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29-10-2020

L & N D Development and Design Ltd [2020] EWHC 2803 (Ch)

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L & N D Development and Design Ltd [2020] EWHC 2803 (Ch) deals with an application under paragraph 74(1)(a) Sch B1 Insolvency Act 1986 by which a Mrs Dixon, the sole shareholder and director of the company, which was put into administration on by Amicus Finance plc as qualifying floating charge holder, was seeking relief against  administrators who had declined to assign to her various causes of action that she claimed the company had against Amicus. (Amicus itself was insolvent and in administration.) She contended that the company had good claims against Amicus for damages for delays in advancing tranches of money under a facility which had in turn led to loss and damage resulting from delays in paying contractors; there was also a claim for intimidation and economic duress. An offer had been made to take an assignment for a lump sum and a share of the proceeds of the action, but the administrators had declined it.

Paragraph 74 Sch B1 to the Insolvency Act provides a route to challenge such a decision if it can be shown that the administrators have acted “so as unfairly to harm the interests of the applicant,” and gives the court wide powers as to the order it may make.

Drawing on Hockin v Marsden, ICC Judge Mullen noted that in that case, Mr Nicholas Le Poidevin QC, sitting as a deputy High Court Judge, had considered similar facts: a company in administration had had two potential claims against a bank which the administrators had declined to assign. He had noted that an applicant under paragraph 74 did not have to show, as in other contexts, that the administrator’s decision was perverse, only that it caused “unfair harm”. This would, as Norris J held in In re Coniston Hotel (Kent) LLP usually take the form of: “unequal or differential treatment to the disadvantage of the applicant (or applicant class),”  but the paragraph in the schedule was not limited to such cases: “a lack of commercial justification for a decision causing harm to the creditors as a whole could be unfair in the sense that the harm is not one which they should be expected to suffer.” But the harm had to be "unfair", so a creditor could not complain of harm to his interests when it was justifiable by reference to the interests of the creditors as a whole.

Judge Mullen considered a number of other well known authorities on assignment by office-holders, notably LF2 Ltd v Supperstone, but also had cited to him a less well known Australian case, Citicorp Australia v Official Trustee in Bankruptcy [1996] FCA 1115, remarking that the reason for its not being better known could be because it was often cited as Re the Bankrupt Estate of Serillo but that “Serillo” was a misspelling of the name “Cirillo”.

He held that LF2 was not authority for the proposition that the burden lay with the  administrators in an application under paragraph 74 to show that the claim was frivolous or vexatious:

 “While an administrator faced with a request to assign should be prepared to assign it unless it would not be proper for him or her, as an officer of the court, to do so, an applicant under paragraph 74 must demonstrate unfair harm. That requires the applicant to show that the cause of action is one that can properly be pursued. That must mean, in the usual run of cases, that it must have a real prospect of success. The expressions ‘frivolous or vexatious’ or ‘no reasonable prospect of success’ are in my judgment synonymous with the familiar test for summary judgment under Part 24 of the Civil Procedure Rules,” he said.

Thus, if the applicant could not show that the claim had a real prospect of success, he or she could not say that unfair harm had been suffered as a result of the administrator not allowing it to proceed:

“It would not be proper for the administrator to assign it. That approach seems to me to be consistent with standards of conduct expected of administrators […] and similarly consistent with the degree of discretion that is afforded to office-holders in the administration of the affairs of an insolvent company.”

He rejected the ability of the applicant to invoke against the administrators the principle in Ex parte James, having considered its recent analysis by David Richards LJ in the Court of Appeal in Lehman Brothers v MacNamara.

Having regard to the merits of the claim, and in particular an adverse finding in prior proceedings in relation to a major issue in the proposed proceedings, the judge  found that the claim was frivolous and thus vexatious. “The cause of action for damages lacks reality”, he found. He also said, “Even if there were a real prospect of those claims succeeding, the assignment on the proposed terms would be of no utility to the company’s creditors, the consideration is inadequate and no protections are in place in the event of an adverse costs order being made against the company or the Administrators.” The application was dismissed.

The case is yet another reminder to aggrieved parties of the uphill struggle they rightly face in challenging a rational and properly informed decision of an administrator, as well as of the limits of paragraph 74 Sch 1B and the rule in Ex parte James.

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