Insolvency actions are often brought against former directors of the insolvent company or persons related to them. It is also common for such claims to be assigned to a litigation fund company given the lack of funds in the insolvent estate to pursue them. This happened in Lock v Stanley where various claims against the former directors, their parents and the related company were attributed to Manolete.
The Court of Appeal’s decision in Lock v Stanley reassures assignees of insolvency claims that defendants will not be able to avoid claims by seeking to attack the assignment where their interest is self-interested, and that liquidators are not not obligated to offer to assign an insolvency claim to a proposed defendant.
It also reminds liquidators that although section 168(5) of the Insolvency Act 1986 (“Act”) allows aggrieved persons to challenge their decisions, unless the claimant has a legitimate and while there is an advantage for the creditors as a whole in reversing or modifying the liquidator’s decision, it is unlikely that a plaintiff will have standing to contest.
Lawsuits were filed by Manolete against former headmistress Ms Lock and other family members, and scheduled for trial in December 2021, but Ms Lock sought to have the assignment to Manolete overturned on the grounds that she and her family had not had the opportunity to buy the claims against them.
The claims alleged undervalued trades, faulty execution and preferences to the tune of £1.2m, which if successful are expected to result in a return to the insolvency estate of £800,000 sterling.
Ms. Lock had suggested at an initial meeting that she might be interested in purchasing the receivables, but (1) she did not follow through, (2) was aware of the liquidator’s intention to pursue his parents (even if it wasn’t her at the time). point), (3) the intention to assign the debts to a financial backer and (4) there was no reason to believe that Mrs. Lock or her parents could offer a better offer.
Article 168(5) of the law allows a creditor, debtor or other aggrieved person to contest an act or a decision of a liquidator, which the court can then confirm, invalidate or modify. Ms. Lock was also a creditor of the insolvent company, so it was on this basis that she relied on section 168(5) and sought to set aside the liquidator’s assignment of debts.
Although Ms Lock was a creditor, the Court of Appeal upheld the approach taken in previous authorities that being a creditor is not in itself sufficient to seek relief under section 168(5), a claimant must also have “a legitimate interest in the remedy”. sought”.
What is a legitimate interest?
What it does not is when the interest of the plaintiff is contrary to the liquidation and to the interests of the creditors.
In the present case, Mrs Lock could not act both as creditor and as defendant because, on the one hand, as creditor, she had an interest in seeing that the debts were maintained and enhanced as much as possible, whereas in wearing her other defendant hat, her interest was to defend the claim and pay as little as possible.
Ms. Lock’s interests were therefore not aligned with the interests of creditors generally, which were to maximize the recovery of the estate and, as such, she had no legitimate interest in the relief sought. Mrs. Lock’s interest was to protect herself and her family from pending claims. In light of this, the trial court had ruled that Ms Lock did not have standing to bring the claim, and the Court of Appeal upheld this on appeal.
When can someone have standing to contest the decision of a liquidator?
It is clear from cases such as Re Edennote that a stranger to liquidation has no standing to bring an action under s. 168(5). For the others (creditors, debtors or injured parties), this is the case, but the remedy must be in the interest of all creditors, and not for any other motivation or reason. This will of course be a question of fact, but if an aggrieved person seeks to protect, prevent or promote the interests of others (and not of creditors), a court is likely to find that they are not has no standing to challenge the act or decision of a liquidator in first instance.
Even if someone has standing to challenge a decision, the court, as also confirmed in Lock v Stanley, will rarely interfere with that decision unless it is perverse, i.e. it was unreasonable and that no other liquidator would have made this decision.
In this case, the fact that Mrs. Lock (among others) never acted on her suggestion to buy the receivables, that she was aware of the litigation in progress and that no offer was on the table meant that the liquidator’s decision to assign the receivables to Manolete was not perverse.
Should chargeholders give proposed defendants the opportunity to make an offer to purchase a claim before assigning it?
The Court of Appeals said this may be sensible practice or good practice, but chargeholders are not required to do so and failure to give a defendant the opportunity to acquire a claim does not is not necessarily bad. That said, chargeholders should consider the position carefully, because while a defendant is able to come up with a better deal, failing to properly explore that option could leave the chargeholder’s decision open to challenge.
Therefore, officer holders should reasonably explore the possibility that a defendant may be willing to make a better offer in exchange for the assigned claims. However, it is a little more difficult to judge whether an offer is better. For example, an offer that offers a lower payment but removes the risk of litigation from pursuing the claim might, in some cases, be better.
© Copyright 2022 Squire Patton Boggs (USA) LLPNational Law Review, Volume XII, Number 136