Out-Law / Your Daily Need-To-Know

Court clarifies procedure for insolvency ancillary claims

Out-Law Legal Update | 25 Jun 2021 | 1:59 pm | 3 min. read

The High Court has clarified the correct legal procedure for issuing a fraudulent transaction claim under section 423 of the UK’s Insolvency Act 1986 (IA 1986), along with other ancillary claims to formal insolvency proceedings.

The decision will impact on insolvency practitioners, assignees of insolvency claims and insolvency professionals issuing insolvency claims under IA 1986 and other ancillary claims which are typically pleaded in the alternative under other statutes, such as the Companies Act 2006.

It also provides a useful reminder that an assignee of a liquidator has no standing to bring claims under section 212 of the IA 1986, unless the assignee is a creditor or a contributory.

The case involved a liquidation in which the applicants were assignees of the liquidators. The applicants brought a claim under section 423 of the IA 1986, which relates to transactions intended to defraud creditors, by way of an insolvency application notice under IA 1986. The respondents challenged this approach and argued that the section 423 claim ought to have been brought under part 7 of the Civil Procedure Rules (CPR), and not by way of an insolvency application notice.

The fault lies in the inflexible procedure set out in the IA 1986 and the Insolvency Rules, which are prescriptive as to the types of claims covered by the Act

The court found for the respondents on this point, and the judge held that the claims should have been brought under part 7 of the CPR. However, the court exercised its discretion under rule 3.10 of the CPR and allowed the assigned company claims and the assigned office holder claims to continue despite the procedural defect, subject to the applicants paying the relevant court fee required under part 7 of the CPR – in this case, a significant sum of £10,000.

The judge came to his decision by observing that section 423 falls within part 16 of the IA 1986. Insolvency applications are made under Rule 1.35 Insolvency (England and Wales) Rules 2016 (the Rules), which states that it only applies to  parts 1 to 11 of IA 1986; not to part 16. The judge also confirmed that the same principles apply to other types of claims which are not insolvency proceedings – including breach of duty claims at common law; breach of fiduciary duty or statutory duty or other legal or equitable duty; and claims under the Companies Act 2006.

The decision is a significant one for insolvency professionals including insolvency practitioners, assignees of insolvency claims and insolvency legal professionals. It is not uncommon for practitioners to issue an insolvency claim, such as misfeasance, in the insolvency court by way of an application notice and to ‘tag on’ ancillary claims, such as breach of duty, as alternative pleadings in the same application. In doing so, applicants have benefitted from the lower court fees in the insolvency court.

As a result of this judgment, two sets of proceedings will be required where the same set of facts give rise to an insolvency claim under the IA 1986 and one or more claims under section 423, or another statute, with the associated higher court fees for those claims that fall outside of the IA 1986. Practitioners should issue both cases in the correct court on the relevant court form in parallel, and then seek directions to transfer and consolidate the two claims in the insolvency court. It will mean that additional court fees will need to be paid, but a successful transfer increases the chance that the matter will be heard by an expert insolvency judge.

It appears that the judge in this case appreciated the implications of his decision, as he said that he had reached his conclusion “with regret”. The fault lies in the inflexible procedure set out in the IA 1986 and the Rules, which are prescriptive as to the types of claims covered by the Act. Unfortunately, section 423 claims and claims under the Companies Act are outside the scope of the Rules.

It remains to be seen whether the current review of the Rules will incorporate changes to the limited scope of rule 1.35 and formalise the practice historically adopted by insolvency professionals, by allowing company claims arising in an insolvency to be brought under the same application notice as the insolvency claims. This would improve the efficiency of the process; free up court resource; and be less expensive for office holders and assignees when issuing claims arising in an insolvency context.

Written by Louisa Chan, a restructuring expert at Pinsent Masons.