This guidance does not create a binding precedent but does set out a helpful framework within which insolvency officeholders can consider a proposed assignment of a cause of action.
Insolvency officeholders for these purposes include trustees in bankruptcy, liquidators and administrators. Each of these officeholders is under a duty to get in the insolvent's property and realise it for the benefit of the creditors. A claim, or cause of action, belonging to the insolvent almost always falls within the definition of property and is potentially realisable.
Insolvency officeholders have the power to pursue claims on behalf of the estate. In practice it is often not possible or practical for the officeholders to pursue claims themselves. There may be evidential difficulties, and litigation funding can be an issue. In these circumstances, the officeholder may seek to assign (sell) the claim.
The Insolvency Act 1986, under which the officeholder's powers and duties primarily arise, does not expressly require an assessment of the merits of a claim before it is assigned. However, it would usually be appropriate to consider the merits of the claim because:
In practice there may be very little evidence on which an insolvency officeholder can base their assessment of the merits or otherwise of a claim.
LF2 Ltd v Supperstone, deals with a creditor's application to court under paragraph 74 Schedule B1 of the Insolvency Act 1986. This paragraph allows a creditor to apply to court for relief if the administrator's conduct unfairly harms the creditor. In this case, the administrators had refused to assign a cause of action to the creditor. The creditor challenged this decision.
The Deputy Insolvency and Companies Court Judge dismissed the application at first instance. The creditor appealed, but there was an error or oversight which meant the Judge's finding that there was no unfair harm to the creditor was not appealed. Accordingly, the appeal had to fail, and was dismissed. The guidance set out in the appeal judgment has not created a binding precedent. Nevertheless, it provides a useful framework for any insolvency officeholder considering an assignment of a cause of action.
The court set out the principles to be adopted by an administrator when considering whether or not to assign a cause of action. These can be applied by analogy to a trustee in bankruptcy or a liquidator.
The judgment adds that it is at the court's discretion to allow a potential defendant to a claim to be heard on an application challenging an administrator's decision on a proposed assignment. If a potential defendant is added as a party to the challenge, it is likely to be appropriate to exclude them from any part of the hearing dealing with the merits of the proposed cause of action.
The decision in LF2 Ltd v Supperstone acknowledges that there will be times where it is apparent to an insolvency officeholder that a cause of action is entirely without merit. The judgment confirms that the officeholder should not assign a claim in these circumstances. However, where there is limited information available it is often not clear whether or not a proposed claim is vexatious. In these cases the default position for an officeholder is to seek to assign the claim, seeking rival bids or selling by auction if necessary.
There is always a risk of challenge to an officeholder's decision. If an officeholder assigns a cause of action there is also a potential risk of a non-party costs order if the claim is ultimately unsuccessful. Officeholders will need to carefully consider their approach to negotiations and the terms of any assignment in order to minimise these risks.
If you are an insolvency officeholder investigating a cause of action and would like further advice on your options please contact a member of the Restructuring and Insolvency team.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at August 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions.