In light of the ruling, Rosling King partner Kate Rigby examines the prospect of success regarding perversity of findings when trying to challenge the assignment of claims in the event of insolvency.
The Supreme Court has recently refused permission to appeal on the basis that the application, in the case, did not raise an arguable point of law which could lead to a successful outcome for the appellant and that the appellant had no real prospect of success on the issue as to perversity. This was the outcome in Lock v Stanley and Another (Re Edengate Holmes Ltd) [2022] (16 September 2022).
This decision sends a strong message reinforcing the high threshold required to successfully challenge the assignment of claims, as well as the Courts’ hesitance to interfere in the commercial decisions of insolvency practitioners.
Background
The claimant, Mrs Lock, was a creditor and former director of Edengate Homes (Butley Hall) Ltd (in Liquidation) (‘the company’), a firm whose only asset was a claim against her and members of her family. In March 2012, Mrs Lock and her husband formed the company as a special purpose vehicle to acquire and develop Butley Hall, Prestbury, Cheshire, which was a Grade II listed mansion house. The company was unable to raise sufficient funds to meet its liabilities under the project and by November 2015 was insolvent. On 26 November 2015, the company went into creditors’ voluntary liquidation and liquidators were appointed.
Following an investigation by the liquidators, it was discovered that there were potential transactions at an undervalue and statutory preference claims against the claimant, her husband and others. The liquidators went on to assign these causes of action and statutory claims to a specialist insolvency litigation financing company, Manolete Partners plc (‘Manolete’).
Mrs Lock sought an order to set aside this assignment under Section 168(5) Insolvency Act 1986 (‘the application’), which states that if any person is aggrieved by an act or decision of the liquidator, that person may apply to the Court, and the Court may confirm, reverse or modify the act or decision complained of, and make such order in the case as it thinks just. The application was based on the notion that (a) Mrs Lock had the required standing and (b) the liquidator’s decision to enter into the Assignment was perverse due to his failure to take legal advice or appropriately survey the market for potential assignees (including allowing the claimant to make a competing offer).
His Honour Judge (HHJ) Halliwell, of the Supreme Court, first considered whether as creditor of the company, Mrs Lock did in fact have the standing to make the application. On examination, he concluded that she did not. He agreed with the liquidators’ argument that she did not have standing as her own interest was adverse to the class of interest of the creditors as a whole. Her interest was in relation to herself and her complaint was in fact with the “proceedings against herself and her family as opposed to the contractual relationship between the liquidator and Manolete”.
This decision sends a strong message reinforcing the high threshold required to successfully challenge the assignment of claims, as well as the Courts’ hesitance to interfere in the commercial decisions of insolvency practitioners.
Whilst HHJ Halliwell held that Mrs Lock did not have the required standing to bring the application, he did consider whether the assignment itself should be set aside for perversity. Following the test set out in re Edencote Ltd [1996] 2 BCLC 389, HHJ Halliwell considered “whether the liquidator’s conduct [amounted] to something so utterly unreasonable and absurd that no reasonable person would have done it”. He also noted the judgment of Sir John Vinelott in Edennote where he stated: “it is only in very exceptional circumstances that the court will interfere with the exercise by a liquidator of his discretion to sell the assets of an insolvent company”.
Ultimately, it was held that the test had not been satisfied. The liquidator had approached another creditor and there was no evidence to prove that better terms may have been achieved with another party. Therefore, the assignment to Manolete could not be considered perverse. Mrs Lock went on to appeal both aspects of the judgment in the Court of Appeal.
The Decision of the Court of Appeal
The Court of Appeal upheld the decision of HHJ Halliwell and refused to set aside the assignment to Manolete. In doing so, they agreed with his reasoning that Mrs Lock did not have standing nor had the threshold for perversity been met.
The Decision of the Supreme Court
The Supreme Court dismissed the application, concluding that it did not raise an arguable point of law which could lead to a successful outcome for the appellant and that the appellant has no real prospect of success on the issue as to perversity.
Commentary
The decisions of both the Court of Appeal and the Supreme Court reflect the Courts’ longstanding reluctance to interfere with the commercial decisions made by office holders, including commercial decisions made by an insolvency practitioner such as a liquidator.
Ultimately, the liquidator is appointed to act instead of the directors of a company and in doing so they will take commercial decisions for the benefit of the company/liquidation.
Furthermore, it confirms that any party seeking to challenge an assignment made during insolvency proceedings must clear a very high threshold to satisfy the test of perversity – a fact which is likely to give confidence to both insolvency practitioners and litigation funders alike.
Kate Rigby, Partner
55 Ludgate Hill, London, EC4M 7JW, UK
Tel: +44 02072 468012
Kate Rigby is a partner in Rosling King’s Dispute Resolution Group. Kate has wide-ranging experience in general commercial litigation, commercial fraud and asset tracing, professional indemnity cases and property litigation.
Rosling King LLP is a London-based law firm specialising in serving the needs of financial institutions, corporates and individuals.
