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26/11/2020

Assigning Claims to Creditors

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What is an Assignment?

An assignment is the transfer of a right from one party to another. A cause of action by which a party may be able to enforce a right is a chose in action and, in principle, is capable of assignment.

Generally speaking a cause of action cannot be assigned if that assignment would offend the rules on maintenance and champerty, however, this principle is subject to certain exceptions and capable of being overridden by statute, as in the case of insolvency claims (Section 246ZD of the Insolvency Act 1986 (“IA 1986”)).

Insolvency Claims

Insolvency procedures (such as administration, liquidation and bankruptcy) involve the appointment of an insolvency office-holder whose primary duty is to get in the property of the company or individual, and realise the value of that property for the benefit of creditors. An office-holder may assign a cause of action because:

  • He has insufficient funds to pursue it on behalf of the estate.
  • He does not consider it to be worth pursuing on behalf of the estate in light of the prospects of success or recovery, the factual complexity or the time required to pursue litigation.
  • It is an effective way to realise value for the insolvent estate.

In considering whether to assign a claim an office-holder must exercise great circumspection, bearing in mind the consequences to the other parties. It is appropriate for the office-holder to take steps to satisfy himself of the merits of the claim before proceeding with an assignment (Cummings v Official Receiver [2002] EWHC 2894). However, an office holder should normally only decline to assign the claim where it is clear that the claim is hopeless and that the potential assignee would simply be seeking to harass the defendant.

Where it is not clear whether the claim is frivolous or vexatious, the office holder should be prepared to assign the claim for a proper price. Where the proper price is not clear, the office holder should seek bids for the claim (LF2 Ltd v Supperstone and another (Administrators of Pennyfeathers Ltd) [2018] EWHC 1776 (Ch).

An insolvency office-holder can assign the following types of claim:

  • Claims comprised in the company’s property at the date of liquidation;
  • Claims vested in a bankrupt’s estate under Section 306 of the IA 1986;
  • Proceedings which are already on foot at the date of administration or liquidation;
  • “Hybrid claims” which combine personal damages with a claim relating to the assets in the bankruptcy. Hybrid claims vest in the trustee, but any proceeds of the personal claim will be held on trust for the bankrupt. Hybrid claims may be assigned, but the assignee (if someone other than the bankrupt) will take the claim subject to the bankrupt’s right to a share of the proceeds; and
  • The right to appeal against the dismissal of a claim.

A liquidator and administrator also have (where the relevant process commenced on or after 1 October 2015) an express power to assign a right of action (including the proceedings of an action) arising under any of the following provisions of the IA 1986:

  • Section 213 or 246ZA (fraudulent trading).
  • Section 214 or 246ZB (wrongful trading).
  • Section 238 (transactions at an undervalue (England and Wales)).
  • Section 239 (preferences (England and Wales)).
  • Section 244 (extortionate credit transactions).
The Right to Benefit

In the recent case of Cage Consultants Ltd v Iqbal (Re Totalbrand Ltd) [2020] EWHC 2917 (Ch) the High Court considered the effect of an assignment of a liquidator’s claim under Section 246ZD of the IA 1986.

In this case, a liquidator had assigned claims to a third party, who was proceeding with the claims against a former director of the company and another person who may have benefitted from the transactions. Those individuals applied to the High Court for the claims to be stayed or dismissed on the basis that Section 246ZD allowed the transfer of a claim but did not amend the identity of the person to whom an award could be made under the relevant sections.

The company had been dissolved, and the applicants claimed that the court could not now make any award because (at least if and until the company were restored to the register) there was no person in whose favour, or for whose benefit, an order could be made.

The court dismissed the applicants’ arguments and held that the assignee’s litigation could proceed. This was because:

  • An assignment under Section 246ZD carried with it the proceeds of the claim transferred;
  • Section 246ZD required a purposive, not a literal, interpretation, so as to allow an assignee to benefit from any order of the court under the relevant sections;
  • Any other outcome would:
    • render section 246ZD futile (as there would be no willing assignees, if all that they stood to gain was the possibility of their litigation costs back, and the risk of incurring an adverse costs order); and
    • defer the dissolution of the relevant company for no concrete reason and with a possible consequent increase in the cost of the insolvency proceedings.
Good news for Creditors

The above case provides welcome reassurance to creditors (and other interested parties) seeking to take assignment of insolvency office-holder claims.

The ability of a creditor to take assignment of a claim is particularly helpful in cases where there are insufficient funds for an insolvency office-holder to pursue litigation and or where the benefit of that claim is likely to yield a better return than a distribution from the insolvent estate.

If you are a creditor wishing to take assignment of an insolvency office-holder claim or if you would like more information on assignments generally please contact our Restructuring & Insolvency Consultant, Lauren Hartigan-Pritchard on 0345 20 73 72 8 or lhartiganpritchard@thursfields.co.uk for a free initial consultation.

Lauren - Colour

Lauren Hartigan-Pritchard,

Business Manager, Restructuring & Insolvency Consultant

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