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The recent Court of Appeal decision in Re Oasis Merchandising Services, delivered on 9 October 1996, considered whether a liquidator could assign the benefit of any proceeds of an action to a company specialising in litigation support for liquidators.
The question before the court in Oasis was whether the liquidator's statutory powers to sell "the company's property" enabled the liquidator to sell the fruits of the wrongful trading action and so made valid what otherwise would be void for champerty. The liquidator considered that there was a prima facie case against former directors of the company for wrongful trading, and asked the creditors for a contribution to fund the action. None of the creditors was able or willing to contribute and the liquidator entered into an agreement with London Wall Litigation Claims, a company specialising in funding claims by liquidators.
The agreement approved by the creditors and the Companies Court, provided that (i) London Wall would finance the action against the directors and in return it would be reimbursed for its expenditure from any proceeds of the litigation, (ii) any excess was to be divided between the liquidator and London Wall, and (iii) the liquidator would conduct the proceedings and any settlement negotiations at the direction of London Wall.
The liquidator was unable to make an outright assignment of the claim under s214 of the Insolvency Act 1986 as such claims can only be made and pursued by liquidators. The directors applied to stay the action on the basis that the agreement was unlawful.
A distinction was drawn, in my view rightly, by the Court of Appeal between actions which the company could have taken immediately prior to its insolvency and actions which it could only take through its liquidators by virtue of the Insolvency Act. Any actions which the company could have taken prior to the insolvency could be sold to any party provided the liquidator's action does not give the purchaser the right to influence the course of, or to interfere with, the liquidators conduct of the proceedings.
The assignment of future recoveries of wrongful/fraudulent trading applications to an unconnected third party in return for funding litigation by the liquidator is champertous and in those circumstances the proceedings will be stayed.
There remains a grey area as to whether liquidators can assign recoveries of action to a third party in return for funding where the action pre-dated the onset of insolvency. The Court of Appeal in Re Oasis suggested that, provided there was no influence exerted by the third party on the liquidator, this would also fall within the "insolvency exception".