Is It Fair A Claim Assigned By A Liquidator Can Be More Valuable In Different Hands?
Picture a potential scenario: A major creditor, disappointed with a Director of an owner-managed company and votes in a Liquidator of their choice to take over the reins from the Director of an insolvent company when a creditors meeting for Creditors Voluntary Liquidation is convened. The creditor is say owed £100,000 and the other creditors combined are owed £50,000. The expenses on the Insolvency Practitioner’s fee estimate anticipated fees of say £50,000. Therefore the total costs of Liquidation and creditors would be £200,000.
The Liquidator does their Statement of Insolvency Practice Number 2 investigations and a claim is discovered. For ease let’s say the claim is a Preference Payment of £1 million (“the Claim”) which can be brought in the name of the Insolvency Practitioner.
In this scenario, a Liquidator could assign the Claim pursuant to Section 118 of the Small Business, Enterprise and Employment Act 2015 and a successful assignee might anticipate a recovery of £1,000,000.
Alternatively, the Liquidator could pursue the action and if litigation costs were say £100,000, then it would be expected that the total amount the Director would have to pay is in this hypothetical example is £300,000 which is made up of the expenses of Liquidation and the creditors.
Clearly, a massive difference is potentially capable of resulting simply by virtue of whose hands the Claim is in.
This issue came up for discussion in the case of Manolete Partners PLC v Hope & Anor [2022] EWHC 1801 (Ch) (“Hope“) a claim was assigned by the Liquidator to a litigation funder. The Court in the first instance said there should be a cap on recoveries. Ordinarily, if a claim is brought by a Liquidator to stop money going around in a circle (such as when the respondents are the shareholders of the company) the Court will not order the respondents to pay more than would be required to discharge the expenses and creditors of the Liquidation.
This is deemed to be a practical step to stop a respondent Director paying large sums then they would then receive a portion back via a shareholder dividend.
On appeal in Hope the Court said there was in effect to be no cap:
… if, as here, a liquidator has, quite properly and in order to benefit the insolvent estate, assigned a cause of action on terms that require the proceeds to be divided with the assignee, then I consider it is wrong in principle to deprive the assignee of any part of those proceeds by the exercise of a discretion intended to prevent proceeds reaching someone tainted with the same wrongdoing as the defendants to the action.
The problem is that claims arising from insolvency are there to compensate creditors for loss or restore a position to that which existed before insolvency arose. Although the Claim itself might be issued either way for the same amount ie. £1 million, the anticipated relief could be very different simply because of who has issued it.
Can it be right the award could vary on such grounds so significantly?
In such a scenario given the huge potential variation in the outcome, it might be only fair to offer to assign the Claim to the Director to ensure the Ex Parte James principles are not overlooked.
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