In Re Edengate Homes (Butley Hall) Limited (in liquidation)  EWCA Civ 626, the Court of Appeal considered a challenge to an assignment of claims by a liquidator. In dismissing the appeal, the court affirmed the formidable test to be satisfied before the court will interfere with the commercial decisions of an officeholder, as well as considering the standing of a defendant to bring a challenge pursuant to section 168(5) of the Insolvency Act 1986 (the Act).
Edengate Homes (Butley Hall) Ltd (the Company) was formed by Mrs Lock, the claimant, and her husband, as a special purpose vehicle for the acquisition and development of a substantial listed building in Cheshire. The company was financed in part by Mrs Lock’s parents. Mrs Lock herself had provided director’s loans to the company, and therefore was a substantial creditor as well as a shareholder and director.
The Company went into liquidation in 2015, having failed to raise sufficient funds to complete the project, and following a dispute with the principal contractor. The liquidator considered that he and/or the Company had substantial claims against Mrs Lock, her husband, her parents and her parents’ company (together, the Defendants), including for transactions at an undervalue, preference and misfeasance.
As no other funding was available to pursue the claims, the liquidator assigned them to Manolete, a litigation funding company, for an upfront payment of £30,000 plus a share of recoveries. Manolete commenced proceedings against the Defendants. Mrs Lock sought an order for the assignment to Manolete to be set aside.
Standing to challenge the liquidator’s decision
Section 168(5) of the Act enables “any person aggrieved by an act or decision” of a liquidator, to make an application to court for the act or decision to be reversed or modified.
In this case, Mrs Lock claimed to have standing to apply under section 168(5) as a creditor of the Company. However, Lord Justice Males held (after a helpful consideration of the authorities) that a two stage test must be adopted – firstly, to ask whether the applicant is “a person aggrieved” within the meaning of the section, and secondly, whether the applicant has a legitimate interest in the relief sought.
It is not enough in itself that an applicant under section 168(5) is a creditor of the company concerned – they must also have a legitimate interest. An applicant to set aside a disposal of property by the liquidator, including the assignment of a claim, would have a legitimate interest if acting in the interests of creditors generally (typically with the aim of maximising the assets of the estate).
However, in this case, Mrs Lock’s interest as a Defendant was to dispose of the claims for as little as possible, whilst the interest of the creditors as a whole was to pursue the claims and to maximise recovery for the estate.
Accordingly the Appeal Court upheld the first instance decision - Mrs Lock did not have standing to challenge the assignment as her interest was adverse to that of the creditors as a whole.
Merits of the liquidator’s decision
Notwithstanding Mrs Lock’s lack of standing, the Court of Appeal also considered the merits of the liquidator’s decision. In general, the court is reluctant to interfere with the act of a liquidator (in the absence of fraud or bad faith), and will only do so where a liquidator has done something “perverse” – i.e. “so utterly unreasonable and absurd that no reasonable man would have done it” (Re Edennote Ltd  2 BCLC 389).
In this case, counsel for Mrs Lock contended that the liquidator had failed to test the market properly, and that his alleged failure to give the Defendants chance to make an offer for the claims, before assigning them to Manolete, was a failure of process and was therefore necessarily perverse.
This argument was rejected by the Court of Appeal. Although at first instance the judge (while ultimately upholding the liquidator’s decision) had made some criticism of the liquidator’s explanation for his failure to approach Mrs Lock and her family, it did not automatically follow that the decision was perverse. The facts clearly supported the liquidator’s decision, and there was no reason to consider that the Defendants would have been willing to offer better terms for the acquisition of the claims than those offered by Manolete. A liquidator’s decision can be open to criticism without meeting the “formidable” test of perversity.
This decision will be welcomed by officeholders in affirming the court’s reluctance to interfere with their commercial decisions, even if their actions may not be immune from criticism. Often in a liquidation scenario, assignment of claims to a litigation funder offers the only prospect of recovering assets for the estate - the clarity provided by this decision on the standing of a "conflicted" creditor to challenge such assignments is therefore also a helpful development.