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You Do Not Have Standing If Your Interests Conflict With Creditors As A Class

Overview Of Creditor Without Standing To Challenge Liquidator

The case of  Lock v Stanley [2021] EWHC 2970 (Ch) is interesting because it shows you the Court’s approach to the position of a creditor without standing to challenge a Liquidator.

The Company right at the heart of this case was Edengate Homes (Butley Hall) Limited (“the Company”) which entered Compulsory Liquidation following a Winding Up Petition being issued on 2 November 2015.

This case was overseen by His Honour Judge Halliwell.

The case was initially placed into Creditors Voluntary Liquidation on 26 November 2015 and on 26 May 2016 the voluntary Liquidators’ report of Kevin Murphy and Martin Maloney declared receipts of £8,072.27, saying that no further realisations prospects had been identified and so no further investigations appeared required.

However, on 18 July 2016, Paul Stanley assumed the reins. Mr Stanley stepped into the vacant position as Liquidator of the Company thereby replacing the Official Receiver at the request of the petitioning creditor.

The case that then came before the Court was the challenge to Mr Stanley’s assignment dated 24 September 2019 of various claims against some connected parties of the Company (“the Assignment”). This challenge was brought by Adele Lock who was a Director of the Company and who claimed in the Statement of Affairs to be owed £2,094,512.00.

The Assignment The Creditor Sought To Challenge

Mr Stanley entered into the Assignment with Manolete Partners Plc (“Manolete”) to assign various claims against various parties, including but not limited to Adele Lock, her husband, and her parents.

The terms of the Assignment were an immediate upfront payment from Manolete of £30,000 and:

… a scheme for the payment of additional consideration based on a percentage of the net proceeds of any successful claim ranging from 50% in the event that the net proceeds amount to £150,000 or less to 70% if greater than £300,000.

Manolete issued proceedings relying upon the Assignment on 20 January 2021 against a number of the parties referred to in the Assignment.

Assignment The Creditor Sought To Challenge

In this case, the Court said that Mrs Lock did not have STANDING to make the challenge to Mr Stanley’s decision to agree to the Assignment notwithstanding that she may have been a creditor of the Company.

What the Court said was that the submissions of Joseph Curl QC were well-founded. In order to invoke the Court’s involvement through the deployment of rights arising under Section 167(3) of the Insolvency Act 1986 to control an aspect of the Liquidation i.e. in this case the Assignment and thereby not exercise judicial restraint, Mrs Lock had to have STANDING.

It was said that she did not have STANDING because although she was a creditor her interests were seemingly inconsistent with the interests of the creditors of her ‘class’ i.e. the other unsecured creditors. Her interests were in relation to herself and her family in relation to the proceedings that they were facing against Manolete:

Mr Curl submitted that Lord Millett’s analysis in Deloitte captures two key governance principles. Firstly, to have standing, the applicant must not be a stranger to the estate; it must have a legitimate interest in it. This is typically shown if the applicant shows it is a creditor. Secondly, the relevant interests are the collective interests of the estate as a whole which means the class or classes with an interest in the assets. Where an applicant is acting otherwise than in accordance with those collective interests, he submitted that it is not a proper person to invoke the court’s jurisdiction to control the liquidation. In my judgment, each of these statements of principle is well established.

In the light of Lord Millett’s observations in Deloitte, the test of standing is more nuanced than might previously have been appreciated. It is not merely a test of status; it requires a wider examination of an applicant’s interest in making the application. Not only must the applicant be a member of the class. Its interest in the outcome of the application must also be aligned with the interest of the class as a whole and it must not have a collateral interest which transcends the class interest.

For cases in which these principles or analogous principles have been applied, Mr Curl referred me to the judgment of Nicholas Strauss QC in Walker Morris (a firm) v Khalastchi [2001] 1 BCLC 1 and the Court of Appeal in Brake v Lowes (supra).

In Khalastchi, the applicants were a firm of solicitors who sought to use their status as creditors in the modest sum of £237, to apply for directions that they were not at liberty to release documents to the liquidator. The Deputy Judge declined to grant the applicants relief, partly on the basis that the solicitors were not acting as creditors but in order to advance the interests of possible debtors.

The decisions under appeal in Brake v Lowes (supra) included a determination that unsecured creditors of a limited liability partnership, in liquidation, did not have standing to challenge decisions of the liquidators because they were being funded by parties with an adverse interest to the creditors as a whole. On the basis there was “unchallenged evidence to the effect that the Unsecured Creditors were seeking to advance the interests of the bankrupts rather than their own”, Asplin LJ adjudged, at [103]-[104], that the judge at first instance was correct to do so. Henderson and Floyd LJJ agreed.

As an application for directions authorising solicitors to withhold documents from the liquidator for the benefit of possible debtors, the Khalastchi application was inherently unlikely, on its face, to have been made in support of the creditors’ interests or in alignment with their interests as a class. This is less obvious in the Brake case where the applicants sought to challenge a transaction for the disposal of land. However, in the latter case, evidence was admitted, at first instance, that the application was prompted by the interest of third parties in acquiring the land. This would again have been extraneous to the interests of the creditors. Having asked herself, at [100], whether the “Unsecured Creditors…have a legitimate interest in the relief sought in the…Application”, Asplin LJ concluded that “it seems to me that that is very doubtful” stating that a direction requiring the Liquidators to accept a third party bid “must be adverse to the interests of the liquidation estate and the unsecured creditors as a whole…”

Whilst the judgments in the Khalastchi and Brake cases are not narrowly based on the principle identified by Lord Millett in Deloitte since they involve an assessment of the conduct of the applicants in addition to their interests as creditors, Mr Curl is entitled to rely upon them as authority for the proposition that, to establish she has standing to make the application, Mrs Lock must show that she has a legitimate interest in the relief sought aligned with the interest of the creditors as a whole.

In my judgment, she has failed to do so. The Main Proceedings are against Mrs Lock, her husband, her parents and IB, a company of which they are the only shareholders and directors. The claim has been brought to obtain declaratory relief against Mrs Lock and her husband for alleged breaches of fiduciary, statutory and common law duties arising from specific transactions relating to assets of the Company. There is also a claim that the leases were transactions at an undervalue and that the repayment of a loan on directors loan account was a preference. It is obvious from the Application itself and the overall context in which it was made, together with Mrs Lock’s two witness statements in support of the Application, that her interests are not aligned with the interests of the creditors as a whole and her real complaint is with the pursuit of the substantive claims in the Main Proceedings against herself and her family rather than the contractual arrangements between the Liquidator and Manolete. Once advised, by Irwin Mitchell’s letter dated 1st February 2018, that Mr Stanley had a claim against Mr and Mrs Forrest, Mrs Lock was motivated more by an impulse to protect her parents than to maximise the return for the Company’s creditors. It is no doubt for this reason that she initially sought to explore the possibility of purchasing the claim. She may also have wished to defend herself and her husband as respondents to a potential claim. However laudable this might be perceived, it is inconsistent with the collective interests of the creditors as a whole and, more specifically, their interest in the relief sought. No comparable point appears to have been taken in re Edennote Ltd [1996] 2 BCLC 389 and, had it been, it is a matter of speculation whether the same outcome would have been achieved.

I am thus satisfied that Mrs Lock does not have standing to make the Application and, for that reason alone, the Application must be dismissed.

Oliver Elliot Observation: Creditor Without Standing To Challenge Liquidator

Oliver Elliot’s CEO, Elliot Green said:

What might be inferred from this case and others like it perhaps, is that if you are going to issue strategic challenges that have the potential appearance of being an attempt to stifle bona fide claims, you had better get all your ducks in a row and ensure that your challenge is a) a good one and b) it might help if you do not appear to the Court to have a conflict of interest.

There have been quite a number of cases where Directors of companies in Liquidation are either facing claims from Liquidator(s) or have been warned that they are likely to face such claims. Those instances where the response has been to either attempt to remove the Liquidator(s), challenge their fees or other aspects of their conduct all too often fail.

It behoves a party facing a bona fide claim to address the substance of the claim that they are facing and organise their defence to meet that claim. It can be a risky and expensive strategy to enter the arena of satellite and other potentially tactical litigation that has the appearance potentially of little more than an unmeritorious attempt to stifle a good claim.

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Disclaimer: Creditor Without Standing To Challenge Liquidator

This page: Creditor Without Standing To Challenge Liquidator is not legal advice and should not be relied upon as such. This article Creditor Without Standing To Challenge Liquidator is provided for information purposes only. You can contact us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.

Elliot Green

Licensed Insolvency Practitioner & Chartered Accountant. We Know Insolvency Inside Out.