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Has the removal of the need for liquidators to obtain sanction before causing a company to commence or defend legal proceedings signalled a change in the way the courts approach a liquidator’s power to bring proceedings? Faith Julian, barrister at 9 Stone Buildings, reviews the decision in Re Longmeade Ltd (in liquidation), in which liquidators sought directions in respect of commencing proceedings contrary to the wishes of creditors.
Re Longmeade Ltd (In liquidation)  EWHC 356 (Ch),  All ER (D) 259 (Feb)
The Chancery Division considered an application by the joint liquidators of Longmeade Ltd (Longmeade) for directions, pursuant to section 168(3) of the Insolvency Act 1986 (IA 1986) in relation to a potential claim in negligence, which they had identified could be made by the company against the Secretary of State for Business Innovation and Skills. Consideration was given to the principles to be applied to the modified regime concerning the commencement of proceedings by a company in compulsory liquidation post-26 May 2015.
Longmeade went into compulsory liquidation in November 2010, whereupon the official receiver (OR) was appointed liquidator. Longmeade’s principal debtor, Lehman Commercial Paper Inc (Commercial Paper), had entered US bankruptcy proceedings in October 2008. In order to obtain a distribution under Commercial Paper’s bankruptcy, the OR was required to file certain US tax forms within a specified period. The OR failed to do so, and Longmeade missed the 2012 rounds of distributions under the US proceedings. Longmeade would have received a total of about $26m in those distributions. The applicants were appointed joint liquidators in March 2013 (the liquidators) and submitted the appropriate forms for the 2013 rounds of distributions, thus securing payments of around $35m for Longmeade.
The liquidators, after taking advice from counsel, considered that a negligence claim (claim) against the Secretary of State of Business Innovation and Skills for about $26m would have at least a 60% prospect of success. The liquidators then obtained third party funding that would mean the claim could proceed at no financial cost or risk to Longmeade. The liquidators formed the view, therefore, that it would be appropriate to accept the third party’s offer of funding and cause Longmeade to the pursue the claim.
In 2014, the liquidators still required sanction from the court to bring the claim and accordingly endeavoured to ascertain the creditors’ views. Over 99% by value of the creditors opposed the claim. HMRC, the single largest creditor, did not wish to support litigation against a government department, while creditor companies in the same group as Commercial Paper wished to close their respective insolvency proceedings quickly, and were reluctant to attract the bad publicity that might accompany suing a UK government department. The position of three smaller creditors was unclear.
On 26 May 2015, amendments to IA 1986 came into force, which meant that the liquidators no longer required sanction to bring the claim. Notwithstanding that, the liquidators applied for directions pursuant to IA 1986, s 168(3) as to whether they should convene a meeting of creditors pursuant to IA 1986, s 168(2), or whether they should cause Longmeade to pursue the claim.
There were two issues the judge had to decide:
Only the liquidators were represented at the hearing.
The first issue
The judge, Snowden J, held at para  of his judgment that:
there is no reason to suppose that the legislative removal of the need for a liquidator to obtain sanction was intended to signal a change to the established approach of the courts to the exercise of powers by liquidators that did not require sanction.
He then summarised the law in this respect:
Applying those principles to the present case, the judge held that the liquidators:
As a final point, the judge referred to para 658 of the Explanatory Notes to the Small Business, Enterprise and Employment Bill which provided that liquidators:
…should not undertake actions that are likely to have a negative financial impact on the estate. Such conduct may give rise to disciplinary concerns which may be addressed the regulatory system.
The judge warned that this should not be taken to mean that liquidators must always adopt the alternative that has the lowest risk of loss to the insolvent estate. The overriding requirement is for liquidators to exercise their professional judgment in what they believe to be the best interest of creditors. They should not voluntarily do something that is likely to result in loss, but that does not mean they cannot properly run some risk of loss.
The second issue
In correspondence, the third party funder had questioned whether the claim could lawfully be assigned, relying on Re Oasis Merchandising. The Court of Appeal had in that case drawn a distinction between the property of the company at the time of the commencement of the liquidation, and property which is subsequently acquired by the liquidator through the exercise of rights conferred on him alone by statute. It was held that only property of the company at the time of the commencement of liquidation can be sold by a liquidator.
The judge did not hear full argument on the assignment point, and so only indicated his provisional view—namely that Re Oasis Merchandising should not be taken to have decided that the liquidators would be unable to sell the claim to a third party. This was because Re Oasis Merchandising did not concern the sale of a common law claim (as here), but the sale of a statutory cause of action vested in the liquidator alone.
The property of Longmeade at the commencement of its liquidation included a debt owed to it by Commercial Paper, which subsequently gave rise to a right to claim in Commercial Paper’s bankruptcy. The judge could see no reason why that subsequent right was not 'property representing' the original debt so as to form part of the property of Longmeade, or the right to claim damages from a third party to compensate Longmeade for the loss of such property should not comprise 'property representing' the original debt or the right to claim in Commercial Paper’s bankruptcy for the same purpose.
Moreover, it would be odd if such a claim could not be assigned—in Re Oasis Merchandising the Court of Appeal, although finding that a sale was not possible, indicated that as a matter of policy there was much to be said for allowing a liquidator to sell statutory claims. That policy has been recognised in section 118 of the Small Business, Enterprise and Employment Act 2015 and the insertion of a new IA 1986, s 246ZD, and there is no obvious policy reason why the only type of claim not capable of being assigned by a liquidator should be a claim arising out of loss or destruction of the property of the company after liquidation has commenced.
The judgment was helpful for two reasons:
The judgment is firstly useful in the guidance it gives to liquidators for the purposes of assessing whether or not to bring proceedings in the name of the company. This guidance ought to be borne in mind—but it is clear that considerable latitude will be afforded to liquidators when exercising their commercial judgment.
Secondly, the judgment confirms that even where the overwhelming majority of creditors by value wish for something to be done or not done, it is ultimately up to the liquidator to assess whether or not a particular course of action is in the best interests of creditors. To that end, it is incumbent upon insolvency practitioners to consider why a creditor has adopted its view on a particular decision, as the weight to be given to that view can properly be diminished where that creditor is influenced by extraneous considerations.
Faith Julian joined 9 Stone Buildings in October 2015. She is developing a broad commercial chancery practice which encompasses personal and corporate insolvency, real property, landlord and tenant, company, commercial, and chancery.
Interviewed by Stephen Leslie.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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Small Business, Enterprise and Employment Act 2015—office-holder actions and removal of requirement to seek sanction
Bringing a claim on behalf of an insolvent company's insolvency office-holder—overview
Ways in which an IP can fund litigation and investigations where there are no assets in the estate
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First published on LexisPSL Restructuring and Insolvency
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