Case law update

IPA Insolvency Practitioner newsletter, December 2021

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An insolvency case law update prepared by Mena Halton, Head of Legal at Manolete Partners PLC.

Lock v Stanley & Anor (Re Edengate Homes (Butley Hall) Ltd) [2021] EWHC 2970 (Ch) (bailii.org)

Hearing dates 28 October, 5 November 2021

Brief Background

On 5 November 2021, His Honour Judge Halliwell sitting as a Judge of the High Court in the Business and Property Court in Manchester dismissed an application under Section 168 (5) Insolvency Act 1986 (“the Application”).

The Application arose out of the insolvent liquidation of Edengate Homes (Butley Hall) Limited (“the Company”). On 24 September 2019 the liquidator assigned causes of action originally vested in the Company and also office holder claims to Manolete Partners Plc (“Manolete”). The Applicant, Mrs Lock, was a member and director of the Company, a Respondent to an application notice issued by Manolete as assignee (“the Main Proceedings”) and claimed to be a creditor of the Company.

The Main Proceedings were issued by Manolete on 20 January 2021 against Mrs Lock and members of her family, seeking relief under the Insolvency Act 1986, the Companies Act 2006 and at common law, the claims having a total quantum of approximately £1.2m.

On 18 February 2021 Mrs Lock issued the Application against the liquidator and the Company to set aside the assignment to Manolete under Section 168 (5) Insolvency Act 1986.

Section 168(5) provides as follows:

“if any person is aggrieved by an act or decision of the liquidator, that person may apply to the court, and the court may confirm, reverse or modify the act or decision complained of, and make such order in the case as it thinks just.”

It was submitted on behalf of Mrs Lock that she had standing to make the application because she is a creditor of the Company, and the liquidator’s decision to enter into the assignment or his act of doing so should be reversed on the basis that they are perverse, owing to his failure to take legal advice or canvass the obvious market for an assignment, namely the target for the relevant claims. Mrs Lock relied on the Court of Appeal decision in re Edennote Ltd [1996] 2 BCLC 389.

HHJ Halliwell first considered whether Mrs Lock had standing to make the Application and concluded that she did not. The judge agreed with the liquidator’s assertion that the applicant did not have standing to apply for relief because her own interest on the facts was adverse to the class interest of the creditors as a whole; her interest was not aligned to that of the creditors, and her real complaint is with the pursuit of the Main Proceedings against herself and her family rather than the contractual relationship between the liquidator and Manolete.

Being satisfied that Mrs Lock did have standing to make the Application, the judge held that, for that reason alone, the Application must be dismissed. However, on the hypothesis that, contrary to his conclusion, Mrs Lock has standing to make the Application, the judge went on to consider whether the assignment to Manolete should be set aside for perversity. Again, on the facts the judge held it should not, recognising that the test of demonstrating perversity as set out in Edennote was a formidable one for an applicant to overcome and reiterating that the court should be reluctant to substitute its own judgment for a liquidator’s decision on what is essentially a “businessman’s decision”. The Edennote test required the judge to be satisfied that the action taken by the liquidator was “so utterly unreasonable and absurd that no reasonable man would do it”. The judge was not satisfied that this was established.

The judge also referred to the judgment of Sir John Vinelott in Edennote where he stated, “it is only in very exceptional circumstances that the court will interfere with the exercise by a liquidator of his discretion to sell the assets of an insolvent company”.

The message for Insolvency Practitioners from this helpful decision is that defendants to assigned claims whose interest conflicts with that of the general body of creditors have no standing to challenge that assignment, and attempts by such defendants to stifle claims in this manner will not succeed. Further, Insolvency Practitioners should be encouraged by this confirmation of the long-standing reluctance of the courts to interfere with commercial decisions made by Insolvency Practitioners, often in challenging circumstances. When assigning claims, Insolvency Practitioners can remain confident that any party seeking to challenge the assignment must clear a very high hurdle to establish perversity.

Content courtesy of IPA corporate partner Manolete Partners PLC.