IP Briefing : The assignation of claims by officeholders, where there are concerns about the utility of those claims or protections for officeholders or company
Lynda Louise Dixon v Nicholas Myers, Adam Henry Stephens (as administrators of L & N D Development and Design Limited)
The English High Court recently considered an application by a company director under para.74(1)(a) of Schedule B1 for an order requiring administrators to assign a cause of action to the director.
The company had been placed into administration by a qualifying floating charge holder (QFCH) in 2018. The QFCH had subsequently also gone into administration. The applicant believed that the company had certain claims against the (now insolvent) QFCH and offered the administrators £2,000 to assign the claims to her. They declined. The applicant then applied for an order under para.74 requiring the administrators to assign the cause of action to her on the basis that by refusing to do so they were acting “so as to unfairly harm” her interests.
It was held that the burden was on the applicant to show that the administrators’ refusal to assign was unfairly harmful to the applicant’s interests which, in turn, required the applicant to establish that the claims she sought assignment of had real prospects of success and could properly be pursued.
An applicant under para.74 did not have to show that an administrator’s decision was perverse but that it caused “unfair harm”. That would usually take the form of unequal or differential treatment to the disadvantage of the applicant.
Furthermore, the court should not direct the assignment of a claim that was frivolous or vexatious. The Judge stated that the expressions “frivolous or vexatious” or “no reasonable prospect of success” were synonymous with the test for summary judgment. A claim without a reasonable, or real, prospect of success was frivolous and such a claim was, for that reason, vexatious. The judgement also provides that “if the applicant cannot show that the claim has a real prospect of success it does not appear to me that he or she can say that unfair harm has been suffered as a result of the administrator not allowing it to proceed.” It would therefore not be proper for the administrator to assign it. That approach is consistent with standards of conduct expected of administrators. It was determined that the claims under consideration had no real prospects of success.
Nevertheless, even if there was a real prospect of the claims succeeding, it was held that the assignment would be of no utility to the company’s creditors, the QFCH was insolvent so in no position to meet any award, the consideration offered was inadequate and no protections were in place in the event of an adverse costs order being made against the company or the administrators.
This judgment approves the guidance set out in the 2018 case of LF 2 Ltd v Supperstone which considered how administrators’ duties to creditors and their professional obligations interact, and the approach they should take to an offer to purchase a cause of action. This case highlights what happened in England when a company director objected to administrators refusing to assign claims to her. She made an application under para.74, which allows a challenge to be made to IPs’ conduct. However, the English court refused her application and approved the Supperstone approach. Obviously this is an English matter so it is not binding in Scotland but, as with the vast majority of insolvency litigation, unless the underlying substantive law is different, it is not unreasonable to expect that the Scottish courts would adopt a similar approach in their reasoning.
BBM Solicitors specialise in advising IP’s in both contentious and non-contentious matters (including transactional work). Contact: Eric Baijal (email@example.com).This briefing note is current as at 23 February 2021 and is our understanding of the position described at that date. Legal advice ought to be taken before relying on its terms (particularly to ensure the law has not changed).