Company – Insolvency – Assignment of claim – Set aside – Respondent liquidator bringing claims against appellant alleging transactions at undervalue, preference and misfeasance – Respondent assigning claim to litigation funding company – High Court refusing appellant’s application to set aside assignment – Appellant appealing – Whether appellant having standing to make application – Whether respondent’s decision to assign being perverse – Appeal dismissed
In March 2012, the appellant and her husband formed the company as a special purpose vehicle to acquire and develop Butley Hall, Prestbury, Cheshire. The development involved converting the main building into flats and building three town houses. The company was unable to raise sufficient funds to meet its liabilities under the project and a dispute arose with the contractor carrying out the development work. By November 2015, the company went into creditors’ voluntary liquidation and liquidators were appointed. The realisable value of the company’s assets was only £4,721. However, the company’s indebtedness on directors’ loans and loans from connected creditors was estimated at £2,094,512, and its estimated indebtedness to trade and expense creditors was £408,593.
In the course of investigating the company’s affairs, the respondent liquidator concluded that he and/or the company had substantial claims against the appellant and members of her family, alleging transactions at an undervalue, preference and misfeasance.
The appellant, as a creditor and former director of the company, sought to set aside the respondent’s assignment of that claim to a litigation funding company (M), on the basis that she and her family were not given an opportunity to buy the claim and thereby to bring it to an end. The High Court dismissed her application under section 168(5) of the Insolvency Act 1986, holding that she did not have standing to make the application and that the respondent’s decision to assign the claim to M could not be regarded as perverse: [2021] EWHC 2970 (Ch). The appellant appealed.
Held: The appeal was dismissed.
(1): On an application under section 168(5), the first stage was to consider whether the applicant was “a person aggrieved” by an act or decision of the liquidator within the meaning of the section. The second stage was to consider whether the applicant had a legitimate interest in obtaining the relief sought. It would not have such interest if its interests were adverse to the liquidation and the interests of the creditors. Thus, an applicant might qualify as “a person aggrieved” by virtue of being a creditor, but would not have a “legitimate interest” if its interest in obtaining the relief was contrary to the interests of creditors generally: Re Edennote [1996] 2 BCLC 389 applied. Deloitte & Touche AG v Johnson [1999] 1 WLR 1605 considered.
Status as a creditor alone was not sufficient to confer standing on an applicant under section 168(5). Creditors would have locus standi if acting as such; but that was irrelevant if they were in fact seeking to advance the interests of possible debtors, which were adverse to those of the creditors: Walker Morris v Khalastchi [2001] 1 BCLC 1 considered.
(2) In the present case, the judge’s approach to the issue of standing was correct. In addition to being a creditor of the insolvent company, the applicant had to have a legitimate interest in the relief sought. Where the application was to set aside a disposal of property by the liquidator, including the assignment of a claim, an applicant would have a legitimate interest if it was acting in the interests of creditors generally. Typically, that would be the case when the effect of the relief sought would be to maximise the assets of the estate. But an applicant would not have standing if the relief sought was contrary to the interests of the creditors as a class, as it would be where that would result in a lesser recovery.
It was clear that the appellant’s interest was as a defendant in the litigation brought by M. Her position had consistently been that the claims against her and her family were without merit. She acknowledged that they had some nuisance value in view of the stress and inconvenience caused by being a defendant even to an unmeritorious claim, but that was as far as she had been prepared to go. In the circumstances, it was clear that the appellant’s challenge to the assignment of the claims to M was not made for the benefit of creditors generally and was not aligned with the interest of the class as a whole.
It was impossible for the appellant to act simultaneously as both a creditor and a defendant: the class interest of the creditors was for the claims to be upheld and turned into as much money as possible; but the class interest of the defendants to M’s claim was to defend the claims and avoid paying as much money as possible. In contrast, there had never been any suggestion that the appellant would be willing to match or to beat the offer made by M. Accordingly, the judge was right to hold that the appellant did not have standing to make her application.
(3) If an applicant did not have standing to challenge an assignment because its application was not in the interests of creditors generally, it would seem unlikely that the court would wish to set aside the assignment on its merits. Nevertheless, the two issues were in principle distinct. The test on the merits was one of perversity. The court would only interfere with the act of a liquidator if he had done something so utterly unreasonable and absurd that no reasonable man would have done it: see Re Edennote. That was a formidable test. It left a potentially large category of cases where the liquidator’s conduct might be open to valid criticism, but where that conduct could not be so characterised.
The judge here purported to apply the Edennote test, which required the judge at first instance to evaluate all the circumstances of the case and be satisfied that the action taken by the liquidator was so utterly unreasonable and absurd that no reasonable man would do it. The appeal court should only interfere with his decision if he went wrong in principle in his application of that test, or reached a conclusion which was not supported by the evidence or was irrational. The facts of the present case clearly justified the conclusion that the respondent’s decision to assign the claims to M was not perverse and the judge was right so to conclude.
Matthew Collings QC (instructed by Simon Burn Solicitors, of Cheltenham) appeared for the appellant; Joseph Curl QC (instructed by Kidd Rapinet LLP) appeared for the respondent.
Eileen O’Grady, barrister
