Making a song and a dance about an assignment of a cause of action in bankruptcy—Cole v Howlett

In Cole v Howlett [2015] EWHC 1697 (Ch), [2015] All ER (D) 178 (Jun), an issue faced by the court was whether the claimant (a discharged bankrupt) could amend his claim form and particulars of claim having acquired from the Official Receiver (OR) the cause of action underlying his claim. A further issue concerned the scope of jurisdiction of the court under the CPR to vary or revoke an order, and whether in this case a previous order made by the judge (Peter Smith J) was a final order.

But what lessons can we take from this case from an insolvency perspective?

Briefly, what were the facts of the case?

Mr Cole was made bankrupt in 1990. One of the assets of his estate (albeit one that he failed to disclose in his statement of affairs) was copyright in music that he had written.

Some years later, Mr Cole issued proceedings against the defendants alleging infringement of that copyright in the song 'Warrior's Dance' by The Prodigy. The trial was due to commence on 22 April 2015. However, shortly before the trial, it came to light that title in the copyright (and therefore the right to sue for infringement of it) did not vest in Mr Cole—it remained as an asset in his bankruptcy estate.

Mr Cole made an application on the first day of the trial for permission to amend his particulars of claim, and for the trial to be adjourned. This application was dismissed by Peter Smith J, who ordered that the claim be stayed for a month so as to allow the OR to apply to intervene and, failing that, that the claim be struck out (the original order).

The OR was contacted, and in due course the copyright and bundle of rights associated with it (including the right to sue for infringement) were assigned to Mr Cole (see below). He therefore made a further application for permission to amend his claim form and particulars of claim and, if appropriate, for the original order to be varied in relation to the strike out of the claim.

What did the court decide?

Mr Cole's application was successful. For further reading, Stuart Adair of XXIV Old Buildings—who appeared for Mr Cole—has written an analysis on the decision that appears on the LexisPSL IP & IT blog—see Finding the bankrupt’s copyright—a right old warriors’ dance. His analysis also includes some interesting commentary on copyright law and bankruptcy.

An application for permission to appeal to the Court of Appeal has been made, with the hearing of the application to commence between 18 August 2015 and 26 October 2015.

Although this case was principally concerned with court rules and practice, it is also of interest to insolvency professionals from the perspective of assignments of causes of action.

Peter Smith J, when he made the original order, envisaged the OR making a decision whether or not to intervene in the proceedings. The OR instead decided to invite sealed bids for the cause of action from the parties to the action—it would have been impracticable to either adopt the proceedings or commence a new claim.

The OR received the following bids:

  • £25,000 from the claimant, together with a £900 contribution to costs and an undertaking to pay a share of any sums recovered in the proceedings
  • £20,000 from the defendants, which was their assessment of the maximum value of the claim

The OR accepted the claimant's offer, except that the OR declined the right to share in any recoveries.

Peter Smith J was surprised at the low level of the defendants' bid, saying that it was 'naive to bid only in the context of the value of the asset as perceived by them' for the following reasons:

  • the claimant would clearly value the claim higher, and would therefore make a higher offer (especially as he had litigation funding, and the funders would want to acquire the cause of action in the face of the proceedings otherwise being struck out). For the defendants to ensure finality, they should have made a higher offer
  • the defendants' offer failed to take into consideration the question of costs, especially those of the claimant if he were successful in his claim

The OR possessed no files for the bankruptcy, and did not know who the creditors were other than the petitioning creditor (HMRC—which indicated that it did not know how much was owed to it). Accordingly, the steps the OR proposed to take were to advertise for creditors' claims in the Gazette, deduct the OR's costs from the sale proceeds and, after distributing any sums to creditors, pay any surplus back to Mr Cole.

The point was made by the defendants' counsel that Mr Cole would have had a better idea of who his creditors were, but he had not provided this information. It is not difficult to conclude that this—at least theoretically—is likely to have put the defendants at a disadvantage:

  • on the one hand, if there was likely to have been a surplus payable to Mr Cole, he would in reality only need to obtain funding to the extent of the OR's costs and any creditors that responded to the Gazette advertisement. To that extent, he could have offered any sum over and above that amount to the OR—and may not even have had to actually pay that additional amount (on the basis that it would be coming back to him in any event)
  • on the other hand, any offer made by the defendants would need to be paid in full—and they would not receive any of it back. Any surplus would be payable to Mr Cole

Comment

Where a cause of action subject to live proceedings forms part of a bankruptcy estate, it is not uncommon for the trustee in bankruptcy to try and assign it to one of the parties to the proceedings for value, rather than adopt and continue with the proceedings. Not only are there the costs of the trustee having to read into the case and take professional advice to assess its merits or otherwise, but there is also the question of funding the litigation if it is to continue. The decision will hinge on what is in the creditors' best interests.

A further issue is whether—by adopting the proceedings—the trustee will become personally liable for all of the costs of the proceedings, even those incurred prior to his appointment. This was commonly thought to be the case until the Supreme Court's decision in BPE Solicitors v Gabriel [2015] UKSC 39, [2015] All ER (D) 179 (Jun)—see Trustees in bankruptcy—who is liable for which costs in proceedings existing at the time of appointment? An interesting point to arise in Cole v Howlett was the extremely reluctant concession by the defendants' counsel (in relation to abuse) that the OR—if concerned by the potential personal costs liability—could simply abandon Mr Cole's proceedings and start afresh.

For defendants, a claimant being adjudged bankrupt during the course of proceedings can be frustrating, particularly in respect of the delay it can cause and the possibility that any previously incurred costs may only be recoverable as an unsecured debt in the bankruptcy. However, the situation may also bring with it opportunities. The likelihood of a settlement being reached may be increased—after all, the trustee should be free of any personal emotion that the bankrupt had in the claim.

But perhaps the biggest lesson to draw from Cole v Howlett for insolvency professionals is what value to ascribe to an assignment of a cause of action from a trustee in bankruptcy, where potentially wider factors will need to be taken into consideration than if the claimant was not bankrupt.

Stephen Leslie, solicitor in the Lexis®PSL Restructuring & Insolvency team

Further Reading

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What assets vest in the trustee in bankruptcy and what steps does the official receiver/trustee in bankruptcy need to take?

What effect does an insolvency process have on ongoing litigation/arbitration proceedings?

Ways in which an IP can fund litigation/investigations where there are no assets in the estate

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First published on LexisPSL Restructuring and Insolvency

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