By : Christopher Camp
Abstract: It’s high time that the Court of Appeal revisited its anomalous decision in Grady v HM Prison Service, in which it decided that all unfair dismissal claims vest in the bankrupt claimant and not in the trustee in bankruptcy.
In several cases I’ve recently been involved in, acting for the respondent, the claimant was made bankrupt after the employment tribunal application was issued but before trial.
Where there is no unfair dismissal claim, few difficulties arise. In Khan v Trident Safeguards Ltd  EWCA Civ 624, the Court of Appeal decided that all money claims (except unfair dismissal claims), in particular all claims for loss of earnings, vest in the trustee in bankruptcy. What this means is that the trustee takes over conduct of the claim and gets to decide how the case should be taken forward. The only claims that don’t vest in the trustee and remain with the claimant – again other than unfair dismissal claims – are claims where money is not being sought or where any money awarded is awarded as damages for injured feelings or personal injury. Money awarded as damages for personal injury or for injury to feelings does not form part of the bankrupt’s estate, so he gets to keep it and it doesn’t go to his creditors.
Where there is an unfair dismissal claim, however, following the decision in Grady v HM Prison Service  EWCA Civ 527 (which was decided shortly before Khan), the claim does not vest in the bankrupt’s trustee. This is so even though any compensation awarded to the claimant does form part of his estate, i.e. he essentially does not get to keep it and it goes to his creditors.
Why does this matter?
It is rather odd that of all the types of case that can be brought in an employment tribunal, an unfair dismissal claim should be the only one that automatically, no matter what remedy is being sought, remains with a bankrupt individual. Oddities and inconsistencies in the law aren’t, though, particularly important in and of themselves. But the unique and privileged position of unfair dismissal claims does matter for two main reasons.
First, leaving an unfair dismissal claim in the bankrupt claimant’s own hands undermines the bankruptcy system.
Bankrupt people are assumed not, or at least not necessarily, to have the interests of their creditors at heart. This is why they have trustees in bankruptcy.
If the bankrupt individual has an unfair dismissal claim, the interests of his creditors would be best served by getting the maximum amount of compensation out of the respondent with the minimum of fuss and expense. A naïve outsider might assume that the bankrupt claimant would want the same. Those practising in employment law, though, know that claimants often want completely different things out of their unfair dismissal claims.
A claimant may not care about money at all and just be looking for vindication or his ‘day in court’, or he may want to cause the maximum amount of disruption to his ex-employer he possibly can, secure in the knowledge that costs will not be awarded against him because he has no money. He may be completely unrealistic in his expectations, causing him to reject eminently reasonable offers of settlement from the respondent. He may neglect his claim because he knows that any compensation will not be going into his pocket but to his creditors. He may even act – to spite his creditors and his trustee in bankruptcy – so as deliberately to weaken his own claim.
Secondly, the bankrupt claimant can be a nightmare from the respondent’s point of view. Of course it is not necessarily the case that an individual will be difficult just because he has the misfortune to be made bankrupt. Personal experience and anecdotal evidence, however, suggest that an unusually high percentage of bankrupt claimants act unreasonably in the conduct of their employment tribunal claims. It may just be that I and other employment practitioners of my acquaintance have been unlucky, but the fact remains that the threat of costs for unreasonable behaviour is not much of a threat to someone who is bankrupt.
Khan provides for a general rule to which Grady is an exception. Khan decides that what’s important is the remedy being sought. If it is a purely personal remedy, such as a claim for injury to feelings for discrimination, then it remains with the bankrupt; if it is, to any extent, a ‘hybrid’ claim – in the sense that the bankrupt claimant is claiming anything that would from part of his bankruptcy estate, e.g. loss of earnings – then the claim vests in his trustee. If this principle were applied to an unfair dismissal claim then if, as in Grady, the claimant is seeking reinstatement / re-engagement, the claim would stay vested in him but if the claimant is seeking compensation for loss of earnings, the claim vests in his trustee.
The basis of the decision in Grady is set out in the speech of Sedley LJ, in paragraphs 22 & 25:
In our judgment the essential nature of a claim for unfair dismissal is personal, not proprietary. Unlike a claim for wrongful dismissal, which (except in the rare case where specific performance can be granted) is an action for damages for breach of a contract, a claim for unfair dismissal only begins with the employer’s fundamental breach. …. The purpose and effect of the sequential provisions for judgment and redress can fairly be said to be the recognition of a vested interest in a job – something of a different order from the common law’s view of a job as a simple contract which can be broken by a party willing to pay the appropriate price for breach.
In our judgment a claim for reinstatement or re-engagement consequent on an unfair dismissal, and indeed a significant element of the compensation which can be awarded in lieu of these, is not a thing in action of the kind which forms part of a bankrupt’s estate, even though the eventual fund (if an award is made) may be. It is a claim of a unique kind which offers the restoration to the claimant of something which only the claimant can do. To vest it in the trustee in bankruptcy would be of no appreciable benefit to the creditors except to the extent that it might produce a money settlement (which would represent not a concession but a liquidation of the bankrupt’s claim to her job). For the rest, the creditors will probably be better served if the bankrupt can get her job back or a similar job in its place, and that is something the trustee cannot do in her stead…
Essentially, the Court of Appeal were, in Grady, saying that because of the availability of remedies of reinstatement and re-engagement – remedies that it would be nonsensical to vest in a trustee in bankruptcy because the only person who might be reinstated or re-engaged is the bankrupt claimant himself – unfair dismissal claims vest in the bankrupt and not the trustee.
In Khan, the decision was substantially to ignore Grady. (The Court of Appeal did not, in Khan, need to deal with Grady head-on because counsel for the respondent in Khan had conceded, in light of the decision in Grady, that the claimant’s unfair dismissal claim remained vested in the claimant – see paragraph 5 of the decision in Khan). The Court’s starting point (paragraphs 45-47, 87, 99 of the decision) was the rule applied to types of claim other than employment claims, as set out in Ord v Upton  Ch 352 – that ‘hybrid’ claims, in particular any claim “in substance a money claim” (paragraph 54; see also paragraphs 60 & 104), vests in a bankrupt’s trustee.
The majority in Khan [there was a ‘pro-respondent’ dissenting judgment] went on to say that when deciding whether or not something is a ‘hybrid’ claim, “the critical question is not what relief [the Claimant] could in theory seek but what relief he is in fact seeking” (paragraph 88). So, in relation to a discrimination claim, if the claimant is seeking compensation for lost earnings, the claim is a ‘hybrid’ one, but if he is just seeking compensation for injury to feelings and/or a declaration that he has been discriminated against, that is a purely personal claim and vests in him (see paragraph 105).
By the logic of the majority in Khan, one should be looking, in every case, not at what remedy the claimant could in theory seek but what remedy he is in fact seeking. Applying that logic to unfair dismissal claims one should look at whether the claimant is seeking compensation (i.e. for lost earnings). If the claimant is seeking compensation, then his claim ought to vest in his trustee.
In Grady, the Court of Appeal did not apply that logic to unfair dismissal claims, because Khan hadn’t been decided yet. Prior to Khan, everyone seems to have operated on the basis that whether a claim was ‘purely personal’ or ‘hybrid’ was to be determined simply by looking at what type of claim it is. This certainly seems to have been the way in which the Court of Appeal were operating in Grady and was the basis of Wall LJ’s partly dissenting judgment in Khan. That approach – looking just at the type of claim being brought – is, according to the majority in Khan, plain wrong.
Wrong or not, Grady is a decision of the Court of Appeal and as such must be followed by tribunals. Equally, Khan is a decision of the Court of Appeal that must be followed. Although the two decisions can co-exist quite happily as a matter of legal technicality, there is at the very least an inconsistency between the trains of logic or thought followed by the Court in the two cases.
For reasons given above, I think it would, in the event of the claimant’s bankruptcy, be desirable for his unfair dismissal claim, just like all other money claims, to vest in his trustee. If this is accepted, the Courts have to find some way to get around, or distinguish, Grady to enable this to happen.
No distinction is drawn in Grady between claims where reinstatement or re-engagement is sought and those where only compensation is sought. Arguably, then, Grady can be distinguished and be said to apply only to the former type of claims. The argument is boosted by the fact that what was said in Khan about claims other than unfair dismissal claims and the basis for the decision in that case are wholly inconsistent with a situation where ‘compensation only’ unfair dismissal claims do not vest in a trustee in bankruptcy.
The only thing preventing the logic of Khan being applied to unfair dismissal cases is Grady, but Grady is distinguishable, on the basis that it was not a ‘compensation only’ case. It is admittedly true that the Court of Appeal in Khan (see paragraphs 5, 79 & 96) thought it was bound by the decision in Grady. However, as above, a concession was made by respondent’s counsel in Khan and the argument being advanced in this note was, obviously (dependent as it is on the final decision in Khan), not advanced before the court in Khan.
Because of Khan, Grady can and should be distinguished on the basis that it only applies to cases where the claimant is seeking reinstatement and/or re-engagement.
In deciding whether or not employment tribunal claims vest in a bankrupt claimant’s trustee, Khan requires an employment tribunal to focus not on the type of claim being brought but the remedy being sought. In relation to this, there is no good or logical reason to draw a distinction between unfair dismissal claims and other types of claim. Grady, pursuant to which such a distinction has to be drawn, was wrongly decided. The only difficult question is whether the Court of Appeal would be willing to distinguish the decision in Grady, or whether someone wanting to end the special status, in bankruptcy, of unfair dismissal claims will have to go all the way to the Supreme Court.
This content is provided free of charge for information purposes only. It does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.
Please note that we do not give legal advice on individual cases which may relate to this content other than by way of formal instruction of a member of Hardwicke. However if you have any other queries about this content please contact: