Month: March 2022

In this post, Matthew Purchase QC of Matrix Chambers discusses the Supreme Court’s decision in the matter of T (A Child) [2021] UKSC 35. The Court was asked to consider two things: first, whether it was a permissible exercise of the High Court’s inherent jurisdiction to make an order authorising a local authority to deprive a child of his or her liberty in this category of case, and secondly if, contrary to T’s argument the High Court can have recourse to its inherent jurisdiction to make an order of the type in question, what the relevance is of the child’s consent to the proposed living arrangements.

The Supreme Court unanimously dismissed the appeal against the decision in [2018] EWCA Civ 2136

 

Introduction

In this case, the Supreme Court was able to supply a legal justification for avoiding express limitations in a clear statutory scheme which, because of a shameful inadequacy of provision, was unfit to protect vulnerable children. It was able to interpret the language of the relevant statutory provisions so as to permit the High Court’s inherent jurisdiction to step in, and it had the support of the Government in so doing. However, despite the focussed analysis and particular facts, these judgments might prove relevant to any future challenge to attempts to curtail the Court’s inherent or common law powers.

 

Background

The High Court has long had an inherent jurisdiction, often but not necessarily invoked through ‘wardship’ proceedings, to provide protection for children whose welfare requires it.

However, by the Children Act 1989 above all, Parliament introduced a comprehensive statutory scheme which set out and limited the powers of the Court and of local authorities to protect (or, depending on your point of view, to interfere in the lives of) children. Similar legislation now exists separately in Wales, mainly in the form of the Social Services and Well-being (Wales) Act 2014.

That legislation confers on a local authority the power a child in its care in ‘secure accommodation’ (that is, accommodation for the purpose of restricting liberty): see, in England, section 25 of the 1989 Act. However, it also sets clear limits on that power. One such limit is set by gateway criteria which prevent the use of secure accommodation unless it is necessary to prevent significant harm to the child or others. However, another limit is set by regulations, namely that accommodation in a children’s home may not be used as secure accommodation unless it has been approved by the Secretary of State for that use. The Supreme Court accepted that ‘secure accommodation’ in this context would generally be the sort of accommodation which would be regulated as a children’s home. Moreover, under the Care Standards Act 2000 in England and the Regulation and Inspection of Social Care (Wales) Act 2016, children’s homes must be registered in any event, and it is a criminal offence to carry on such a home if it is not registered.

There was no dispute in T’s case that she needed secure accommodation. The problem was that there was no suitable place available in any of the approved registered children’s homes. The only suitable place was in a registered children’s home which had not been approved for use by the Secretary of State. This sort of scenario is so regrettably common in the family justice system that Lord Stephens described it as ‘the enduring well-known scandal of the disgraceful and utterly shaming lack of proper provision for children who require approved secure accommodation’. The Secretary of State sought to suggest that the problem arose in ‘exceptional’ cases where existing provision broke down or could not meet the needs of the child, calling for ‘bespoke’ solo placements. Whether that is true or not, there is no doubt that this has become a systemic problem.

At any rate, this meant that T could not be accommodated consistently with section 25 of the 1989 Act or its equivalent in Wales. Thus, the local authority applied to the High Court for authority, in the exercise of its inherent jurisdiction, to accommodate her nonetheless.

T argued that any such power could not exist consistently with the statutory scheme. It was not just that section 25 of the 1989 Act was clearly intended to cover all of the circumstances in which looked-after children could be placed in secure accommodation. In addition, section 100(2)(d) of the 1989 Act specifically prohibited the use of the inherent jurisdiction ‘for the purpose of conferring on any local authority power to determine any question which has arisen… in connection with any aspect of parental responsibility for a child’.

The local authority and others argued that the inherent jurisdiction could still be used. The Secretary of State agreed, at least in the sort of ‘exceptional’ situation set out by him.

The Supreme Court, in a magisterial leading judgment given by Lady Black and in consenting judgments given by Lord Stephens and Lady Arden, accepted that the inherent jurisdiction continued to allow the High Court to sanction placements in unapproved

 

Discussion

On one analysis, it looks like the statutory regime developed in and under section 25 of the 1989 Act, and its equivalent in Wales, was intended to be comprehensive. That regime sets clear limits on the power to place children in secure accommodation and, as a matter of principle, those limits are plainly sensible. What I have called the gateway criteria ensure that children are placed in such accommodation only when there is a real need for it. The further requirement for such accommodation to be registered and specifically approved by the Secretary of State (at least if it constitutes a children’s home) serves the obvious aim of ensuring that it is suitable and meets regulatory standards. It is not easy to envisage that Parliament intended that the residual powers of the High Court could be used, in effect, to circumvent these restrictions. Indeed, nobody suggested that the inherent jurisdiction could operate if the gateway criteria were not met.

There is plenty of authority to support the argument that the courts should not exercise their common law powers in a way which would cut across such a regime. To take one random example, see Johnson v Unisys [2013] 1 AC 518, in which the House of Lords held that it was not permissible to bring a common law claim for breach of contract which would sidestep the restrictions on the statutory unfair dismissal regime. The point might be said to be rammed home in the present context because, insofar as the statutory scheme prevents accommodation at a children’s home which is not registered, it is a criminal offence to run such a home.

However, a number of features placed In re T in a different category.

The first was what was at stake. If neither the Court nor the local authority had the power to accommodate children like T in secure accommodation, their own lives and wellbeing – and that of others – would be placed at unacceptable risk. As Lady Black said: ‘courts should be slow to hold that an inherent power has been abrogated or restricted by Parliament, and should only do so where it is clear that Parliament so intended. I would endorse that as being of particular importance where the inherent power exists for the protection of children’. One might add to that point that, although the regime governing the registration of children’s homes was statutory, the requirement for such a home to be authorised by the Secretary of State before providing secure accommodation was to be found in secondary legislation. However, the Supreme Court clearly held that, in appropriate cases, the High Court could authorise secure accommodation in children’s homes which were not even registered, contrary to primary legislation.

The second was that the legislative regime, though it ought to have been capable of meeting the needs of children, was not working in practice because of the failures of the Government. The deployment of the inherent jurisdiction was not, in that sense, a direct challenge to the legislative restrictions but a means of compensating for the State’s own failure to enable them to operate as Parliament must have intended they should.

The third was that Parliament had, in section 100 of the same 1989 Act, (i) expressly ousted the use of the inherent jurisdiction but only in specified circumstances and (ii) authorised the Court to allow a local authority to make an application under the inherent jurisdiction if certain conditions were met. It was possible – indeed, arguably, entirely orthodox – to interpret the ouster as not extending to this sort of case. The Supreme Court’s analysis of section 100(2)(d) is perhaps slightly elliptical, focussing more on the broad legislative intent. However, the basic thrust appears to be that, although the High Court’s authorisation to the local authority to place T in secure accommodation might have conferred on them a power which, by virtue of section 25, they would not otherwise have had, it was not conferring on them a power to determine the question: the determination of whether T could be placed in secure accommodation was made by the Court. Further, the reserved power to grant leave to apply clearly did extend to this sort of case: the result sought by the local authority could not have been achieved by any other order the local authority could have sought, and there was reasonable cause to believe that, if the Court did not exercise the inherent jurisdiction, the child was likely to suffer significant harm.

That being so, it is arguable that the Supreme Court could have reached the conclusion it reached simply on a perfectly orthodox and literal interpretation of the express language of section 100. If section 100 of the 1989 Act expressly allows the use of the inherent jurisdiction in this sort of case, it is a relatively easy step to the conclusion that a legislative regime set up under the same Act could not sensibly be taken impliedly to have prohibited the use of that inherent jurisdiction.

It may be that the Court considered this too fragile a basis on which alone to rest its decision: its interpretation of section 100 needed the added heft of a wider consideration of the context and the broad legislative intent. At any rate, the judgments are valuable for their wider and authoritative exploration not only of the legal framework for protecting children in the position of T but also of the reluctance of the Courts to accept that their inherent powers have been restricted or ousted by legislation other than in the clearest of cases where vital interests are at stake.

On Tuesday 29th March the Supreme Court will hear the case of The Soldiers, Sailors, Airmen and Families Association – Forces Help and another (Respondents) v Allgemeines Krankenhaus Viersen GmbH (Appellant) on appeal from [2020] EWCA Civ 926. The court will consider the main issue of whether the Civil Liability (Contribution) Act 1978 has extra-territorial effect, and if it does, whether this would allow a contribution claim to be brought under the 1978 Act despite the contribution claim being governed by German law rather than English law.

The following Supreme Court judgments remain outstanding: (As of 28/3/22)

The Law Debenture Trust Corporation plc v Ukraine (Represented by the Minister of Finance of Ukraine acting upon the instructions of the Cabinet of Ministers of Ukraine) Nos. 2 and 3, heard 9-12 December 2019
BTI 2014 LLC v Sequana SA and Ors, heard 4 May 2021
East of England Ambulance Service NHS Trust v Flowers and Ors, heard 22 June 2021
Basfar v Wong, heard 13th-14th October
Secretary of State for the Home Department v SC (Jamaica), heard 19th October
Commissioners for Her Majesty’s Revenue and Customs v Coal Staff Superannuation Scheme Trustees Ltd, heard 26th October
Harpur Trust v Brazel, heard 9th November 2021
Guest and another v Guest heard 3rd December 2021
Fearn and others v Board of Trustees of the Tate Gallery heard 7th December 2021
Stanford International Bank Ltd (in liquidation) v HSBC Bank PLC, heard 19th January 2022
R v Maughan, heard 27th January 2022
Cornerstone Telecommunications Infrastructure Ltd v Compton Beauchamp Estates Ltd, Cornerstone Telecommunications Infrastructure Ltd v Ashloch Ltd and another and On Tower UK Ltd (formerly known as Arqiva Services Ltd) v AP Wireless II (UK) Ltd, heard 1st February 2022
DCM (Optical Holdings) Ltd v Commissioners for Her Majesty’s Revenue and Customs (Scotland), heard 8th February 2022
R (on the application of Coughlan) v Minister for the Cabinet Office, heard 15th February 2022
Competition and Markets Authority v Pfizer Inc and Flynn Pharma Ltd, heard 22nd February 2022
In the matter H-W (Children) and H-W (Children) No 2, heard 22nd March 2022
The Soldiers, Sailors, Airmen and Families Association – Forces Help and another (Respondents) v Allgemeines Krankenhaus Viersen GmbH (Appellant) heard 29th March 2022.

In this post, Andre Anthony, a senior associate in the Tax team at CMS, comments on the decision of the UK Supreme Court in Commissioners for Her Majesty’s Revenue and Customs v NCL Investments Ltd and another [2022] UKSC 9. The Supreme Court was asked to consider whether accounting debits relating to the grant of share options to employees are a deductible expense for corporation tax purposes.

On 23 March 2022, the Supreme Court unanimously dismissed HMRC’s appeal against the decision of the Court of Appeal in Commissioners for Her Majesty’s Revenue and Customs v NCL Investments Ltd and another 2020 EWCA Civ 663.

Background

The appeal turns on whether accounting debits relating to the grant of share options to employees are a deductible expense for corporation tax purposes.

The taxpayers were wholly owned subsidiaries of a holding company, Smith & Williamson Holdings Ltd (“SWHL”). The taxpayers employed staff whom they made available to other companies within the corporate group for a fee.

In 2003, SWHL settled an employee benefit trust which gave employees a contractual right to acquire shares in SWHL for a specified price. When options were granted to employees of one of the taxpayers, it would recognise an indebtedness to SWHL equal to the fair value of the options, which was settled monthly (“the Recharge”). The taxpayers passed the cost of the Recharge to the group companies using the services of their employees as part of the charge made to those companies.

The grant of the options was governed by the accounting standard International Financial Reporting Standard 2 (“IFRS 2”). Pursuant to IFRS 2, on the grant of a share option to an employee, the relevant taxpayer was required to recognise a debit in its income statement equal to the fair value of the options, regardless of whether the taxpayer had to pay any amount to the holding company or the trustee of the employee benefit trust in relation to the grant of those options, and recognise a capital contribution received from the holding company as a credit on its balance sheet.

The taxpayers claimed the debits as deductions in the computation of the profits of their trade for the purposes of corporation tax. HMRC refused the corporation tax deduction and issued “closure notices” disallowing the deductions.

Decisions of the lower courts

At first instance, the taxpayers successfully appealed to the First-tier Tribunal against the closure notices. The First-tier Tribunal held that the taxpayers were entitled to claim deductions for corporation tax purposes as expenses against trading profits for ten accounting debits relating to the grant of share options to the taxpayers’ employees that were recognised in their respective income statements pursuant to IFRS 2. HMRC appealed to the Upper Tribunal.

The Upper Tribunal dismissed HMRC’s appeal on the following four grounds. First, the IFRS 2 debits were expenses incurred wholly and exclusively for the purposes of each taxpayer’s trade. Second, the Corporation Tax Act 2009 (the “Act”), s 54(1)(a) did not impose an additional requirement on what was an “expense” under the Act, ss 46 and 48. Third, the IFRS 2 debits were correctly categorised as revenue rather than capital items. Fourth, the Act s 1290 did not bar a corporation tax deduction whenever a company makes an outright payment to employees that are not subject to tax in the employee’s hands.

HMRC’s appealed against the decision of the Upper Tribunal to the Court of Appeal on the overall basis that the options could not be taken into account in the calculation of the taxpayers’ profits because there was no matching outflow of cash from the taxpayers.

In a unanimous decision, the Court of Appeal dismissed HMRC’s appeal, on two main grounds.

First, the Court of Appeal held that the combined effect of the Act, ss 46 and 48, was to define allowable expenses as those debits made in accordance with generally accepted accounting practice (“GAAP”) in calculating the profits of a trade. Those provisions did not require any further examination of whether such accounting debits were “expenses”. The use of “incurred” in the Act s 54(1)(a) did not impose any additional requirement.

The Court of Appeal agreed with the First-tier Tribunal that the debits in this case were required by IFRS 2 to reflect the consumption by the taxpayers of the services provided by the employees, who were in part remunerated by the grant of the options. The taxpayers consumed those services wholly and exclusively for the purposes of their trades.

Second, the Court of Appeal held that the Act, s 1290 did not apply to deny or defer allowance of the relevant debits in this case on the basis that the deductions claimed by the taxpayers were not deductions in respect of an “employee benefit contribution”. The benefit received by an employee was the option. It was the option that entitled the employee to acquire shares at a price that might be less than their market value. The acquisition of shares on exercise of the option was not the benefit received by the employee, but the fulfilment of an existing contractual entitlement.

The Supreme Court decision

In a unanimous decision, the Supreme Court dismissed HMRC’s appeal, on the same grounds as the courts below. The judgment was given by Lord Hamblen and Lady Rose, with whom Lord Reed, Lord Briggs and Lord Sales agreed.

The Supreme Court considered four issues, as follows:

first, whether disregarding the debits is an “adjustment required or authorised by law” within the meaning of the Act, s 46(1);
second, whether the deduction is disallowed by the Act, s 54(1)(a);
third, whether the deduction is disallowed by the Act, s 53, which provides that no deduction is allowed for “items of a capital nature”; and
fourth, whether the deduction is disallowed (or deferred) by the Act, s 1290.

On the first issue, the Supreme Court opined that there is no general theoretical basis to calculate profits other than in accordance with GAAP. Here the debits had been brought into account in calculating the profits in accordance with GAAP. As such, under the Act, s 48, they are treated as expenses for the purpose of the calculation of trading profits, whether or not an amount had actually been paid, subject to an “express provision to the contrary”. No such contrary provision had been identified by HMRC.

The Court held that there is no adjustment required or authorised by law to the effect that if profits in the profit and loss account are depressed because of an entry which is matching an entry in the balance sheet, then that is to be left out of account in calculating profits for corporation tax. Nor did the Court see any policy justification for drawing that distinction.

On the second issue, the Court held that the deduction is not disallowed by the Act, s 54(1)(a). It rejected HMRC’s contention that the Act, s 54 imports a further requirement as to what constitutes an “expense”, namely that it has to be shown to be “incurred”.

On the third issue, the Court agreed with the First-tier Tribunal that the debits were revenue in nature, not capital. The fact that the matching credit entry was a capital contribution does not change that. What matters is the character of the debits, not that of any corresponding credit. On this basis, the Court held that the deduction is not disallowed by the Act, s 53(1).

On the final issue, the Court held that the Act, s 1290 did not apply here because the grant of the option was not an “employee benefit contribution” within the meaning of the Act, s 1291, adopting the same reasoning as the lower courts on this issue.

Comment

This case considers the interaction between tax law and GAAP. It is rare for such a case to reach the Supreme Court.

While the Court of Appeal acknowledged that the “accounting treatment by the taxpayers of the grant of the options is central to the issues” and remarked that on these facts, IFRS 2 produced a “counter-intuitive” and “surprising” result by “requiring a debit to profit and loss account even though there is no outflow of funds but prohibiting a debit that does recognise an outflow of funds” (in respect of the Recharge), the Supreme Court did not express a view on this.

The facts of this case would have allowed the Supreme Court to explore more broadly the relationship between the principles of tax law and the current accounting standards. However, the Court did not further explore this theme, preferring instead to focus on the specific facts and issues relevant to the appeal.

On appeal from 2020 EWCA Civ 663

The Respondent Companies were subsidiaries of a holding company, Smith & Williamson Holdings Limited (“SWHL”). The Debits arose as a result of the grant to the Companies’ employees of options to acquire shares in SWHL. These option grants (“the Options”) were made via an employee benefit trust (“EBT”) set up by SWHL.

The Companies were required to recognise an expense on their income statements in respect of the grant of the Options by the EBT (“the Debits”). Although the grant of the Options did not require the Companies to part with any cash or other assets, it did require that the consumption of services provided by the Companies’ employees in exchange for the Options to be recognised as an expense. As it was impossible to value precisely how much of the employees’ services were to be treated as the result of the incentivisation arising from the grant of the Options, IFRS2 set the value of those services at the fair value of the Options.

The Debits on the Companies’ income statement had to be matched by a corresponding credit on their balance sheets. As the share options came originally from SWHL, the Companies were required to treat the corresponding credit as a capital contribution from a parent company (“the Capital Contribution”).

In computing their liability to corporation tax, the Companies therefore claimed to be entitled to deduct an amount equal to the Debits from their profits. The Appellants contend that the Debits should not be taken into account in this way. The First–tier Tribunal, the Upper Tribunal and the Court of Appeal rejected these arguments.

 

Held – Appeal unanimously dismissed.

 

Issue 1: Whether disregarding the Debits is an “adjustment required or authorised by law” within the meaning of section 46(1) of the Corporation Tax Act 2009 (“CTA 2009”)

The Supreme Court concluded that there is no law requiring an adjustment to the Companies’ financial accounts so as to exclude the Debits from the computation of profits. Odeon Associated Theatres Ltd v Jones [1971] 1 WLR 442 and cases following it have established that the profit of a taxpayer’s trade is to be determined in accordance with “ordinary principles of commercial accountancy”. In the corporation tax context, this is now reflected in section 46(1) CTA 2009 which requires that profits must be calculated in accordance with generally accepted accounting practice “subject to any adjustment required or authorised by law”.

Tax is the creature of statute, and while it is possible for a judge-made rule to authorise an adjustment, that rule would have to be clearly applicable.

The Appellant argued further that generally accepted accounting practices which are directed at preserving the integrity of the taxpayer’s balance sheet (such as IFRS2) were less relevant to corporation tax than other accounting practices, because corporation tax was concerned primarily with a company’s profit and loss account. The Supreme Court holds that there is no basis for such a distinction. A company’s balance sheet and profit and loss account are not separate and severable as HMRC suggest because entries on one may affect entries on the other in order that overall they give a true and fair view of the financial state of the company.

 

Issue 2: Whether the deduction is disallowed by section 54(1)(a) CTA 2009

Section 54(1)(a) CTA 2009 states that no deduction should be made for “expenses not incurred wholly and exclusively for the purposes of the trade”. HMRC contend that the Debits were not “incurred” because the Companies suffered no loss in relation to them, and / or the Debits were not for the purposes of trade.

The Supreme Court rejected the Appellant’s case that section 54 imports a further requirement for an “expense” to be deductible. The requirements for what constitutes a deductible expense are set out in sections 46 and 48 CTA 2009. The FTT had made a finding of fact that the Debits were incurred for the purposes of the Companies’ trades and there are no grounds for challenging that finding.

 

Issue 3: Whether the deduction is disallowed by section 53 CTA 2009

Section 53 CTA 2009 provides that “no deduction is allowed for items of a capital nature”. The Appellants argued that the Debits are of a capital nature because they are simply the corresponding entry required to match the Capital Contribution from SWHL. The Supreme Court rejected this argument, agreeing with the FTT that the Debits had a revenue, rather than capital, nature. The fact that the matching credit entry was a capital contribution does not change this; what matters is the character of the Debits themselves.

 

Issue 4: Whether the deduction is disallowed (or deferred) by section 1290 CTA 2009

Section 1290 CTA 2009 places restrictions on deductions that would otherwise be allowable when calculating a company’s profits, if that deduction is a deduction in respect of “employee benefit contributions”. This is defined in section 1291 CTA 2009, the critical part of which requires property to be “held… under an employee benefit scheme”.

The Supreme Court analysed the definition of an employee benefit contribution and decides that what happens in this case does not involve any property being so held.

Hearings in the Supreme Court are now shown live on the Court’s website.

On Tuesday 22nd March the Supreme Court will hear the joint cases of In the matter H-W (Children) and H-W (Children) No 2, on appeal from [2021] EWCA 1451. The Court will consider the following issue: when an appellate court reviews a first instance decision concerning the proportionality of orders made under the courts’ obligations under the Human Rights Act 1998, is it necessary for the appellate court to undertake its own proportionality assessment of that decision? The hearing will take place at 10:30 in Courtroom 2.

On Wednesday 23rd March the Court will hand down judgment in Commissioners for Her Majesty’s Revenue and Customs v NCL Investments Ltd and another, on appeal from 2020 EWCA Civ 663. The Court was asked to consider Whether accounting debits relating to the grant of share options to employees are a deductible expense for corporation tax purposes.

 

The following Supreme Court judgments remain outstanding: (As of 23/3/22)

The Law Debenture Trust Corporation plc v Ukraine (Represented by the Minister of Finance of Ukraine acting upon the instructions of the Cabinet of Ministers of Ukraine) Nos. 2 and 3, heard 9-12 December 2019
BTI 2014 LLC v Sequana SA and Ors, heard 4 May 2021
East of England Ambulance Service NHS Trust v Flowers and Ors, heard 22 June 2021
Basfar v Wong, heard 13th-14th October
Secretary of State for the Home Department v SC (Jamaica), heard 19th October
Commissioners for Her Majesty’s Revenue and Customs v Coal Staff Superannuation Scheme Trustees Ltd, heard 26th October
Harpur Trust v Brazel, heard 9th November 2021
Guest and another v Guest heard 3rd December 2021
Fearn and others v Board of Trustees of the Tate Gallery heard 7th December 2021
Stanford International Bank Ltd (in liquidation) v HSBC Bank PLC, heard 19th January 2022
R v Maughan, heard 27th January 2022
Cornerstone Telecommunications Infrastructure Ltd v Compton Beauchamp Estates Ltd, Cornerstone Telecommunications Infrastructure Ltd v Ashloch Ltd and another and On Tower UK Ltd (formerly known as Arqiva Services Ltd) v AP Wireless II (UK) Ltd, heard 1st February 2022
DCM (Optical Holdings) Ltd v Commissioners for Her Majesty’s Revenue and Customs (Scotland), heard 8th February 2022
R (on the application of Coughlan) v Minister for the Cabinet Office, heard 15th February 2022
Competition and Markets Authority v Pfizer Inc and Flynn Pharma Ltd, heard 22nd February 2022
In the matter H-W (Children) and H-W (Children) No 2, heard 22nd March 202

On appeal from [2019] EWCA Civ 143

 

A passenger whose flight is cancelled or delayed has rights to compensation under Regulation (EC) No 261/2004 (which is retained law in the UK following Brexit).

The Appellant handles a large volume of passenger compensation claims for flight cancellation and delays, primarily on a “no win, no fee” basis. Prior to 2016, the Defendant dealt with the Appellant in respect of the claims it handled, and when claims were admitted, would pay compensation directly into the Appellant’s client account. In early 2016, the Defendant changed its practice and began communicating directly with Bott’s clients, and paying compensation directly to them. As a result, instead of deducting its fees from the compensation paid into its client account, the Appellant now has to pursue its clients for payment.

Following this change, The Appellant brought proceedings claiming an equitable lien over the compensation in respect of its costs, and an injunction restraining the Defendant from paying compensation directly to customers when Ryanair is on notice that Bott has been retained by them.

In the High Court, the judge held that he was bound by previous authority to find that a solicitor’s equitable lien arose only once proceedings had actually been started. As a result, there could be no equitable lien in circumstances where compensation is paid out without passengers having commenced legal proceedings.

By the time the Court of Appeal heard the appeal, the Supreme Court had given judgment in Gavin Edmondson Solicitors Ltd v Haven Insurance Co Ltd [2018] UKSC 21, which decided that a solicitor’s equitable lien can arise where no proceedings have been started. The Court of Appeal dismissed the appeal on the basis that unless and until Ryanair disputes a claim for compensation, Bott is not providing a litigation service in the promotion of access to justice.

 

Held – Appeal allowed by a 3–2 majority. The majority judges, Lord Burrows, Lady Arden and Lord Briggs, give three separate judgments but all agree with the test for an equitable lien adopted by Lord Burrows. Lord Leggatt and Lady Rose jointly dissent.

 

Lord Burrows considers that Gavin Edmondson supports a clear, principled and easy–to–apply test for recognising a solicitor’s equitable lien that does not turn on whether or not a dispute has arisen. In Gavin Edmondson, no proceedings had been issued, no real dispute had yet arisen, and the solicitors who claimed the lien had done little in the way of progressing the legal claim beyond entering it in an online portal. On this basis, Lord Burrows sets out the relevant test for a solicitor’s equitable lien as whether a solicitor provides services in relation to the making of a client’s claim (with or without legal proceedings) which significantly contribute to the successful recovery of a fund by the client. On the facts of this case, the Appellant has provided services to its clients in relation to the making of claims for compensation for flight cancellation and delay provided for by Regulation 261, which have significantly contributed to the recovery of compensation. Lord Burrows therefore holds that the Appellant is entitled to a lien over that compensation for its costs and allows the appeal.

Lady Arden holds that any extension of equitable liens must be principled. Effective access to justice includes ensuring that a person can get advice and is now a foremost animating principle of the lien. Lady Arden agrees with the claim-based test set out by Lord Burrows in para 88.

Lord Briggs highlights his primary considerations when analysing this difficult question. First, the disproportionate cost of engaging solicitors for relatively low–value claims is a significant obstacle to access to justice in England and Wales. The Appellant’s scheme allows consumers to benefit from professional assistance to recover compensation at a low cost, with no cost at all in the absence of recovery. Second, there is a need for reasonable certainty as to the existence and scope of a solicitor’s lien, given that an equitable lien is a property right that does not depend upon the court’s exercise of discretion. Lord Briggs finds that the minority’s approach introduces an unacceptable level of uncertainty. Lord Briggs therefore agrees with the test set out by Lord Burrows, and regards his reasoning and that of Lord Burrows to be closely aligned. He also indicates his agreement with the central thrust of Lady Arden’s reasoning.

Lord Leggatt and Lady Rose, dissenting, disagree with the majority view that solicitors’ equitable liens ought to be extended beyond circumstances involving an actual or reasonably anticipated dispute. A test based on whether the client is ‘making a claim’ is uncertain. It would appear to extend the lien to some transactional work carried out by a solicitor, work which the majority accepts should not be covered. Lord Leggatt and Lady Rose therefore would dismiss Bott’s appeal.

Watch hearing

20 May 2021
Morning session
Afternoon session

Judgment (PDF)
Press summary (HTML version)
Judgment on BAILII (HTML version)

Hearings in the Supreme Court are now shown live on the Court’s website.

On Wednesday 16th March, the Court will hand down judgment in Bott & Co Solicitors v Ryanair DAC [2022] UKSC 8, on appeal from [2019] EWCA Civ 143. The court was asked to decide what the limits are to the principle under which a solicitor can ask the Court to grant an equitable lien in order to protect his entitlement to fees as against his client. Hand down will take place at 9;45am in Courtroom Three.

The following Supreme Court judgments remain outstanding: (As of 16/3/22)

The Law Debenture Trust Corporation plc v Ukraine (Represented by the Minister of Finance of Ukraine acting upon the instructions of the Cabinet of Ministers of Ukraine) Nos. 2 and 3, heard 9-12 December 2019
BTI 2014 LLC v Sequana SA and Ors, heard 4 May 2021
East of England Ambulance Service NHS Trust v Flowers and Ors, heard 22 June 2021
Basfar v Wong, heard 13th-14th October
Secretary of State for the Home Department v SC (Jamaica), heard 19th October
Commissioners for Her Majesty’s Revenue and Customs v Coal Staff Superannuation Scheme Trustees Ltd, heard 26th October
Harpur Trust v Brazel, heard 9th November 2021
Guest and another v Guest heard 3rd December 2021
Fearn and others v Board of Trustees of the Tate Gallery heard 7th December 2021
Stanford International Bank Ltd (in liquidation) v HSBC Bank PLC, heard 19th January 2022
Commissioners for Her Majesty’s Revenue and Customs v NCL Investments Ltd and another, heard 25th January 2022
R v Maughan, heard 27th January 2022
Cornerstone Telecommunications Infrastructure Ltd v Compton Beauchamp Estates Ltd, Cornerstone Telecommunications Infrastructure Ltd v Ashloch Ltd and another and On Tower UK Ltd (formerly known as Arqiva Services Ltd) v AP Wireless II (UK) Ltd, heard 1st February 2022
DCM (Optical Holdings) Ltd v Commissioners for Her Majesty’s Revenue and Customs (Scotland), heard 8th February 2022
R (on the application of Coughlan) v Minister for the Cabinet Office, heard 15th February 2022
Competition and Markets Authority v Pfizer Inc and Flynn Pharma Ltd, heard 22nd February 2022

 

 

 

 

In this post, Calum Fairbairn, a trainee solicitor in the litigation team at CMS, previews the decision awaited from the UK Supreme Court in Candey Ltd v Crumpler and another (as Joint Liquidators of Peak Hotels and Resorts Ltd (In Liquidation) [2020] EWCA Civ 26. The appeal was heard on 2 and 3 March 2022.

Background

The appeal turns on what action a solicitor must take when entering into an additional security arrangement with a client in order to avoid waiving their rights under a pre-existing equitable lien (or creating an inference of waiver).

An equitable lien arises by operation of law in certain situations recognised by authority. This type of lien occurs as a result of the relationship between parties, rather than any actions taken by them. A solicitor’s equitable lien flows from the solicitor-client relationship in specific circumstances. It allows a solicitor to recover their costs by applying to a court to enforce a charge over sums recovered from success in litigation or arbitration in which the solicitor has acted.

Candey Ltd (“Candey”) acted for Peak Hotels and Resorts Ltd (“Peak”) between April 2014 and March 2016 in extensive litigation which took place in England and several other jurisdictions. By August 2015, Peak owed Candey hundreds of thousands of pounds in unpaid legal fees. Peak could no longer afford to finance the ongoing litigation, and in October 2015, the company and some of its backers negotiated a Fixed Fee Agreement (“FFA”) with Candey to cover all future litigation. The FFA was secured by a Deed of Charge registered in the British Virgin Islands (“BVI”), which purported to create charges over Peak’s assets and undertakings, and over damages, costs, monies and other sums or benefits flowing from the litigation.

Subsequent to the FFA being agreed, Peak entered liquidation in the BVI, and the respondents were appointed as joint liquidators of the company. As litigation involving Peak was ongoing in London, the liquidators applied for and obtained a recognition order under Schedule 1 to the Cross-Border Insolvency Regulations 2006 (“the CBIR”). This recognised the BVI liquidation as the foreign main proceedings, and therefore had the effect of staying all proceedings against Peak, except for those listed in the order.

The liquidators replaced Candey with new solicitors soon after being appointed. A dispute then arose between the liquidators and Candey regarding unpaid fees which Candey alleged were owed to it by Peak. During this dispute, Candey was represented by a separate entity, Candey LLP. Candey LLP operated from the same offices as Candey and appeared to have the same fee earners. In March 2016, Candey entered into a Conditional Fee Agreement (“CFA”) with Candey LLP, under which it was obliged to pay a 100% success fee to Candey LLP if it was successful in its dispute with the liquidators.

Procedural History

There were several hearings in the dispute, and the liquidators were ordered to pay some of Candey’s legal costs. The High Court determined two key issues. Firstly, the court held that the liquidators were not obliged to pay the success fee owed by Candey to Candey LLP. Secondly, the court rejected Candey’s request to convert a putative equitable lien over settlement sums paid to Peak during the litigation into a charge on Peak’s assets under s 73 of the Solicitors Act 1974, as it held that Candey had waived its right to the lien by entering into the subsequent Deed of Charge. Candey appealed to the Court of Appeal on both of these issues.

The Court of Appeal dismissed Candey’s appeal on both grounds.

Success Fee

Under s 44 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (“LASPO 2012”), since 1 April 2013, the general rule has been that success fees payable under CFAs cannot be recovered from an opponent. As such, the successful party in an action must pay any success fee to which it has agreed itself.

However, Article 4 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Commencement No.5 and Saving Provision) Order (SI 2013/77) (“the LASPO Order”) listed several exemptions to the general rule, including:

“proceedings in England and Wales brought by a person acting in the capacity of –

a liquidator of a company which is being wound up in England and Wales or Scotland under Part IV and V of the (Insolvency Act 1986)”.

Section 44 of LASPO 2012 came into force from 6 April 2016, with the result that success fees can no longer be recovered from the other side in insolvency proceedings. However, given that the CFA between Candey and Candey LLP under which the success fee became payable was entered into in March 2016, the court was not precluded from ordering the liquidators to pay the success fee in this case.

Candey argued that the liquidators were acting in the capacity of English liquidators as required by the LASPO Order exemption by virtue of the recognition order which was granted in their favour. The Court of Appeal rejected this argument.

The Court of Appeal held that the liquidators’ application did not fall within the LASPO Order exemption as the recognition order granted under the CBIR did not have the effect of treating foreign representatives, such as the liquidators, as acting in the capacity of an English liquidator. Article 21 of Schedule 1 to the CBIR states that upon recognition of a foreign proceeding, a court can grant any appropriate relief at the request of the recognised foreign representative where necessary to protect the assets of the debtor or the interests of creditors. This includes, inter alia, at Article 21(1)(g), “any additional relief that may be available to a British insolvency officeholder under the law of Great Britain including any relief provided under paragraph 43 of Schedule B1 to the Insolvency Act 1986”.

The court found that if the recognition order had the effect of deeming the foreign representative to have the same abilities, capacities and powers of a British insolvency practitioner, Article 21 would be redundant as the representative would automatically have the powers given by the Schedule.

The court added:

“There is nothing in the structure or wording of Schedule 1 that supports the contention that a recognised foreign representative is to be treated as a British insolvency officeholder or that he acts in the capacity of a British insolvency officeholder. The provisions that refer to the recipient of the recognition order still refer to him as the foreign representative.”

The court added that, in its view, it was not the intention of Parliament to “allow foreign representatives to continue to recover success fees under their CFAs in the same way as English liquidators. If that had been the intention it would have been a simple matter to make that clear.”

Lien

It is a long-standing principle that solicitors are entitled to recover their unpaid fees out of sums received by their client as a result of success in the litigation in which they are instructed. This concept was described by Lord Briggs JSC in Gavin Edmondson Solicitors Ltd v Haven Insurance Co Ltd [2018] UKSC 21 as promoting access to justice, as it allows solicitors to provide litigation services on credit to clients with strong cases who do not have the financial means to pay upfront.

Candey applied to the court for a charging order under s 73 of the Solicitors Act 1974, in order to enforce the lien it claimed it had over settlement sums paid to Peak.

The court said that generally, a person would not be treated as having waived their rights unless they make an unequivocal representation by words or conduct that they forgo those rights. However, the courts regarded a solicitor’s equitable lien as more prone to being waived than other rights. Candey argued that it was not subject to this lower threshold as it had advised Peak to obtain independent legal advice regarding the FFA and Deed of Charge it entered into, rather than providing advice itself. Candey therefore submitted that it had put itself in the position of a ‘banker or innkeeper’ with the concomitant higher threshold for inference of waiver being drawn, rather than a solicitor in a fiduciary relationship.

The court dismissed this argument on the basis that the duty of a solicitor is not simply to explain to their client the additional security arrangements being entered into. Rather, the solicitor must describe what the combined impact of both the new security and existing lien will be on the client’s prospects of receiving any actual monetary award from success in the litigation. The court noted that in most cases, the client has a choice between either signing the new security agreement or abandoning the litigation altogether due to inability to fund legal costs. They must have a complete understanding of what their solicitors’ claims will be to any sum awarded, and what (if any) proceeds would remain after this, to assist in making this decision. The relevance of the solicitor’s fiduciary duty is that they are seeking to have their fees paid from sums awarded in the litigation in which they are representing the client.

The court said that Candey would be treated as having waived its equitable lien if (i) the inconsistencies between the Deed of Charge and the lien were such that it intended to abandon the lien and (ii) it failed to reserve that lien.

On the incompatibility of the lien with the Deed of Charge, the court found that the Deed of Charge covered the proceeds of the litigation, which were the fruits of litigation covered by the lien, as well as a charge over all of Peak’s assets.  It could be inferred that the taking of additional security over the proceeds of litigation which would otherwise be covered by the lien indicated that the solicitor no longer intended to rely on that lien.

The court also found that the difference in priority ranking of the two securities (the lien would have entitled Candey to a charge in priority to all other debts, whereas under the Deed of Charge, Candey ranked behind a third-party litigation funder) cannot have been intended to exist in parallel.

Additionally, the difference in the right to interest on the debt payable under the two forms of security (the standard terms and conditions of the original retainer on which Candey was retained did not specify any interest rate, whereas the FFA provided for interest to be paid at 8% in some circumstances) meant that the new security arrangements were incompatible with the continued existence of the lien.

The court held that it was not possible to read the FFA and Deed of Charge as reserving the lien. Inter alia, Clause 1 of the FFA explicitly stated that the agreement superseded and replaced any previous agreement between the parties in respect of fees. It also found that, in the event that it is possible by operation of law for a lien to ‘revive’ if the inconsistent security were set aside, this principle was not applicable to the case.

Comment

The Court of Appeal placed significant emphasis on the fiduciary duty owed by a solicitor to their client. The solicitor must explain not only the new security arrangements, but also the combined effect of these new arrangements and the pre-existing equitable lien on the client’s prospects of recovering any financial award from success in the litigation. The court noted that in most cases, a client entering into a new security agreement faces a choice between either agreeing to the new arrangements or withdrawing from the litigation due to lack of funds. It is therefore vital that solicitors explain fully to the client the impact of the combined security arrangements on their prospects of recovery in order to avoid the inference being drawn that the solicitor has waived their rights to the lien.

This case demonstrates the importance of a solicitor reserving their right to an equitable lien when entering into new security arrangements with a client if they wish to continue to rely on that lien, in order to rebut any inference of waiver. This is particularly important if there are inconsistencies between the two forms of security which may lead a court to find that there has been an inference of waiver, such as covering the same assets or being subject to different priority rankings or interest rates. Because of a solicitor’s fiduciary duty to their client, courts will be more willing to find that there has been an inference of waiver in a solicitor-client relationship compared to other situations where an equitable lien may arise. Solicitors must make any reservation in a clear and transparent manner. It will be interesting to see whether the Supreme Court agree.

Oscar Davies, a barrister at Lamb Chambers, and Jack Castle, a barrister at Henderson Chambers, offer their views on the Elan-Cane decision (R (On the application of Elan-Cane) v Secretary of State for the Home Department) [2021] UKSC 56) in this piece that first appeared in the New Law Journal. 

 

Elan-Cane is contrary to domestic and international developments, which are moving towards legal recognition of non-binary gender identities.

In R (on the application of Elan-Cane) v Secretary of State for the Home Department [2021] UKSC 56, [2021] All ER (D) 53 (Dec), the Supreme Court found there was no positive obligation on the state to provide the option of an ‘X’ gender category on passports.

The claimant, Christie Elan-Cane, is non-gendered; ‘non-gendered’ being one of the gender identities that are neither male nor female. Although common ground that this gender identity engaged Art 8 of the European Convention on Human Rights, the amount of ‘respect’ due to that aspect of private life did not outweigh other factors, in particular the interest in a coherent state-wide administrative approach. However, the court’s reasoning differentiates between, on the one hand, binary male- and female-gendered people (whether cis- or trans-), and on the other, those who are not male or female, such as non-gendered and non-binary persons. This may have created a two-tier approach to rights protections.

 

Sex, gender & Art 8

In what is becoming common usage, ‘gender’ refers to identity, distinguished from ‘sex’ which evokes anatomy/biology. The Supreme Court introduced the terms as such: ‘The term “gender” is used in this context to describe an individual’s feelings or choice of sexual identity, in distinction to the concept of  “sex”, associated with the idea of biological differences which are generally binary and immutable’ (at [3]).

Yet, as the court noted, ‘there is no legislation in the United Kingdom which recognises a non-gendered category of individuals. On the contrary, legislation across the statute book assumes that all individuals can be categorised as belonging to one of two sexes or genders (terms which have been used interchangeably) […] albeit not necessarily the gender recorded at birth’ (at [52]).

Most reported cases on sex and gender identity issues relate to people transitioning from male to female or vice versa. Elan-Cane is solely about recognition of further forms of gender identity: is a state in breach of Art 8 if it fails to provide an option (here, ‘X’) on passports for a gender identity other than male/female?

The Court of Appeal held that Art 8 was engaged, calling it ‘obvious, and indeed beyond argument’ (at [46], [2020] EWCA Civ 363, [2020] All ER (D) 62 (Mar)). This point was not taken in the Supreme Court. The court however noted that the ‘respect’ that must be had for private and family life under Art 8 is less clear-cut in the jurisprudence of the European Court regarding positive (rather than negative) obligations, as in Elan-Cane, are concerned. Citing Hämäläinen v Finland (2014) 37 BHRC 55, the court said that while a variety of practices are followed in contracting states, relevant factors include ‘the importance of the interest at stake and whether “fundamental values” or “essential aspects” of private life are in issue or the impact on an applicant of a discordance between the social reality and the law, the coherence of the administrative and legal practices within the domestic system being regarded as an important factor in the assessment carried out under article 8’ (at [34]).

The court then considered cases on ‘the impact on an applicant of a discordance between the social reality and the law’, in particular B v France [1992] ECHR 13343/87. B’s birth sex was male, and ‘lived as a woman and had a female appearance’. The European Commission on Human Rights found ‘the applicant indisputably suffers particularly trying ordeals in her daily life because of the discrepancy between her appearance and the entries concerning both gender and forename on the documents relating to her’ (quoted in Elan-Cane at [40]), and the European Court of Human Rights agreed.

The claimant in Elan-Cane argued the same analysis applied to non-gendered people: it is a similar breach of Art 8 for a non-gendered identity to not be recognised as for an individual’s male/female gender identity not to be recognised.

 

The Supreme Court’s approach to Elan-Cane

The Supreme Court held that the purpose of providing male/female gender on passports ‘is not to inform [HM Passport Office] as to the applicants’ feelings about their sexual identity, and the applicants are not being forced to lie about those feelings.’ The passport application form ‘is concerned with the applicants’ gender as a biographical detail… It is therefore the gender recognised for legal purposes and recorded in those documents which is relevant. The gender recorded on the passport can also be used for the other purposes mentioned in paras 10-11 above [verifying identity, enabling officials to deal with them in ways appropriate to gender, such as correct pronouns and searches]: purposes which are associated with the passport-holder’s appearance and physiology rather than their innermost thoughts’ (at [39]).

The court’s conclusion was primarily that the need for a cohesive legal and administrative system based on two genders was sufficient to outweigh the need to recognise Elan-Cane’s gender identity, and that any change to that scheme was a matter for Parliament. It considered there was a balance between competing private and public interests, such that a wide margin of appreciation is appropriate (at [55]–[62]).

However, the court also distinguished the position in Elan-Cane from B v France, and in doing so potentially opened a gap in rights protections. It said: ‘perhaps most importantly, there is not the obvious discrepancy between the appellant’s physical appearance and the “F” marker in the appellant’s passport that there was between the feminine appearance of the applicant in B v France and her male identity papers’ (at [41]). In so doing, the court differentiated the level of harm caused by misgendering people of the male/female genders (whether they are cis- or trans-) from the lesser harm caused by not recognising the gender identity of non-binary/non-gendered persons.

But it is unclear why the harm caused would be any less severe. The claimant was successful in B v France, and the same argument is relevant to Elan-Cane; the sincerely-held gender identities of both claimants were not recognised by the state, meaning they could only prove identity and use services requiring such proof by using a gender which is no longer theirs. For both there was a ‘discordance between the social reality and the law’.

The court arrives at its conclusion by not adequately considering the social reality of Elan-Cane’s gender. Its reasoning appears to be as follows: in law, only male and female genders exist. Elan-Cane’s legal gender is female. In appearance and physiology there is no ‘obvious discrepancy’ between this legal gender and social reality, despite Elan-Cane’s ‘innermost thoughts’ being non-gendered. As such, there is no discord. Legal gender sets the parameters for what can be socially real: ‘female’ is the yardstick that appearance and physiology—social reality—may diverge from.

It does not consider Elan-Cane’s social reality could be that of a non-gendered person. Although not reasoned, the court assumes ‘social reality’ as mentioned in Hämäläinen is synonymous with ‘appearance and physiology’, and that only male/female gender identities are ‘social realities’. It also seems to have assumed other gender identities are (merely) self-conceptions, and not social realities or even ‘biographical detail’—they are ‘feelings’ and ‘innermost thoughts’.

This is a false dichotomy. It does not follow that non-gendered or non-binary gender identities are exclusively thoughts or self-images and not social realities. Self-conceptions may be or inform social facts, and not all characteristics protected by Art 8 are apparent in physical appearance. Gender identity may be appearance, innermost thoughts, or both, and be no less socially real for that. It is certainly a ‘biographical detail’. This is particularly so for Elan-Cane, who has undergone extensive surgery to remove female sex organs—surgery the Supreme Court did not consider gender reassignment surgery (at [44]) despite it being undertaken to correct ‘psychological distress resulting from identifying as non-gendered while possessing a woman’s reproductive physiology’ (at [45]). Even in appearance and physiology, Elan-Cane is non-gendered.

In effect, the court begged the question: it failed to recognise the social existence of non-gendered identities in its reasoning, categorised Elan-Cane as resembling female, then said the gender in the passport was a tolerably accurate description of the facts as it saw them. If the court had considered non-gendered identities to be as ‘real’ as the male and female genders, its conclusion may have been different.

 

Ramifications of the Supreme Court’s approach

By its approach the Supreme Court has, perhaps inadvertently, created a two-tier system of rights protections—binary male and female people above, and non-gendered/non-binary people below—effectively rendering the latter second-class citizens. Despite Art 8 applying to all gender identities, the court may have opened a difference in rights protections between certain of them.

 

Wider implications

The court’s seeming creation of a two-tier system is at odds with recent developments, both domestically and internationally, which call for wider recognition of and protection for non-binary identities.

Domestically, an employment tribunal has recently held that non-binary and gender-fluid gender identities are part of the protected characteristic of gender reassignment (Taylor v Jaguar Land Rover Limited Case No 1304471/2018, case comment here). It relied on extracts from Hansard and in particular remarks on the Equality Bill from the then solicitor general, who said in Parliament that gender reassignment (s 7, Equality Act 2010 (EqA 2010)):

‘concerns a personal move away from one’s birth sex, into a state of one’s choice […] There are lots of ways in which that can be manifested—for instance, by making their intention known. Even if they do not take a single further step, they will be protected straight away. Alternatively, a person might start to dress, or behave, like someone who is changing their gender or is living in an identity of the opposite sex. That too, would mean they were protected. If an employer is notified of that proposal, they will have a clear obligation not to discriminate against them’ (quoted at [177]).

The employment tribunal then held: ‘it was very clear that Parliament intended gender reassignment to be a spectrum moving away from birth sex, and that a person could be at any point on that spectrum. That would be so, whether they described themselves as “non-binary” ie not at point A or point Z, “gender fluid” ie at different places between point A and point Z at different times, or “transitioning” ie moving from point A, but not necessarily ending at point Z, where A and Z are biological sex.’ (at [178]).

The approach of the Supreme Court to Art 8 in Elan-Cane is therefore at odds with EqA 2010 and Taylor in differentiating between the protections afforded non-binary people and those afforded binary (trans) people. Whereas Elan-Cane could be protected by EqA 2010, because of an intention to move away from the sex assigned at birth, the court put undue emphasis on Elan-Cane’s somatic appearance and resemblance to one of the binary genders.

There are signs that the Supreme Court has passed the question to a legislature which may be moving in the direction of Taylor. The report for the Reform of the Gender Recognition Act by the House of Commons Women and Equalities Committee of 15 December 2021 recommended that the government clarify what the barriers are preventing it from allowing non-binary people to be legally recognised within 12 weeks of its publication. It also stated the Equality and Human Rights Commission should undertake research in this area so that proposals to allow for legal recognition of non-binary people can be brought forward to Parliament (para 226 of the report).

More broadly, the Equal Treatment Bench Book (December 2021, revision of February 2021 edition) stresses the importance of judges treating different trans gender identities equally: ‘the broader meaning of “trans” or “transgender” can be used to encompass a wide range of gender identities […] “non-binary” “a-gender” […] “genderqueer” […] “gender fluid” […] It should go without saying that all people deserve to be treated fairly, and with respect for their private life and personal dignity, irrespective of their gender or gender history’ (at paras 7 and 9, p332).

Internationally, as the Supreme Court recognised, there are at least 12 countries which recognise ‘X’ on passports in one way or another, including New Zealand (2005), Australia (2011) and Canada (2017). Though not mentioned in the judgment, the US also issued its first gender-neutral ‘X’ passport in 2021.

In light of a general movement towards widening protections for non-binary/gendered identities, the Supreme Court’s inadvertent differentiation between the rights of binary people and non-binary people seems misplaced.

 

 

This article was originally published in the New Law Journal and is reproduced with thanks. This is a guest contribution to the UKSC Blog, who would like to thank the authors. The views and thoughts expressed above are theirs and are intended as a critical and reasoned analysis of the Court’s judgment. 

 

 

In this post, Jen Knibbs, an associate at CMS, comments on FirstPort Property Services Ltd v Settlers Court RTM Company Ltd and others [2022] UKSC 1, an important judgment providing much needed clarity on the extent of the statutory right to manage under the Commonhold and Leasehold Reform Act 2002.

On 12 January 2022, the Supreme Court unanimously allowed FirstPort’s the appeal from the Upper Tribunal (Lands Chamber), and overruled the decision of the Court of Appeal in Gala Unity Ltd v Ariadne Road RTM Co Limited [2012] EWCA Civ 1372.

The issue for the Supreme Court was whether a right-to-manage (“RTM”) company, set up to manage a single residential block on a multi-block development pursuant to the provisions of the Commonhold and Leasehold Reform Act 2002 (the “2002 Act”), acquires the right to manage common areas on the estate which are shared with leaseholders from other non-right-to-manage blocks.

Background

FirstPort is the named management company in the leases of certain flats at the Virginia Quay Estate (the “Estate”) in London. The Estate comprises many properties, including several freehold houses and nine other blocks of flats, as well as certain common property such as gardens and accessways. Settlers Court RTM Company Limited (the “RTM Company”) acquired the right to manage Settlers Court, one of the blocks forming part of the Estate.

After successfully acquiring their statutory right to manage Settlers Court, the RTM Company took over FirstPort’s responsibility for providing services at Settlers Court. FirstPort continued to provide services to the whole Estate, including Settlers Court, as per its responsibilities in terms of the lease, and continued to collect fees for the services rendered.

An issue then arose when a number of lessees refused to pay their portion of the fees charged by FirstPort notwithstanding the fact that they had had the benefit of the services. The lessees argued that they were no longer obliged to pay FirstPort, as the right to collect fees had passed to the RTM Company. Under s 97(2) of the Act, a landlord or management company cannot carry out the management functions that have been acquired by the RTM company unless otherwise agreed.

Decisions of the lower courts

First instance decision

The RTM Company applied to the First-Tier Tribunal for a determination as to whom the service fees relating to the management of the Estate appurtenant property were payable.

The Tribunal held that service charges were payable to the RTM Company and not to FirstPort, finding that the right to provide all management functions and services at Settlers Court, including its appurtenant property, passed to the RTM Company when the right to manage was acquired. Reliance was placed on the Court of Appeal decision in Gala Unity Ltd v Ariadne Road RTM Co Limited [2012] EWCA Civ 1372 (“Gala Unity”) where it was found that the right to manage extended to “non-exclusive” parts of a wider estate, e.g. car parks, gardens etc.

“Appurtenant property”, defined at s 112 (1) of the Act, means property “in relation to a building or part of a building or a flat, means any garage, outhouse, garden, yard or appurtenances belonging to, or usually enjoyed with, the building or part or flat”, or, in other words, the property surrounding the building.

The Upper Tribunal

FirstPort appealed to the Upper Tribunal and argued that Gala Unity had been wrongly decided. The Upper Tribunal found that whilst the outcome in Gala Unity created many difficulties in wider estate management, the decision was not made in error, nor was the Court’s reasoning leading to the final decision demonstrably wrong.

The Upper Tribunal did however issue a “leapfrog” certificate which enabled FirstPort to apply for permission to appeal directly to the Supreme Court and to bypass the Court of Appeal.

The Supreme Court decision

In a unanimous judgment, the Supreme Court agreed with FirstPort’s arguments that Gala Unity produced “absurd and unworkable” results in allowing the RTM Company to acquire management rights over non-exclusive estate property. The Supreme Court closely considered the true construction of the 2002 Act in their judgment, stating that the appeal turned upon the interpretation of the relevant provisions of the legislation.

In his judgment, Lord Briggs stated that in reaching the decision to overrule Gala Unity, he bore in mind that the case “has stood as binding authority for several years, and that estate facilities in many estates may at present be being managed under sharing agreements made by RTM companies and others on the assumption that the law was as set out in that case,” but “that is not, however, a sufficient reason to perpetuate an interpretation which is not merely causing practical difficulties but, more fundamentally, is contrary to the purpose of the statute” .

The court placed great significance on the construction of the 2002 Act and the definition of the “premises”. They found that managing shared estates did not fall into this definition, and therefore the right to manage could not extend to those parts.

In conclusion, Lord Briggs said “I consider that the right to manage scheme in Chapter 1 of Part 2 of the 2002 Act makes no provision within the statutory right to manage for management by the RTM company of shared estate facilities. It is concerned only with management of the relevant premises, that is the relevant building or part of a building, together with appurtenant property (if any) which means nearby physical property over which the occupants of the relevant building (or part) have exclusive rights. The right to manage is an exclusive right in the RTM company to manage the relevant premises, and no provision is made in Chapter 1 for any shared management of anything, save only where the RTM company chooses to agree otherwise.”

Ultimately, the Court accepted the appellant’s argument that the Court of Appeal’s construction of the legislation produced an “absurd and unworkable” result which could not have been what Parliament intended.

Comment

It was widely acknowledged that Gala Unity created practical difficulties for estate management; the Law Commission proposed overruling the decision in their July 2020 report on the right to manage. The Supreme Court’s decision will no doubt be welcomed by all those involved in the management of multi-block developments as it clarifies the extent of this important statutory right.