Setting aside the assignment of a claim to a litigation funder?

Edengate Homes (Butley Hall) Ltd, Re [2022] EWCA Civ 626When will the court interfere with the assignment of a claim by a liquidator?

Overview

This case addresses the factors a court will consider in determining whether to set aside an assignment of a claim to a litigation funding company, including standing and perversity, and confirms that a party seeking to set aside the assignment faces a formidable test.

Background

Mrs Adele Lock was a creditor and former director of Edengate Homes (Butley Hall) Ltd, a company in liquidation whose only asset was a claim against her and members of her family. The claims are for about £1.2 million exclusive of interest, and allege transactions at an undervalue, preference and misfeasance. They are disputed by Mrs Lock and her family.

The company had no funds to enable the liquidator to pursue the claims. In April 2019, the liquidator received an offer from Manolete to purchase the claims and, in May 2019, the liquidator wrote to Mrs Lock and her family warning them that he was contemplating selling the claims against them to a specialist insolvency litigation funder in the absence of settlement within a reasonable time. No response was received to this letter and, in September 2019, the liquidator entered into an assignment with Manolete in exchange for an upfront payment of £30,000, with recoveries net of costs and of the upfront payment to be shared equally up to £150,000, 60:40 in favour of the liquidator between £150,000 and £300,000, and 70:30 in favour of the liquidator in excess of £300,000. The liquidator’s calculation was that if the claims were to succeed in full, the value to the estate would be approximately £800,000.

In early 2021, Manolete commenced proceedings against Mrs Lock and her family. Mrs Lock then brought an application to set aside the assignment to Manolete, arguing that the liquidator was under a duty to test the market properly, which included affording the Mrs Lock and her family an opportunity to make an offer to acquire the claims, and that the failure to do so was perverse in light of evidence that Mrs Lock and her family would have been prepared to pay a reasonable amount to acquire the claims.

The Judgment

Judge Halliwell, sitting in the Business and Property Courts in Manchester, dismissed the application, finding that Mrs Lock did not have standing the make the application. The judge cited a number of cases which stood for the proposition that, to bring an application under section 168(5) of the Insolvency Act 1986, the applicant must not only be a member of the class of persons entitled to make an application (here, a creditor), its interest must be aligned with the interest of the class as a whole. Applying that test, Mrs Lock’s interest was not aligned with the interest of creditors, which was to maximise the recovery to the estate from the claims; rather, it was to protect her family and herself by ensuring that the claims against them would not be pursued.

Even if she did have standing, the judge noted that the criterion which an applicant would have to satisfy was that the liquidator’s decision to assign the claims was perverse (“so utterly unreasonable and absurd that no reasonable man would so act”), which was a formidable test. Although the judge criticised the liquidator’s explanation of his reasons for not offering Mrs Lock the opportunity to buy the claims, he was not satisfied that the test of perversity was satisfied. There was a foundation for the liquidator to conclude that Mrs Lock would not have sufficient funds to purchase or compromise the claims; neither she nor anyone had offered to do so; there was nothing to indicate that the liquidator could have achieved better terms from Mrs Lock than he had obtained from Manolete; the liquidator had explored other options; and the terms negotiated with Manolete provided a reasonable rate of return for creditors, with no specific challenge having been advanced to the terms agreed.

The Appeal

On appeal, Lord Justice Males (writing for the Court) concluded that the judge’s approach to the issue of standing was correct. It is not sufficient that an applicant for relief under section 168(5) is a creditor of the insolvent company. It must in addition have a legitimate interest in the relief sought. Where the application is to set aside a disposal of property by the liquidator, including the assignment of a claim, an applicant will have a legitimate interest if it is acting in the interests of creditors generally. Typically that will be the case when the effect of the relief sought will be to maximise the assets of the estate. But an applicant will not have standing if the relief sought is contrary to the interests of the creditors as a class, as it will be where that will result in a lesser recovery.

Lord Justice Males similarly upheld the judge’s findings with respect to perversity. There was no failure by the judge to recognise that the liquidator was under a duty to give Mrs Lock and her family an opportunity to acquire the claims. He was under no such duty. Rather, the question was whether it was perverse of him not to do so. Whether a liquidator’s act is perverse in the sense described in the authorities is an objective question. The judge was entitled to conclude, if the facts justified it, that the liquidator’s decision to assign the claims to Manolete was not perverse even if the reasons which he gave for his decision were unsatisfactory. The facts here clearly justified that conclusion. In particular, Mrs Lock never followed up the suggestion that she might be interested in buying the claims; there was no response to the liquidator’s letter warning that he was contemplating selling the claims; and the liquidator had no reason at all to think that Mrs Lock or her family would have offered a better deal than the terms on which Manolete was prepared to acquire the claims.

The Supreme Court’s Decision

In June of this year, Mrs Lock applied to the Supreme Court for permission to appeal the decision of the Court of Appeal. The Supreme Court refused permission to appeal on the basis that the application does not raise an arguable point of law which could lead to a successful outcome, and that Mrs Lock has no real prospect of success on the issue as to perversity. No written reasons have been released at this point.

Court of Appeal Judges: Lady Justice Asplin, Lord Justice Males and Lord Justice Stuart-Smith

Counsel: Matthew Collings QC of Maitland Chambers (instructed by Simon Burn Solicitors) for the Appellant; Joseph Curl QC of 9 Stone Buildings (instructed by Kidd Rapinet LLP) for the Respondents