Norglen Ltd v Reeds Rains Prudential Ltd (Levy v ABN Amro Bank NV, Mayhew-Lewis v Westminster Scaffolding Group Plc)

A liquidator may validly assign a company’s cause of action, including in return for a share of the proceeds, to an individual who intends to seek legal aid. The exclusion of companies from legal aid does not impliedly invalidate an assignment otherwise authorised by insolvency law. Questions about eligibility for, or abuse of, legal aid belong to the statutory legal-aid scheme.

The assignment also remains valid despite depriving the defendant of the security for costs potentially available against a corporate claimant. Once the assignee has the only title to sue, perceived abuse of legal aid is not a proper ground for refusing substitution. Any breach of duty by the liquidator may be challenged by creditors in the Companies Court but does not affect the assignment’s validity.

These conjoined appeals concerned insolvent companies which had assigned causes of action to individuals able to apply for legal aid. Norglen Ltd assigned claims arising from an allegedly fraudulent property transaction to Mr and Mrs Rodgers. Circuit Systems Ltd assigned contractual and misrepresentation claims against Zuken-Redac (UK) Ltd to its former managing director, Mr Basten.

At first instance, both assignments were treated as invalid devices for obtaining the indirect benefit of legal aid. In Norglen, the Court of Appeal allowed substitution of the assignees and declined to require security for costs. A differently constituted Court of Appeal subsequently followed Norglen in Circuit Systems and upheld that assignment.

The principal question before the House was whether the assignments were invalid because their purpose included enabling the litigation to continue with legal aid, thereby benefiting the insolvent companies and defeating potential security-for-costs protection. Norglen also raised the liquidator’s conduct, substitution under the Rules of the Supreme Court and the priority of litigation costs.

1. Both appeals dismissed unanimously. Lord Hoffmann delivered the leading speech. Lord Browne-Wilkinson, Lord Lloyd of Berwick, Lord Nolan and Lord Clyde agreed with his reasons.
2. Per Lord Hoffmann, liquidators and trustees in bankruptcy occupy a privileged position in relation to the assignment of causes of action. Their statutory responsibility to realise assets for creditors permits them to sell a cause of action for a fixed sum or a share of the proceeds, even though an equivalent transaction outside insolvency might offend the law against champerty.
3. The assignments were not invalid because the assignees intended to seek legal aid. Whether the Legal Aid Act 1988 authorised assistance in those circumstances was not before the House. If assistance was authorised, Parliament had entrusted control of abuse to regulations and the Legal Aid Board’s discretion. If it was not authorised, the assignments created no legal-aid mischief. The legal-aid scheme did not require courts to invalidate otherwise lawful private transactions.
4. Advanced Technology Structures Ltd v Cray Valley Products Ltd [1993] BCLC 723 was wrong to invalidate such an assignment as a sham, stratagem or device. The transactions transferred the legal and beneficial interests they purported to transfer. Nor were they invalid because they removed the defendants’ opportunity to seek security under section 726 of the Companies Act 1985.
5. Any breach of duty by Norglen’s liquidator in making the assignment was a matter for the creditors in the Companies Court. It did not affect the assignment’s validity. Since the assignees alone held the causes of action, substitution was necessary. The possibility that their legally aided prosecution might be abusive was for the Legal Aid Board and was not a proper ground for refusing joinder.
6. Lord Hoffmann stated that conditions on substitution may protect a defendant from additional costs caused or wasted by the joinder. They should not ordinarily recreate the protection which the defendant would have enjoyed had the corporate claimant remained the plaintiff. The House did not finally decide that point because the Court of Appeal had instead found that Norglen possessed sufficient assets to meet the costs for which it remained liable.
7. Costs ordered against a company in liquidation in proceedings which it has brought or adopted are payable from the net assets held by the liquidator in priority to other claims. By adopting the action, the company adopts it as a whole and becomes liable for costs incurred before as well as after liquidation.

• House of Lords: Dismissed both appeals unanimously and upheld the validity of the assignments.
• Court of Appeal — Norglen: Allowed Norglen’s appeal, ordered the substitution of Mr and Mrs Rodgers, and declined to order security for costs. It held that an assignment was not invalid merely because it enabled an individual to prosecute the claim on terms benefiting the company.
• High Court — Norglen: Morritt J dismissed the substitution application and ordered Norglen to provide £74,000 security for costs, following Advanced Technology Structures Ltd v Cray Valley Products Ltd [1993] BCLC 723.
• Court of Appeal — Circuit Systems: Allowed the appeal, followed the Court of Appeal’s decision in Norglen and held the assignment to Mr Basten valid.
• First instance — Circuit Systems: Judge Richard Havery QC held the assignment invalid as a device for obtaining legal aid.