Irwin & Anor v Lynch & Anor

The Court of Appeal allowed an appeal permitting the substitution of the company as claimant outside the limitation period under section 35 of the Limitation Act 1980 and Civil Procedure Rules rule 19.5(2) and (3)(b). The court held that substitution was "necessary" because the administrator (the appellant) lacked locus standi to pursue the company’s misfeasance/breach of trust claim under section 212 of the Insolvency Act 1986, so the original claim could not be maintained unless the correct party (the company) was substituted.

The court analysed the requirements of section 35(5)(b) and (6)(b) and concluded that rule 19.5 must be read no wider than permitted by section 35; on the facts the conditions were satisfied because the identical cause of action was already asserted on the company’s behalf but doomed to fail for lack of standing. The judge rejected the respondents' contention that substitution should be refused because the original claimant never had a proper cause of action to bring the claim.

Background and parties: Daniel Lynch Limited entered administration on 30 December 2004. The administrators were the company directors, and Mr Gerald Irwin was subsequently appointed administrator. The respondents were the two directors, Daniel Bernard Lynch and Jane Olwyn Lynch.

Nature of the application: The administrator issued proceedings seeking relief arising from three matters. The principal issue on this appeal concerned a building contract for works at Barrells Hall which the administrator alleged was a transaction at an undervalue and that the respondents were guilty of misfeasance and breach of trust in causing the company to enter into it. Other claims included alleged voidable preferences under section 239 of the Insolvency Act 1986 relating to payments of £850,000 and alleged preferential or undervalue intercompany dealings.

Procedural posture: The respondents applied to strike out aspects of the personal claims against them. HHJ Cooke permitted amendment to substitute the company as claimant but struck out the Barrells Hall limb on the ground that it was time-barred; he gave permission to appeal. The Court of Appeal heard an appeal from that order.

Issues before the court:

• whether substitution of the company as claimant outside the limitation period was permissible under section 35 of the Limitation Act 1980 read with CPR rule 19.5;
• whether substitution was "necessary" within the meaning of section 35(5)(b) and (6)(b) and CPR rule 19.5(3)(b) where the administrator lacked locus standi under section 212 of the Insolvency Act 1986; and
• whether allowing substitution would improperly permit a person without a proper basis to bring and then validate a claim after the limitation period.

Court’s reasoning and decision: The court held that an application to add or substitute a party involving a new party is governed by section 35 and the court rules made under it; thus CPR rule 19.5 must be construed no wider than section 35 permits. The addition or substitution of a party qualifies as "necessary" where the claim asserted in the original action cannot be maintained by the existing party unless the new party is joined. Although the administrator could never maintain the misfeasance/breach of trust claim in his own right under section 212, he had advanced the company’s cause of action and the company’s claim was identical; substitution of the company was therefore necessary for the determination of the original action. The court rejected the respondents’ submission that the distinction between a claim subject to a cast-iron defence and one brought by a party without locus was determinative. The appeal was allowed and the earlier refusal was reversed.

Relief sought: declarations and compensation for transaction at an undervalue, misfeasance and breach of trust; recovery of preferences under section 239 and claims under section 238.

Appeal allowed. The Court of Appeal held that substitution of the company as claimant was permissible under section 35 of the Limitation Act 1980 and CPR rule 19.5(3)(b) because the original action could not be maintained by the administrator for lack of locus standi under section 212 of the Insolvency Act 1986; substitution was therefore necessary to determine the original claim and the court should have allowed the amendment.

Appeal from HHJ Cooke, Chancery Division, Birmingham District Registry (order dated 29 January 2010 refusing to permit substitution in respect of the Barrells Hall claim). Appeal heard in the Court of Appeal, reported at [2010] EWCA Civ 1153.