Challenging a liquidator's decision to assign a cause of action - Edennote Revisited

In a recent decision that will be of considerable interest to insolvency practitioners, the English High Court dismissed a challenge to a liquidator's decision to assign causes of action originally vested in an insolvent company to a specialist insolvency litigation financing company.

The judge found that the applicant, despite being a creditor of the insolvent company, did not have standing to make the application. If he was wrong on that point, the application would still have been dismissed on the basis that the liquidator's conduct was not sufficient to justify interference by the court.

Both aspects of the judgment are interesting. It might be a surprise to some that the applicant did not have standing given her status as a creditor. However, the decision not to interfere with the liquidator's actions might also be a surprise to those familiar with the Court of Appeal's decision in Re Edennote [1996] 2 BCLC 389 where unsecured creditors of that company were successful in setting aside an assignment in similar circumstances.

Standing

The challenge was made under Section 168(5) of the Insolvency Act 1986 (IA 1986). This allows any person who "is aggrieved by an act or decision of the liquidator" to apply to the court asking for that decision to be reversed or to modify the act or decision complained of. While this provision only applies in England and Wales, a creditor or contributory could raise a similar challenge in Scotland using Section 167(3) IA 1986.

In this case, the applicant had been a director of the insolvent company and was listed as a creditor. It was as a director that the applicant faced the claims assigned by the liquidator (to the specialist funder). You might normally expect such a person to come within the definition of "any person who is aggrieved". However, the judge held that it was not enough to consider whether the applicant was within the category of persons entitled to make the application, it was also necessary to assess whether the applicant had “a legitimate interest in the relief sought." In other words, where a creditor was acting otherwise than in accordance with the collective interests of the creditors, they should not be allowed to ask the court to exercise its supervisory role in controlling the liquidation.

It was for the applicant to demonstrate that she had a legitimate interest in the relief sought and that this was aligned with the interests of the general body of creditors. She was unable to do that and so the judge held that she did not have standing to bring the application. In seeking to challenge the assignment, the judge held that the applicant was acting inconsistently "with the collective interests of the creditors as a whole and, more specifically, their interest in the relief sought."

Edennote

While that was enough to deal with the application, the judge did go on to look at the position if he was wrong and the applicant did in fact have standing. This part of the decision is interesting because of the judge's analysis of the Edennote case. In Edennote, the Court of Appeal did strike down the assignment under section 168(5) IA 1986 because the assignment was made by the liquidator without first obtaining legal advice and without taking into account the possibility of a third party offer. A third party had offered the liquidator £75,000 to purchase the claims, but the claims were ultimately assigned for just £7,000. No steps were taken to approach the applicants in that case, or any associated party to explore the possibilities that might be available to them. The court in that case found that this was something "so utterly unreasonable and absurd that no reasonable person would have done it." It was one of those rare occasions when the court was willing to interfere with a commercial decision of the office holder.

It will come as no surprise that the applicant in this case was quick to point out the similarities to Edennote. The liquidator appears not to have obtained specific legal advice regarding the assignment and perhaps more importantly did not approach the applicant or any members of her family with a view to compromising, selling or otherwise disposing of any of the assigned claims prior to assigning the claims. Indeed, he did not even send a letter of claim to the applicant or do anything else to warn her or her family that he was minded to make such a claim or assign it to a third party.

However, the judge was prepared to distinguish Edennote. While not uncritical of the liquidator's actions (and the reasons given for why he did not offer the claims more widely), on balance he felt that the liquidator had done enough to survive a challenge under Section 168(5), which he described as a formidable test. He accepted the liquidator's evidence that he considered the applicant would not have sufficient funds to purchase or compromise the claims and for that reason did not approach the applicant. In addition, there was no suggestion, as there was in Edennote, that the liquidator would have been able to negotiate better terms than he did with the litigation funder in this case. While he might have done more, he had negotiated a "comprehensive commercial agreement" which meant that even if the applicant had standing, the judge would not have been prepared to strike down the liquidator's actions in assigning the claims.

Why important?

The ability to assign claims and the predicted increase in insolvency related litigation post pandemic means that insolvency practitioners will increasingly find themselves making decisions on whether to assign claims to creditors and/or litigation funders. This judgment will make it harder for those decisions to be challenged by aggrieved parties who might have wanted to "buy" the claims for themselves. Whilst office holders might take encouragement from the judgment, it is clear that any decision to assign a claim still requires careful consideration. Office holders should be alive to the possibility of challenge under Sections 167 or 168. Where an office holder is considering assigning a claim, best practice will likely involve taking legal advice and canvasing interested parties. Keeping a record of the matters the office holder took into account before deciding to assign a claim may also prove useful.