The assignment of a cause of action is increasingly front of mind for many insolvency practitioners.
Get in touch
Vernon Dennis, Partner
Signs of increasing activity are visible in the rise in number of challenges that have been made in respect of office holders who have assigned, or refused to assign, claims.
On 11 July Mr Justice Morgan handed down judgment in the case of LF2 Ltd v Supperstone and Shinners (Administrators of Pennyfeathers Ltd) [2018] EWHC 1776 (Ch). This case is an interesting one, less for the decision itself, but rather for the lengthy consideration of the principles and procedures that an office holder should adopt when considering whether to assign a cause of action. The case provides an indication as to the current judicial thinking.
An insolvency office holder's ability to assign a cause of action has been long established (see Seear v Lawson [1880] 15CH 452 and Ramsey v Hartley [1977] 1 WLR 686). This ability is an exemption from the common law rules that prohibit the trafficking of litigation; the law developing in this area to prevent intermeddling by third parties in disputes, which has the effect of encouraging litigation, and/or discourage the support and maintenance of litigation in return for a financial reward.
An insolvency practitioner is viewed differently from other litigants. In pursuing an action they do so for and on behalf of creditors, and in the interests of realising value from the insolvent estate's property (which includes causes of action). Often they have no funds to litigate and the only practical means to realise value from the cause of action is to assign it. As a result, the interests of creditors are considered to overreach any consideration of public policy, which would otherwise prohibit the trafficking in litigation.
In exercising any discretion to assign, an office holder should be concerned as to the costs risks, which are heightened if an interest in the proceeds of litigation is maintained. Furthermore simply by interceding in the dealings of litigious parties, who are likely to bear extreme animosity towards one another, an IP's decision is likely to be contentious and susceptible to challenge.
As a result office holders are rightfully concerned to obtain a full indemnity from the assignee and consider carefully whether they should maintain any interest in the proceeds of any litigation to obtain greater realisation against the more cautious approach of assigning the cause of action for a fixed sum. As a result a practice has grown up which leads the office holder to firstly identify whether the claim has merit and secondly whether it is fair and reasonable to leave a defendant potentially exposed to a vexation of the litigant.
The origin of this practice seems to be drawn from two cases, the first a 1980 judgment of Mr Justice Browne-Jacobson in the case of Re Papaloizou (reported [1999] BPIR 106). This case concerned, like many others at that time, the assignment of a trustee in bankruptcy of cause of action back to the bankrupt. In the Judgment a warning was given 'that such steps should be taken with great circumspection…. remembering that the bankrupt is likely to conduct litigation against third parties who would have no effective cost remedy.' The second being Cummings v the Official Receiver (2002) EWHC 2894 (Ch) where Mr Justice Blackburn referred to a need to demonstrate that the claim to be assigned was neither frivolous nor vexatious.
In the more recent case of Hockin v Marsden (2014) EWHC 763 Mr Nicholas Le Poidevin QC (sitting as a deputy judge) recognised the public policy consideration, that it would be unjust to assign a cause of action where the consequence would be to submit a defendant to being harassed with regards to a claim that had no serious prospects of success.
It is of note that after considering the cause of action (which concerned the assignment of a potential claim against a Bank when selling an interest rate swap) the Deputy Judge was "not in the least surprised that the administrators had declined to pursue the claim themselves". He held however that it was not justifiable for the administrators to decline the offer of assignment as such a refusal would unfairly harm the interests of the creditors if the claim were otherwise lost (Insolvency Act 1986 Schedule B1 paragraph 74). The Deputy Judge considering it more appropriate for the argument on whether the claim was frivolous or a vexation to be conducted between the assignee and the defendant who would have an ability to strike out the claim.
Interestingly, despite considering the claim should be assigned the Court was still alive to the issue that the administrator would need and expect to be provided with a full and effective indemnity, including a personal indemnity from the assignee. Furthermore ultimately it was irrelevant that the assignee in pursuing the claim was unlikely to see financial benefit, with the likely beneficiary of any action being it seemed the secured creditor Isobel Asset Company Limited, a vehicle set up by the very same Bank and in respect of which the Bank retained a 75% ownership stake.
The case of Re Meem SL Ltd (in administration) [2017] EWHC 2688 (Ch) concerned a challenge to the ability of the administrators to sell a claim by auction, the claimant alleging that they had entered into a binding agreement to buy the claim. Alternatively they argued that the auction (and potential sale to a rival bidder/potential defendant to the claim) would result in the litigation being stifled and thereby cause unfair harm.
On the facts of the case no binding agreement was found. It was held that although a cause of action might be difficult to value, it was nevertheless likely to be of substantial value, no reasonable administrator would sell it for a fixed price without properly considering its value by expert legal determination, or finding a sensible way of bypassing that need, such as testing the market by holding an auction. As such the administrators' decision to sell the claim by auction did not cause unfair harm.
It is into this on-going debate that the obiter dicta of Mr Justice Morgan in LF2 Ltd v Supperstone and Shinners (Administrators of Pennyfeathers Ltd) should be read. In his opinion the correct approach in considering any offer to purchase a claim should be as follows:
Where the claim is hopeless, and the assignees intention is simply to harass the potential defendant, as an office holder of the Court (required to act honestly, fairly and without favour see the rule of Ex Parte James), it would normally be unreasonable for the IP to assign the cause of action.
If however it is unclear that claim would be vexatious, the office holder should be prepared to obtain a proper payment for the assignment. If the value is unclear the IP may well be advised to seek rival bids and/or hold an auction of the cause of action.
Mr Justice Morgan exploration of the law in this area determined that there was no principal in law that means that the office holder in assigning the claim needed first to be satisfied that the claim has merit, nor should they be concerned (save in obvious cases) as to whether a defendant is potentially exposed to a frivolous or vexatious litigant.
Instead consideration of merit is one that goes to the issue of value, and the price being offered for the assignment. An IP should be assisted in this exercise by expert legal determination but where this is not possible, due to time or cost limitations, the IP should generally attempt to bypass such consideration and seek bids or sale by auction.
The commercial imperative for the office holder to realise value from the claim also outweighs, save in very obvious cases, the possibility that the defendant may be subject to frivolous or vexatious litigation. It is a matter for the proposed assignee and the defendant to conduct such arguments, and generally it is not appropriate for the court to consider these arguments and the context of the insolvency proceedings.
Taking together these recent authorities seem to suggest that save in rare and fairly obvious circumstances an IP will be justified in granting an assignment and that where an assignment is refused such a decision may well be seen to cause unfair harm to the interests of the creditors. Of some assistance to the IP is the fact that the Court seems to be sympathetic to refusals based on commercial grounds, such as the offer would not cover the costs of investigation/valuation and execution of the assignment and/or where no effective indemnity is provided.
Save for such commercial considerations, to assign, or not to assign? That is the question. The answer in nearly all cases will be to assign.
Want to hear more from us?
Our lawyers are experts in their fields. Through commentary and analysis, we give you insights into the pressures impacting business today.
VIEW ALL
