Duties of insolvency office-holders when assigning causes of action (LF2 Ltd v Supperstone and another)

Duties of insolvency office-holders when assigning causes of action (LF2 Ltd v Supperstone and another)

Insolvency office-holders are under a duty not to assign a cause of action that is without merit. However, it is for the party opposing an assignment to prove that it does not have any prospect of success. Reuben Comiskey of Radcliffe Chambers, a specialist in insolvency and commercial disputes who acted for the respondent administrators, discusses the court’s findings.

LF2 Ltd v Supperstone and another [2018] EWHC 1756 (Ch), [2018] All ER (D) 86 (Jul)

What are the practical implications of this case?

The importance of LF2 Ltd v Supperstone and another lies in what the judge said about the way in which administrators should deal with a claim of uncertain prospects and whether or not it is right for them to assign such a claim. The most recent authority on the subject before this was Hockin v Marsden [2014] EWHC 763 (Ch). In Hockin v Marsden, it was held that the office-holders should not assign a claim that had no real prospect of success. It was also held that it was for the person seeking the assignment to persuade the office-holders that the claim did have some prospect of success.

Morgan J in LF2 Ltd v Supperstone and another went against that. Morgan J held that office-holders should only refuse to assign a claim if they are certain that it has no prospects of success. In addition, the burden is on the person who asserts that the claim has no prospects of success to establish that.

So far as office-holders are concerned, the practical result of this decision is to reduce the burden on them of assessing the merits of a potential claim, because they are only obliged to refuse to assign a claim if it is clear that it has no prospect of success. By contrast, the decision in Hockin v Marsden suggested that they had to be satisfied that a claim does have merit before they can assign it. Obviously, carrying out this exercise can result in an increase in time and costs. The upshot is that office-holders are now freer than they were previously to deal with potential claims belonging to the company in administration or liquidation.

Another noteworthy aspect of the case was the comments made in relation to the procedure to be adopted when there is an argument on the merits of a claim. On this, the judge followed the Court of Appeal decision in Craig v Humberclyde Industrial Finance Ltd [1998] 2 BCLC 526, which held that in ordinary circumstances, where the target of the claim proposed to be assigned is taking part in the appeal—as was the case here—then that target should to be excluded from the hearing during the time in which the merits of the claim are being discussed by the potential assignee and the office-holder. Otherwise, the judge held, there can’t be a frank discussion about the strengths and weaknesses of the potential claim.

What was the background?

LF2 Ltd v Supperstone and another arose out of a challenge by the appellant to the decision of administrators not to assign a cause of action. The company, Pennyfeathers Ltd, and two of its directors, had entered into a conditional fee agreement (CFA) with Fieldfisher when it was engaged in litigation concerning some land. The CFA provided for the payment of fees on the success of that litigation. But the successful outcome of the litigation didn’t result in any payment to the company. About two and a half years later, Fieldfisher successfully applied for an administration order as its fees had not been paid. A solicitor, who had been approached by one of the directors, then contacted the administrators, identifying a potential claim by the company against Fieldfisher for failing to properly advise on the CFA. The solicitor offered to act for the company in bringing the claim, or as an alternative to purchase the claim for £10,000.

The administrators refused to assign the claim on the basis that they weren’t satisfied that the claim had any real prospect of success and that the price offered would not make any material difference to the creditors of the company. Eventually the solicitor took an assignment of a debt owed to the director who had first approached him, so as to become a creditor of the company himself, and he then assigned this debt to LF2, a company in which he was the sole shareholder and director. LF2 made an application under paragraph 74 of Schedule B1 to the Insolvency Act 1986, challenging the decision of the administrators on grounds that it caused unfair harm to the interests of LF2 as a creditor. At first instance, the application failed both on the grounds that the claim had no real prospect of success and also that the proposed assignment would not be of any benefit to the creditors of the company. This decision was then the subject of appeal.

What did the court decide?

The appeal was dismissed as there was no appeal against the decision in the first instance that the proposed assignment would not benefit the creditors. The administrators asked the judge to determine in any event whether the claim had any prospect of success, so they could then proceed to auction it to see if they could benefit the creditors in that way. The judge held that the claim did have sufficient prospect of success to make it appropriate for the administrators to assign it.

Interviewed by Diana Bentley.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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About the author:

Stephen qualified as a solicitor in 2005 and joined the Restructuring and Insolvency team at Lexis®PSL in September 2014 from Shoosmiths LLP, where he was a senior associate in the restructuring and insolvency team.

Primarily focused on contentious and advisory corporate and personal insolvency work, Stephen’s experience includes acting for office-holders on a wide range of issues, including appointments, investigations and the recovery and realisation of assets (including antecedent transaction claims), and for creditors in respect of the impact on them of the insolvency of debtors and counterparties.