 there needs to be an arrangement to allow a person other than a lawyer with rights to appear in this court to represent a company and (ii) if so, what are the circumstances in which such an arrangement should be available and (iii) what such an arrangement should be.

[18] I have not had the benefit of hearing parties' submissions on these issues. I set out below some preliminary views in the hope that they might assist any discussion.

[19] In relation to the first issue, I consider that in exceptional circumstances it may be necessary for the court in order to ensure a fair hearing to allow a director or other representative to appear on behalf of a company, for example, to defend its interests against a winding up application which might result in its dissolution. But the circumstances in which that will be necessary will be very severely circumscribed both because those who trade through registered companies must accept the disadvantages of doing so as well as the benefits and also because the court is entitled to regulate its procedure to ensure that unqualified persons do not misuse its processes or cause avoidable delay. Where a company is pursuing a claim in the ordinary course of business or where the company has sufficient funds to pay for legal representation, it does not appear to me that the requirement of legal representation would breach Article 6.

[20] Thus, turning to the second issue, where a company has insufficient funds to employ lawyers to oppose an application to wind it up, a question of the fairness of the proceedings might arise if the court were not to allow the company's position to be articulated by a representative, subject to suitable safeguards to prevent delay, the raising of irrelevant issues or unreasonable behaviour. There may be other occasions when this question of fairness would arise. Those occasions might include analogous insolvency proceedings, such as an application for an administration order, and a hearing in relation to diligence on the dependence of an action.

[21] In relation to the third issue, it would, I suppose, be possible for the court to appoint an amicus curiae, but the cost of such representation would fall on the Scottish Court Service. If a court were to allow a director to address it, I consider that the court could and should exercise strict control over the way in which the representative raised issues and also the content of the matters raised in order to avoid the pursuit of irrelevant issues. In the Rules of the Court of Session a party litigant can sign a summons or petition only if the document has been placed before a Lord Ordinary for leave to proceed (Rule 4.2(5)). While that rule does not apply in relation to defences, it is nonetheless a recognition that the court needs to regulate the activities of unqualified persons in the interests of justice and the efficient use of public resources. Such considerations should also apply in my opinion if the court in exceptional circumstances and in order to achieve justice were to allow an unqualified person to represent a company. This would be necessary particularly in the case of a director or other representative acting on behalf of a limited company as, unlike a party litigant, the representative would not normally be personally liable in expenses if he should fail.

[22] I am not aware of any precedent in Scotland for this course of action. How it should be dealt with is something on which views may develop with experience. At this stage I can only suggest certain obvious considerations to which the court might have regard. First, it would be necessary for the director or other representative to show that the company had authorised him to act on its behalf. Because conflicts of interest can arise between a company and a director, especially in the context of a winding up, it would be important that the company should expressly authorise the line of defence which the representative was to adopt. Secondly, it would have to be demonstrated that the company did not have the financial means to obtain legal representation. It would not, for example, be sufficient to show that legal representatives were not prepared to act, as that unwillingness might be because there was no defence to the application or because the company directors were insisting upon raising points which were irrelevant. Thirdly, the court would require to be satisfied that the director or representative was in a position to present the company's case. In determining whether to grant a director or representative permission to appear on behalf of a company the court would, fourthly, also have regard to the nature of the defence which the director proponed in order to ascertain whether there was a bona fide and relevant dispute of fact or a relevant legal issue to be determined.

[23] I consider that in the context of a company application before a commercial judge the court has sufficient case management powers, including the power to require submissions in writing and evidence in the form of affidavits or signed witness statements, to prevent delaying tactics or the raising of irrelevant issues in an attempt to prevent or delay the making of a winding up order. The court could restrict the representative's right to address it to those points which were relevant to the issue which the court had to determine. If a court did not have such powers, or if, when exercising a discretion to hear a director, it had not reserved the power to regulate his behaviour by such means, or if the same judge did not hear the case on each occasion, the problems of unqualified representation would be much greater.

[24] It may be that the Rules Council should address the wider question of whether to introduce new rules in the Rules of Court in relation to the representation of companies. The implementation of any recommendations by the Civil Courts Review in relation to case management would also be relevant.