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Fiona McWilliams is a senior litigation assistant at Ashurst Morris Crisp.
In a recent case, Mr Justice Walker fired a timely shot across the bows of insolvency practitioners, reminding them the 1986 Insolvency Act gives them special powers and, in so far as these are unique to and arise from their appointment, are incapable of transfer to third parties.
His decision, in Ward v Aitken & ors, involved an application by directors Jonathan Aitken and John Hemingway to stay a wrongful trading action brought by the liquidator of Oasis Merchandising Services. The liquidator entered a deal with London Wall Litigation Claims whereby London Wall would fund the wrongful trading action in return for a share of any money recovered from the directors.
First, Justice Walker considered the proceeds of a wrongful trading action did not constitute property of Oasis. Therefore, they could not be sold or assigned by the liquidator to London Wall.
Second, he concluded a liquidator should not be able to assign a wrongful trading action because, by its nature, it involves a penal element and is not ordinary civil litigation.
Insolvency legal proceedings are often funded by third parties such as banks or trade creditors. These arrangements will not normally amount to maintenance. However, the third party in this case, London Wall, had no link with the company prior to its insolvency and had no interest in the proceedings other than a financial one. The arrangements with London Wall were, therefore, champertous.
The decision means third parties can no longer fund wrongful trading actions in return for a share in the proceeds of the action. Undoubtedly there will be occasions where there are grounds for an action against former directors but where the liquidator has insufficient funds to pursue it.
If it believes the action will succeed, the liquidator can seek a fighting fund from creditors of the company and can now obtain legal advice on a contingency basis. If it cannot persuade either creditors or solicitors to assist it there may be cases where financial reasons prevent the liquidator from pursuing a legitimate claim.
This is unfortunate but a lesser evil than the liquidator trading in powers which were vested uniquely in him as an officer of the court and which involve a penal element.