Office-holders commencing claims in the sanctionless era—Re Longmeade Ltd (in liquidation)

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.

Original news

Re Longmeade Ltd (In liquidation) [2016] EWHC 356 (Ch), [2016] 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.

What was the background to the judgment?

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.

What were the legal issues the judge had to decide?

There were two issues the judge had to decide:

  • whether the removal of the need for liquidators to obtain sanction before causing a company to commence or defend legal proceedings should signal a change in the way the courts approach a liquidator’s power to bring proceedings (the first issue)
  • whether the liquidators could assign the claim to a third party, or whether that was prohibited by the dictum of Peter Gibson LJ in Re Oasis Merchandising Services Ltd (In Liquidation) [1998] Ch 170, [1997] 1 All ER 1009 (the second issue)

Only the liquidators were represented at the hearing.

What did the judge decide and why?

The first issue

The judge, Snowden J, held at para [60] 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:

  • a decision by liquidators appointed by the court as to whether to commence proceedings in the name of the company is essentially a commercial decision which the liquidators are entrusted to take without obtaining sanction from the court or the liquidation committee
  • in taking that decision, the liquidators should act in what they believe to be the best interests of the insolvent company and all those who have an interest in its estate
  • the liquidators may—but are not obliged to—consult the creditors (or contributories) who have an interest in the estate
  • the liquidators should normally give weight to the reasoned views of the majority of such creditors (or contributories), provided that they are uninfluenced by extraneous considerations
  • if all those who are interested in the insolvent estate are fully informed and are unanimously of the same view, the liquidators should ordinarily give effect to their wishes
  • the court should not generally become involved in giving directions to liquidators as to how to make commercial or administrative decisions
  • the court should not generally interfere with a commercial or administrative decision of liquidators after the event, unless it is a decision that was taken in bad faith or was a decision that no reasonable liquidator could have taken

Applying those principles to the present case, the judge held that the liquidators:

  • are not obliged to summon a creditors’ meeting under IA 1986, s 168(2)
  • are entitled to discount the view of the two largest creditor groups who are 'plainly influenced by extraneous and individual considerations'
  • ought to give the three small creditors a last opportunity to express and explain their wishes

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.

To what extent is the judgment helpful in clarifying the law in this area?

The judgment was helpful for two reasons:

  • firstly, it confirms that the removal of the need for sanction has not changed the courts’ approach to a liquidator's exercise of powers not requiring sanction, and the established principles (set out above) should continue to be applied
  • secondly, it makes it unlikely that a Re Oasis Merchandising type objection to the assignment of claims would succeed in the future

What practical lessons can those advising take away from this case?

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.

Further Reading

If you are a LexisPSL subscriber, click the link below for further information:

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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