A company director had no standing to challenge an insolvency practitioner’s assignment of a claim against her parents to a litigation funder, the High Court has ruled.
His Honour Judge Halliwell said Adele Lock “was motivated more by an impulse to protect her parents than to maximise the return for the company’s creditors”.
The judge went on: “It is no doubt for this reason that she initially sought to explore the possibility of purchasing the claim. She may also have wished to defend herself and her husband as respondents to a potential claim.
“However laudable this might be perceived, it is inconsistent with the collective interests of the creditors as a whole and, more specifically, their interest in the relief sought.”
The High Court heard in Lock v Stanley  EWHC 2970 (Ch) that Matthew and Adele Lock formed a company to convert a building in Prestbury, Cheshire, into flats and build three town houses.
Mrs Lock’s parents loaned the company money, in return for long leases on two of the flats. Ultimately, the Locks’ company was unable to raise sufficient funds to meet its liabilities under the project and in November 2015 went into creditors voluntary liquidation.
HHJ Halliwell said that at this point the “realisable value” of the company’s assets was around £4,700, but the company’s indebtedness on directors’ loans and loans from connected creditors was estimated at £2.1m and its indebtedness to trade and expense creditors at over £408,000. Mrs Lock was herself a creditor for the full amount of the directors’ loans.
Paul Stanley was appointed as liquidator in July 2016. He assigned any potential claims against the Locks and Mrs Lock’s parents to litigation funder Manolete Partners in September 2019.
Manolete commenced proceedings against them, and against a company set up by the parents, in January this year, arguing that the long leases for the parents were transactions at an undervalue within the meaning of section 238 of the Insolvency Act 1986. The case is listed for trial next month.
Ahead of this, Mrs Lock sought to set aside the assignment under the statutory powers conferred on the court by section 168(5) of the Act.
Counsel for Mrs Lock argued that she had standing to make the application as a creditor of the company and Mr Stanley’s decision to enter into the assignment was perverse “owing to his failure to take legal advice or canvass the obvious market for an assignment, namely the target for the relevant claims”.
HHJ Halliwell said that, when an applicant asked the court to exercise a statutory power, it was “not enough to consider whether the applicant is within the category of persons entitled to make the application”, but also whether she had a “legitimate interest” in the relief sought.
Her interest in the outcome of the application must also be “aligned with the interest of the class as a whole and it must not have a collateral interest which transcends the class interest”.
The judge said: “It is obvious from the application itself and the overall context in which it was made, together with Mrs Lock’s two witness statements in support of the application, that her interests are not aligned with the interests of the creditors as a whole and her real complaint is with the pursuit of the substantive claims in the main proceedings against herself and her family rather than the contractual arrangements between the liquidator and Manolete.”
Her secondary argument, that the assignment was perverse, needed to meet a “formidable test”.
The judge said there was “nothing to suggest” that Mr Stanley’s failure to obtain legal advice about the steps he should take to negotiate with Mrs Lock or her family arose “from a failure to understand his legal rights and obligations”.
Mr Stanley “did examine other options”, but “from the outset there were insufficient funds available for him to fund the litigation on the usual fee-paying basis”. He considered conditional fees but was “unable to raise sufficient funds” for after-the-event insurance.
HHJ Halliwell dismissed Ms Lock’s application.
Dominic Vincent, Manolete’s associate director for the North-West, said the case “clearly reinforces the very high hurdle which must be cleared” by an applicant who wanted to challenge a liquidator’s decision to assign claims on the basis that the decision was perverse.
He added: “It also demonstrates that a liquidator who acts reasonably and fairly is very unlikely to see his actions successfully challenged by an aggrieved applicant who would perhaps have wished the claim against him had not been assigned to a funder with the motivation and resources to pursue it.”
Separately, Manolete’s results for the six months to 30 September 2021, issued last week, showed that revenue increased by 15% to £10.2m and gross profit by 38% to £5.4m from the previous six months, but were 46% and 43% respectively below the same period last year.
Manolote said the disparity was due to the first half last year benefiting from “an exceptionally large single case settlement of £9.3m” and much less impact from the temporary insolvency measures introduced by the government as a result of Covid.
Investment in cases has grown by 5% to £41m since a year earlier, with 78 new cases, while 64 cases have completed in the past six months.
Chief executive Steven Cooklin told investors: “These are resilient results, produced against a back-drop of an extraordinary market, and they demonstrate the strength of the Manolete business.
“Throughout the interim period to 30 September 2021, the UK insolvency market was artificially suppressed by unparalleled UK temporary government measures.
“Despite the effect of the government actions, the business has continued to perform strongly, particularly in terms of case completions, which were 23% higher than the comparable period last year and in line with management expectations.”
The temporary measures ended on 1 October and Mr Cooklin said the market was beginning to recover to pre-pandemic levels. “We are seeing a sharp increase in both case enquires and signed cases,” he added.
Manolete’s share price has fallen 30p to 294p since the results were unveiled. It has fallen steadily since reaching an all-time high of 565p in early May 2020.