Hich Court backs liquidators’ sale of director claims to investor

A High Court judge has dismissed an attempt by former directors of a failed AIM-listed group to unwind a liquidator’s assignment of litigation claims to a third-party investor, finding that the directors (who are defendants to the litigation) lacked standing and were in effect seeking to disrupt the actions against them to the detriment of creditors.

In Styles & Wood Group Ltd (in liquidation), Insolvency and Companies Court Judge Greenwood rejected an application by two former directors to set aside a June 2023 agreement under which the company’s liquidators, Derek Hyslop and Trevor Oates of Ernst & Young, assigned pre-insolvency claims against them to Knaresborough Investments Ltd, an entity controlled by the group’s former ultimate owner. The directors argued that the deal was perverse, inadequately investigated, and commercially flawed, and that it improperly aligned the liquidators with the claimant pursuing parallel proceedings against the company and its former management.

The company, a construction and property services firm specialising in design, fit-out, and refurbishment, particularly for commercial and retail clients, entered creditors’ voluntary liquidation in 2020 with virtually no realisable assets and no funding to investigate or pursue claims. By contrast, Knaresborough had already acquired related claims from the group’s administrators, had funded extensive investigations, and was prepared to pursue heavyweight Commercial Court litigation backed by directors’ and officers’ insurance. Under the challenged assignment, the liquidators received a contingent entitlement to 22.5% of net recoveries, capped at £7 million, with only nominal upfront consideration.

Judge Greenwood held that the former directors lacked standing to bring the application under section 168(5) of the Insolvency Act 1986. Although they were contingent creditors by virtue of contribution claims they had asserted in the Commercial Court proceedings, the Court found they were acting in substance as defendants seeking to derail claims against them, not in their capacity as creditors seeking to enhance recoveries for the estate. Setting aside the assignment would, if anything, extinguish the only realistic prospect of any dividend to unsecured creditors, the judge said.

Even if standing had been established, the Court found no perversity in the liquidators’ decision. Applying the established Re Edennote test, the judge emphasised that office-holders are afforded wide latitude in commercial decision-making, particularly where estates lack funds, claims are not obviously hopeless, and time pressures such as limitation loom. There was no duty in the circumstances to conduct independent investigations, seek external legal advice, or market the claims more widely, especially where the claims only had value if pursued alongside related causes of action already owned by the assignee.

The judgment also rejected arguments that the assignment created a conflict by discouraging the liquidators from defending claims against the company. The Court held that creditors had no economic interest in resisting those claims, which merely underpinned the value of the assigned causes of action, and that assignment was the only viable means of realising any value at all.

Read the decision here.

Tina Kyriakides of Radcliffe Chambers (instructed by Addleshaw Goddard) acted for Derek Hyslop and Trevor Oates of Ernst & Young in their capacity as the joint liquidators of the Styles & Wood Group), while Derrick Dale KC and Max Evans, both of Fountain Court Chambers (instructed by DAC Beachcroft), acted for Knaresborough Investments.

James Pickering KC of Enterprise Chambers and James Davies of New Square Chambers (instructed by Hewlett Swanson Limited) acted for the applicants, Philip Lanigan and Anthony Lenehan.