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The Court held that failure by a liquidator to give a defendant the opportunity to buy or settle a claim against it before selling the claim to a third party is not necessarily perverse. However, it may often be sensible or good practice to do so.
The Court also gave useful guidance on the circumstances in which a person can apply to court to challenge a liquidator’s decision. We have summarised the decision, and key takeaways for Insolvency Practitioners, below.
In a liquidation, a person “aggrieved” by the act or decision of the liquidator may apply for an order setting aside or modifying that act or decision pursuant to s.168(5) of the Insolvency Act 1986. This route is not open to everyone. Only a person with standing may make an application under this provision.
In Re Edengate, the Court of Appeal confirmed that there is a two stage test to establish whether or not an applicant has standing:
1. Firstly, the court must consider whether the person bringing the application is “a person aggrieved” by the liquidator’s act or decision.
2. Secondly, the court must consider whether the applicant has a “legitimate interest” in the relief sought.
To take each part of the test in turn, an applicant will be “a person aggrieved” if they are a debtor, creditor or another person with an interest in the outcome of the liquidation. An outsider to the liquidation (for example, any person who was not given an opportunity to bid for an asset, but was not a creditor in the liquidation) will not have standing to bring a challenge.
In this case, the applicant was both a creditor in the liquidation and a respondent to the claims that had been assigned. She had a dual capacity. She did not have standing to bring the application in her capacity as a respondent to the claims. However, she could potentially have had standing to bring the application in her capacity as a creditor.
This is where the second part of the test comes in. A person will have a “legitimate interest” in the relief sought if the effect would be to maximise the assets of the estate. There will be no “legitimate interest” if the relief sought is contrary to the interests of the creditors as a class.
In this case, the Court found that the applicant’s challenge was made entirely in her own interests and those of her relatives. It was not made in the interests of the creditors as a whole and there was no suggestion that the relief she sought (an order setting aside the liquidator’s assignment of a claim against her to a third party funder) would maximise the assets of the estate. As a result, in this case, the applicant did not have standing to challenge the assignment.
Although the applicant in Re Edengate did not have standing to bring a challenge, the Court did go on to consider the test that would apply where a challenge was possible. It confirmed that the test set out in the earlier and confusingly similarly named Court of Appeal decision in Re Edennote continues to apply:
“the court will only interfere with the act of a liquidator if he has done something so utterly unreasonable and absurd that no reasonable man would have done it.”
This is a high standard, requiring that the liquidator has done something utterly unreasonable or perverse. On the facts of this case, even if the applicant had standing to challenge the assignment of the claim against her, the Court held that it would not interfere with the liquidator’s decision simply because they had not offered the assignment to the applicant. Although the liquidator had not formally sought an offer to buy the claim from the applicant, the correspondence showed that she and her relatives had received plenty of notice of the proposal to deal with the asset in this way, and there had been lots of opportunities for her to put forward her own offer and she did not do so.
The courts remain very unwilling to interfere with the exercise by insolvency officeholders of their discretion.They will only do so in circumstances where the hypothetical reasonable person would consider the officeholder’s act or decision to be utterly unreasonable and absurd.
If a cause of action held by the company (or an officeholder claim) is not vexatious or frivolous and is capable of assignment, the insolvency officeholder should where possible take steps to test the market in order to ensure they are maximising realisations for the estate.However, there is no hard and fast requirement to offer the claim to the defendant and in some cases it may be inappropriate to do so.There are plenty of ways to test the market and insolvency officeholders will need to consider the best approach depending on the circumstances in each case.
In order for a person to challenge an officeholder’s actions they must satisfy a two stage test.Firstly, they cannot do so if they are an outsider with no interest in the insolvency process.Secondly, their interest in the outcome of the challenge must be legitimate in that it is aligned with the interests of the creditors as a whole.It is not impossible for a defendant to a claim to satisfy this part of the test, but it will depend entirely on the facts in each case.
There is always a risk of challenge to an officeholder's decision.If an officeholder assigns a cause of action there is also a potential risk of a non-party costs order if the claim is ultimately unsuccessful.Officeholders will need to carefully consider their approach to negotiations and the terms of any assignment in order to minimise these risks.
If you are an insolvency officeholder investigating a cause of action and would like further advice on your options please contact a member of the Restructuring and Insolvency team.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at May 2022. Specific advice should be sought for specific cases. For more information see our terms & conditions.
19 May 2022
Insights 05 JANUARY 2023