A recent decision from the Court of Appeal in England has highlighted the merits of good communication with creditors and other parties about the liquidator’s decisions to assign claims. Good communication at an early stage may avoid decisions being challenged.
Lock versus Stanley
In Lock v Stanley (also known as Re Edengate Homes (Butley Hall) Ltd (in liquidation), Mrs Lock challenged the liquidator’s decision to assign a number of claims to Manolete under section 168(5) of the Insolvency act 1986. Mrs Lock, along with her husband had formed the company in connection with a residential development. Mrs Lock had loaned the company significant sums in director’s loans. Mrs Lock’s parents, Mr and Mrs Forrest, had allegedly loaned money to the company and had later formed a separate company which was granted long leases to some of the properties in the development. The development did not go well and the company was unable to meet its liabilities and went into liquidation.
The liquidator realised he may have claims against Mrs Lock and her family for transactions at undervalue, unfair preference, and misfeasance. A letter was sent to Mr and Mrs Forrest by the liquidator’s solicitors asserting a claim but there was no correspondence with Mr and Mrs Lock about any claims against them. Around 18 months later, the liquidator assigned the claims against Mr and Mrs Forrest and Mr and Mrs Lock to Manolete Partners for initial consideration of £30,000 with additional consideration payable from any recoveries. Manolete then commenced proceedings against Mr and Mrs Forrest and Mr and Mrs Lock. Mrs Lock brought an action to set aside the assignation to Manolete.
The outcome of the claim
Her claim failed for two reasons. The first was the issue of standing. Although Mrs Lock was a creditor, she did not have a legitimate interest in the setting aside of the assignation to Manolete that aligned with the creditors as a whole – her interest was in preventing claims from being made against her and her family. The second issue was whether the decision of the liquidator to assign the claims was perverse. Mrs Lock also failed on this ground as the court accepted that, while the liquidator’s handling of the matter had been inadequate due to his failure to communicate with Mrs Lock and her family about compromising the claims and had not taken legal advice on the merits of the claims and assignation, it fell short of the threshold for perversity. The court affirmed that it would take a decision by a liquidator that was so unreasonable no reasonable man would do it before the perversity test would be met.
This decision is reassuring for insolvency practitioners in that the court was reluctant to interfere with the commercial decisions of the liquidator. However, the failure in this case of the liquidator to adequately communicate with the parties, especially Mrs Lock, about the claims against them and the possibility of compromising or purchasing the claims left open the challenge being brought by Mrs Lock. The Court of Appeal emphasised that it was good practice for a liquidator to give the defenders of any potential claims the opportunity to settle or compromise those claims. Failing to do so may not always reach the test for perversity but it may in some circumstances. Had the liquidator in this case instead taken legal advice on the steps he should take to negotiate with Mrs Lock and her family and then communicated with Mrs Lock and her family in order to canvass purchasing or settling the claims prior to the assignation to Manolete, there would have been little scope for the decision to be challenged and little scope to involve the liquidator in expensive litigation. Good communication with creditors and debtors can be the key to reducing the likelihood of decisions being challenged.
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