Kate Rigby, Rosling King partner, examines the prospects of success regarding perversity in findings in challenging the assignment of claims in the case of insolvency.
Recently, the Supreme Court denied permission to appeal because the case did not raise an argumentable point of law that could result in a favorable outcome for the appellant, and the appellant had no realistic prospect of success regarding the question of perversity. This was the result in Lock and Another (Re Edengate Holmes Ltd.) [2022] (16 Sept. 2022).
This case sends a strong signal that the Courts are hesitant to interfere with the commercial decisions made by insolvency practitioners and the high threshold necessary to challenge the assignment.
Background
Mrs Lock was a former director and creditor of Edengate Homes/Butley Hall (in Liquidation) Ltd (‘the firm’), which was her only asset. She also had a claim against her family members. Mrs Lock and her husband founded the company in March 2012 to develop and acquire Butley Hall, Prestbury (Cheshire), a Grade II listed mansion. In November 2015, the company was declared insolvent after it failed to raise enough funds to pay its obligations under the project. The company entered creditors’ voluntary liquidation on 26 November 2015. Liquidators were appointed.
After an investigation by liquidators, it was found that the claimant, her husband, and other parties could have been involved in transactions at a low value and had statutory preference claims. These causes of action and statutory rights were then transferred to Manolete Partners plc (“Manolete”) by the liquidators.
Mrs Lock applied for an order to cancel the assignment under Section168(5) Insolvency Act 1987 (‘the application’). This section states that any person who is aggrieved due to an act or decision by the liquidator may apply to the Court. The Court can confirm, reverse, modify, or amend the complaint and make such orders as it considers appropriate. The application was based upon the belief that Mrs Lock had the necessary standing and that the liquidator’s decision not to enter into the Assignment was perverse because he failed to seek legal advice or properly survey the market for potential assignees (including the possibility of the claimant making a competing offer).
His Honour Judge (HHJ), Halliwell of the Supreme Court first examined whether Mrs Lock, as creditor to the company, had the standing to file the application. He concluded that she didn’t. He agreed with the liquidators that her interest in standing was not adverse to the entire class of creditors. Her concern was with herself, and her complaint was actually with the “proceedings” against her and her family rather than the contractual relationship between Manolete and the liquidator.
This case sends a strong signal that the Courts are hesitant to interfere with the commercial decisions made by insolvency practitioners and the high threshold necessary to challenge the assignment.
While HHJ Halliwell ruled that Mrs Lock didn’t have the standing to make the application, he did look at whether the assignment should be rescinded for perversity. HHJ Halliwell examined the question of whether the conduct of the liquidator [amounted] [in re Edencote Ltd] [1996] BCLC 389. He also referred to the Edennote judgment of Sir John Vinelott, where he stated that “only in exceptional circumstances will the court interfere with the liquidator’s discretion to sell assets of an insolvent firm”.
In the end, it was decided that the test had failed. Although the liquidator had made contact with another creditor, there was no evidence that they could have reached better terms. The assignment to Manolete cannot therefore be considered perverse. Mrs Lock appealed both parts of the judgment to the Court of Appeal.
Appeal Court Decision
The Court of Appeal upheld HHJ Halliwell’s decision and rejected Manolete’s assignment. They agreed with him in that Mrs Lock was not eligible for standing and had not met the threshold of perversity.
The Supreme Court’s Decision
The Supreme Court rejected the application. It concluded that it didn’t raise an arguable point in law that could lead to a favorable outcome for the appellant, and that there is no realistic prospect that the appellant will succeed on the question of perversity.
Commentary
Both the Court of Appeal’s and the Supreme Court’s decisions reflect the Courts longstanding reluctance not to interfere with commercial decisions made office holders. This includes commercial decisions made insolvency practitioners such as liquidators.
The liquidator will act in place of directors and make commercial decisions to the benefit of the liquidation.
It also confirms that any party seeking challenge to an assignment made insolvency proceedings must meet a very high threshold for satisfying the test of perversity. This is likely to increase confidence in both litigation funders and insolvency practitioners.
Kate Rigby. Partner
55 Ludgate Hill London, EC4M7JW, UK
Tel: +44 02072 468012
Kate Rigby, a partner in Rosling King’s Dispute Resolution Group. Kate has extensive experience in commercial litigation, asset tracing, commercial fraud, professional indemnity, and property litigation.
Roslingking LLP is a London-based law office that specializes in serving individuals, corporations and financial institutions.