Assignment of causes of action by administrators

LF2 Ltd v Supperstone & Anor (Administrators of Pennyfeathers Ltd) [2018]

This decision is a useful summary of the principles and procedure that should be applied when administrators are considering assigning a claim of the insolvent company.

Request to assign cause of action – Pennyfeathers Limited (Company)

The administrators of the Company refused to assign a potential professional negligence claim against the Company’s lawyers to a third party. The basis of the refusal was that they did not consider that the potential assignee had provided evidence that the solicitors had been negligent, nor were they convinced that sufficient evidence had been provided in relation to the value of the claim. The administrators also believed that it would not be in the interests of the Company’s creditors to incur costs and time pursuing the claim. As administrators are not to propagate spurious or vexatious claims they did not intend to pursue the assignment or the cause of action further.

Challenge to administrators’ decision on assignment of claim

The potential assignee challenged the administrators’ decision against assigning the claim by an application made under Paragraph 74 Schedule B1 Insolvency Act 1986, on the basis that their decision unfairly harmed its interests as a creditor of the Company. The application was dismissed at first instance and this was appealed by the potential assignee.

The appeal

Mr Justice Morgan dismissed the appeal. At first instance, the judge had found that there was no unfair harm suffered by the applicant. As this finding was not the grounds of the appeal, it was bound to fail.

Determining whether to assign a claim

This case provides guidance when determining whether to assign a claim.

  • An administrator has power to assign a cause of action as part of their statutory power to sell or dispose of property of the company in administration. The exercise of that power is not limited by the merits of that cause of action.
  • A viable claim by the company against a third party is an asset. An administrator should consider investigating whether such an asset should be preserved and pursued.
  • Where the administrator does not have funds to investigate, an offer to purchase such a claim is potentially an asset of the company. The administrator should normally wish to preserve and pursue that asset.
  • Where the claim is hopeless and the potential assignee wishes to harass a defendant, the administrator should normally decline to assign the claim.
  • Where administrators are not clear whether the claim would be vexatious, but are offered money for the claim, they should be prepared to assign the claim for a proper price. If a proper price is not clear they can invite bids, or hold an auction.
  • Where there are time pressures or other risks to the value of the claim (such as expiry of the limitation period) - prompt action is needed, i.e. by issuing a protective claim, or entering into rapid negotiations to obtain the best available offer.
  • If a claim is considered to be frivolous or vexatious, but the creditor disputes this by way of court application, the preferred action would be to permit the assignment (unless clearly frivolous or vexatious). This allows the defendant to apply for strike out or summary judgment in relation to the claim.

Comment

This case is a welcome summary for administrators and potential assignees in addressing how the parties should approach an assignment of claims in circumstances where administrators consider that the cause of action may be questionable.

Prevailing interpretation of previous case law on the issue considered that when it is not clear whether the cause of action has merit, the administrator ought not assign it and should instead place a burden on the party seeking the assignment to demonstrate that the claim is not frivolous or vexatious. The Judge in this case considered that approach was wrong in principle and so the decision provides useful clarification on this point.

Read other items in the Commercial Brief - September 2018