Out-Law Legal Update | 17 Nov 2020 | 1:29 pm | 3 min. read
The former directors are being pursued for various claims under the 1986 Insolvency Act by a litigation funder who had been sold or assigned the relevant rights of action by the Liquidator of the dissolved company. The court considered the plain wording as well as the purpose and intention of the relevant legislation in its decision. The decision is thought to be the first reported case relating to this issue and will be welcomed by officeholders, litigation funders and creditors of insolvent companies.
Totalbrand Limited (the company) entered creditors' voluntary liquidation on 28 July 2016. The liquidators of the company assigned certain rights of action to Cage Consultants Limited (CCL) under s.246ZD of the 1986 Insolvency Act (IA86). These rights of action included claims against the directors of the company for misfeasance, and claims under IA86 relating to fraudulent trading (s.213), transactions at an undervalue (s.238) and preferences (s.239). The company was dissolved on 24 September 2019. At the first hearing the district judge refused an application by the directors that proceedings against them by CCL should be dismissed or stayed.
On appeal, the High Court helpfully considered the background and policy objectives of the power to assign contained in s.246ZD. It was noted that while an officeholder was able to assign to third parties a claim for misfeasance (as an asset of the insolvent company), the courts had previously ruled that statutory rights of actions conferred on an officeholder could not be assigned. S.246ZD was introduced by the 2015 Small Business, Enterprise and Employment Act to widen the claims that could be sold or assigned by an officeholder for the benefit of the creditors of an insolvent company. The section also addressed the fact that there was low uptake in cases against directors of insolvent companies due to limited funds in the insolvent estate and a reluctance of creditors to fund such actions.
The directors argued that the wording of each of s.213, s.238 and s.239 meant that even if the claims were assigned to a third party, the court was only permitted to order that the proceeds be paid in favour of the company. Unless and until the company was restored to the register, there was no one an order could be made in favour of and consequently the directors agued that the claim had to either be dismissed or stayed. Further, as the purpose of s.246ZD was to benefit the creditors of the company rather than 'bypass' them it was argued that unless CCL was in a position to pay any proceeds of the claims into the general assets of the company for distribution to the creditors, the claims should not proceed.
The court rejected the directors' arguments for four reasons. First, the plain wording of s.246ZD makes clear that the proceeds of any action can be included in the assignment. While a particular agreement may specify a different split of the proceeds, the statute is unqualified.
Secondly, it could not be said that creditors of the company would not benefit from the assignment. Assignments of rights of action by officeholders would invariably be for a price and the proceeds of the sale would become assets of the insolvent company for distribution to creditors.
Thirdly, s.246ZD requires a purposive and non-literal reading to give effect to any assignment by the liquidator. For instance, following an assignment the provisions relating to transactions at an undervalue have to be interpreted in a way to allow the liquidator's assignee to apply to court. There is no reason why the part of the relevant legislation providing the relief should not also be read purposively so that any payment after a successful claim is made to the assignee rather than the insolvent company or officeholder.
Lastly, the directors' interpretation would deprive s.246ZD of its purpose. No prospective purchaser of a claim would fund litigation and risk an adverse costs order where the only benefit is the prospect of a dividend from the insolvent estate of a company. The aim behind s.246ZD of increasing the uptake of such claims for the benefit of an insolvent company's creditor would not be met.
Whilst the decision may be unsurprising it will be welcomed by officeholders, litigation funders and creditors of insolvent companies who ultimately stand to benefit from the sale by an officeholder of claims against a miscreant director. It is also a cautionary reminder to directors whose conduct may be scrutinised on a subsequent liquidation or administration that the insolvent company's lack of funds will not necessarily mean that they escape an action against them.
Co-written by Qasim Ali of Pinsent Masons.