Trustee and officeholder approval applications: res judicata and protection from future claims

Summary

Trustees and officeholders (such as administrators, receivers and liquidators) can ask the Court to approve steps that they propose to take in the administration of their estate (such as the sale of an asset or settlement of a claim). 

In a recent case¹, the English Court of Appeal held that the Court's prior approval of a trustee or officeholder's proposed course of action does not afford the trustee/officeholder blanket protection from future claims.  Instead, in applying res judicata principles, the Court held that the extent of any protection will depend upon:

• the nature of the approval sought;
• the issues which the Court was required to consider in order to reach its approval decision; and
• the parties which were before the Court on the approval application.

If the Court which heard the approval application determined a particular issue, a party to that application will be prevented from seeking to relitigate that issue in a subsequent claim against the trustees or officeholders.  Conversely, where beneficiaries or creditors were not joined as parties to the approval application (whether directly or by the appointment of representative respondents), the trustees or officeholders will not obtain "immunity" in any substantive sense from subsequent claims by those beneficiaries or creditors. 

However, it is possible that a subsequent claim by beneficiaries or creditors may still be struck out as an abuse of process even if they were not parties to the approval application.  Trustees and officeholders who advertise their intention to seek approval, so that beneficiaries or creditors have the opportunity to attend and be heard, will undoubtedly have a better prospect of persuading the Court that a subsequent claim by a beneficiary or creditor would be an abuse of process.

Approval orders should contain a clear statement identifying the issues which have been decided and the type of future claims which would (or would not) be barred.  It will be important for trustees and officeholders to structure any approval application accordingly and to give careful consideration to joining potentially interested beneficiaries/creditors to the application.

Background

The Receivers were appointed by the Court as receivers of (among other things) the assets of Denaxe Limited (the Company), including its shareholding in a football club and real estate assets used in the operation of the football club (including the stadium and training ground) (together, the Footballing Assets).  The Receivers decided that the Footballing Assets² should be sold as a single package, having formed the view that splitting the assets would have a detrimental effect on the values to be obtained. 

The Receivers applied to the High Court (the Sanction Application) for an order permitting them to enter into a proposed sale transaction.  Whilst the Court does not generally get involved with approving day-to-day commercial decisions of officeholders, the Receivers submitted that the proposed sale was a particularly "momentous" decision. The High Court made the order sought (the Sanction Order)³ and the sale was duly completed.

Thereafter, the Company brought a claim for damages against the Receivers asserting that they had breached their duties of care and had sold the Footballing Assets at an undervalue – in particular that they had failed to consider selling the shares in the football club separately to the stadium or other assets. The Company's claim was struck out by the High Court on the grounds that, by reason of the Sanction Order, the Receivers had immunity from any claim against them based upon the allegation that the Footballing Assets were wrongly sold as a single package in a single transaction, notwithstanding that the High Court was not satisfied that the claim should be struck out on the basis of issue estoppel⁴.  The High Court also held that had it reached a different decision on the immunity ground, the Company's claim would instead have been struck out as a Henderson v Henderson abuse of process⁵: the Company may not raise matters that were not, but could and should have been, raised during the Sanction Application.  The Company appealed. 

Judgment

The Court of Appeal dismissed the appeal, concluding that the High Court's decision to strike out the claim was correct⁶.  The appeal was determined on the basis of a finding of abuse of process.  However, the Court of Appeal also gave detailed consideration to the High Court's finding of immunity, although ultimately did not need to reach a conclusion upon this in order to dispose of the appeal.

Abuse of process: The High Court had been entirely correct to find that is was a Henderson v Henderson abuse of process for the Company to now bring the claim.  The Company had been given the clearest possible opportunity at the hearing of the Sanction Application to raise the central issue on which the claim depended (whether the Receivers should have sought to sell the property assets separately from the remainder of the Footballing Assets) and had not done so.  It would be manifestly unjust to the Receivers and a misuse of the Court's resources for the Company to be able to pursue the Receivers with that allegation now.

The concept of "immunity": In the absence of any binding authority which directly addressed the precise extent of immunity conferred by an approval decision, the Court of Appeal returned to first principles and considered what was meant by a trustee or other officeholder obtaining "immunity" or "protection" from a subsequent claim.  What principle of law prevented such a claim from being pursued? 

Although the High Court had treated "immunity" as a discrete concept, the Court of Appeal held that there was in fact no separate doctrine of English business or property law called "immunity".  Instead, the concept of immunity flowing from an approval decision was most easily understood as the bar on subsequent proceedings that results from the relevant category of res judicata (an issue estoppel)⁷.  If the Court hearing the approval application determined a particular issue as a step in deciding to give its approval, that will operate as a bar to a party to the application (or a related party) seeking to relitigate that issue in subsequent proceedings against the trustee or officeholder. 

Approval does not give rise to blanket protection for trustees and officeholders; it depends upon the issues decided on the approval application and the parties who were before the Court: There is no blanket rule of law that the Court's approval of a transaction automatically generates full immunity in all respects concerning the transaction; the Court is "not a sanctuary or bomb shelter" for officeholders⁸. 

The scope of any subsequent immunity will be fact sensitive: it will depend upon the specific nature of the question(s) before the Court on the approval application and of any answer(s) given by that Court.  The extent to which the Court will determine issues will vary from case to case and may depend, for instance, upon:

• The identity of the applicant (eg are they a professional trustee or officeholder, or an unpaid family trustee).
• The reasons why the proposed decision is said to be "momentous" (eg is it a disposal of a hugely valuable or sensitive asset, or does it involve acute allegations of conflict of interest).
• The nature of the legal or evidential inquiry that would be involved (eg resolution of a difficult question of law or review of complex expert evidence and reaching a factual conclusion).The Court asked to review a transaction in advance might find it inappropriate to embark on a lengthy and detailed fact-finding process better suited to a trial.

In considering the scope of the protection afforded by an approval from the Court against subsequent claims, it is necessary to compare the issues determined (or which could and should have been determined) in the earlier proceedings and those raised in the subsequent claim, not the precise juridical origins (eg common law or equity) of the applicant's duties or the subsequent cause of action. 

There will be no protection from future claims (in any substantive sense) unless the claimant in the second set of proceedings was also a party to the approval application.  This is the underlying reason why, for example, trustees seeking approval to a proposed transaction will join all potentially interested beneficiaries, or, if that is not practical, seek the appointment of representative beneficiaries so that the interests of beneficiaries are represented before the Court⁹.

However, if trustees or officeholders advertise their intention to seek approval for a "momentous" decision, so that beneficiaries or creditors have the opportunity to attend and be heard, then they will undoubtedly have a better prospect of persuading a Court that a subsequent claim by a beneficiary or creditor would be an abuse of process.

Guidance for future approval applications: The Court of Appeal suggested that, in the context of future approval applications such as this, parties should invite the Court to identify in the judgment the issues which it is deciding and the type of future claims which would or would not be barred.