High Court ‘draws amendment line’ applicable to insolvency claims

It follows a significant decision from the High Court of England and Wales, clarifying the boundaries for amending claims in insolvency proceedings - where a proposed amendment constitutes a new cause of action and not arising out of the same or substantially the same facts as the existing cause, the court does not have jurisdiction to grant the amendment. 

The case centred on a series of loans made by the now-insolvent Callimedia Limited – later CL Realisations 2020 Limited – to Marlixia Limited, a company with no assets or income, which had acquired Callimedia from its former directors.

Marlixia was to pay £1 million for the goodwill and £565, 000 for the net asset of Callimedia. Around the time of the acquisition, the Callimedia lent £1,085,000 to Marlixia on a repayable on demand, unsecured and interest free basis under a signed but not dated loan agreement. Three more loans totalling £308,452 were provided by the Callimedia to Marlixia between September 2017 and December 2019.

Callimedia went into administration on 3 February 2020 and moved to creditors’ voluntary liquidation (CVL) on 3 July 2020 where new insolvency practitioners were appointed as liquidators. Marlixia was dissolved on 5 October 2021. 

In July 2023, an insolvency application was issued protectively against the previous directors so as not to be out of time for limitation purposes. Following a four month stay on proceedings, the liquidators filed and served their supporting witness statement, a directions hearing took place, and the parties were to file points of claim, defence and reply in the usual way.

When serving their points of claim, the liquidators also sought to amend their original application to include four new allegations. The first three amendments related to misfeasance (improper conduct causing harm of loss to the company), breach of their fiduciary and other duties owned to the company and sought to advance that the loans caused the company to become insolvent. It was claimed that the additional loans were made when the company was already insolvency or that the directors ought to have known that there was no prospect that Marlixia would never be able to repay it. The fourth amendment also claimed that the directors were guilty of misfeasance but on the basis that the advancement of sums to Marlixia was to fund its purchase of Callimedia for the sole purpose of transferring out valuable assets were unlawful distributions.

The High Court granted permission for three of the four proposed amendments, finding that they either did not constitute new causes of action or arose from substantially the same facts as the original claim. However, the court refused the fourth amendment, which alleged that the loans were unlawful distributions used to fund the company’s own acquisition.

The court applied the so-called ‘Mulalley test’, reaffirming that amendments outside the limitation period must not introduce new causes of action unless they arise from the same factual matrix. The fourth amendment, the court held, failed this test and was not supported by sufficient evidence of coherent particulars.

There are, however, circumstances where inevitably applications are issued protectively, and factual matrixes are not as thorough as one would like. In those situations, officeholders are best off pleading their cases as widely as possible and avoiding any amendment applications were possible. It should always be borne in mind that the court will generally err on the side of caution and ensure that fairness against respondents is upheld.