Circuit Systems Ltd and Another v. Zuken-Redac (U.K.) Ltd (Formerly Racal-Redac (U.K.) Ltd)

The House of Lords considered whether causes of action assigned by companies in liquidation to individuals were invalid because the assignments would enable the companies to benefit indirectly from legal aid or to defeat a defendant's statutory right to security for costs under section 726 of the Companies Act 1985. The court held that (i) liquidators have statutory power to assign causes of action and such assignments are not automatically void for public policy merely because they may enable the assignee to obtain legal aid; (ii) whether legal aid should be granted to an assignee is a matter for the Legal Aid scheme and its rule‑making and discretion, not a ground in private law for treating assignments as invalid; and (iii) the fact of assignment does not of itself prevent a defendant from seeking security for costs, but it does not follow that an assignment is void because it may alter the defendant's position on security for costs. The court dismissed the appeals and affirmed that the validity of the assignments must be judged principally by insolvency law and ordinary private law principles, subject to any separate statutory limitation in the legal aid rules.

Background and parties:

• Two related appeals reached the House of Lords. In Norglen Ltd v Reeds Rains Prudential Ltd a small single‑purpose company (Norglen) alleged fraud in the sale of land and, after compulsory liquidation, its liquidator assigned the cause of action to one of the shareholders and his wife; they obtained legal aid and sought substitution as plaintiffs. In Circuit Systems Ltd v Zuken‑Redac the liquidator of a failed trading company assigned its causes of action against its supplier to the former managing director (Mr Basten), who obtained legal aid and was joined as plaintiff.

Procedural history: Both matters were litigated in the lower courts. The Norglen assignment was held to be a "sham" by Morritt J and substitution refused; the Court of Appeal allowed substitution. In Circuit Systems a first instance judge relied on Advanced Technology Structures Ltd v Cray Valley Products Ltd [1993] B.C.L.C. 723 to hold the assignment invalid, but the Court of Appeal allowed the assignment. Both appeals were brought to the House of Lords.

Nature of relief sought and issues:

• (i) Declarations/contests as to the validity of assignments by companies in liquidation of their causes of action; (ii) whether such assignments are void or unenforceable because they enable the company to benefit indirectly from legal aid; (iii) whether assignments improperly defeat or deprive defendants of the protection of security for costs under section 726 of the Companies Act 1985; (iv) whether substitution under R.S.C. Ord. 15 r.7(2) could be refused or be made subject to conditions (for example security for costs).

Court’s reasoning: The House of Lords emphasised that trustees and liquidators have long been treated as having a privileged power to realise causes of action for the benefit of creditors, including by assignment for a share of proceeds. That principle supports the validity of assignments in insolvency. The court rejected the view that private law assignments must be struck down to protect the legal aid scheme: the availability of legal aid to an assignee is a matter for the Legal Aid Act 1988, the Lord Chancellor’s regulations and the discretion of the Legal Aid Board, not a reason in private law to treat assignments as invalid. The court considered Advanced Technology Structures to be incorrectly decided on that point. On security for costs, the court held that the law entitles defendants to protection against impecunious corporate plaintiffs but that does not forbid companies from assigning assets to individuals; defendants may seek security for costs but the existence of an assignment does not in itself invalidate the assignment. As to substitution, the court held the discretion under R.S.C. Ord.15 r.7(2) must be exercised judicially and cannot be used to override a valid assignment on the ground that the assignee may receive legal aid. The court also addressed whether conditions (such as imposing security for costs) could properly be attached to substitution and endorsed the established approach that the court may impose appropriate conditions but cannot use the discretion to ensure the defendant is placed in a better position than if the individual had been plaintiff from the outset.

Procedural posture: Appeals from the Court of Appeal (civil division) decisions; the House of Lords dismissed both appeals, upholding the validity of the assignments and the substitution in the Norglen case on the terms decided by the Court of Appeal.

Both appeals were dismissed. The House of Lords held that assignments by liquidators of causes of action to individuals are not automatically void as contrary to public policy merely because the assignee may obtain legal aid or because the assignment may affect the defendant's ability to obtain security for costs; issues about legal aid are for the statutory scheme and rules and do not render a private assignment invalid. The discretion under R.S.C. Ord. 15 r.7(2) should be exercised so as not to deny substitution where the assignee has a valid title to sue, and security‑for‑costs concerns do not justify treating such assignments as invalid in private law.

Original interlocutory and preliminary rulings at first instance (including District Judge Fish and Morritt J in Norglen; Judge Richard Havery Q.C. in Circuit Systems); Court of Appeal decisions: Norglen (Sir Thomas Bingham M.R., Hobhouse and Aldous L.JJ) allowed substitution; Circuit Systems Court of Appeal (Staughton, Simon Brown and Thorpe L.JJ) allowed assignment; both appeals to the House of Lords ([1997] UKHL 51). Advanced Technology Structures Ltd v Cray Valley Products Ltd [1993] B.C.L.C. 723 was a key Court of Appeal authority considered and rejected by the House of Lords on the central point.