LF2 Ltd v Supperstone & Anor (Administrators of Pennyfeathers Ltd)

An administrator should normally investigate and seek to realise a company’s viable or arguably viable cause of action. A proposed assignee bears no general burden of proving that the claim has prospects of success. The administrator or objecting party must establish that the claim is clearly hopeless or vexatious before refusing an assignment on that ground. Where value is uncertain, an auction or rival bidding process may be appropriate. Questions of frivolousness, vexatiousness and security for costs should generally be dealt with in the subsequent claim, rather than by lengthy proceedings under paragraph 74 of Schedule B1. A proposed defendant may be heard on such an application, but has no automatic right to participate.

LF2, a creditor of Pennyfeathers Ltd, applied under paragraph 74 of Schedule B1 to the Insolvency Act 1986 for an order requiring the company’s administrators to assign to it a potential claim against the company’s former solicitors, Fieldfisher LLP. The Deputy ICC Judge dismissed the application, finding that the claim was frivolous and vexatious and that LF2 had not shown unfair harm to its interests.

LF2 appealed. It challenged the finding concerning the proposed claim and the order for Fieldfisher’s costs, but did not initially challenge the separate finding that the administrators’ conduct caused no unfair harm. The central issues were whether the claim was clearly hopeless and whether the appeal could succeed without challenging the alternative finding.

1. Disposition. The appeal was dismissed. The court refused LF2 permission, sought very late in reply, to amend its appellant’s notice to challenge the separate finding that the administrators’ conduct had not unfairly harmed LF2 or the creditors. That finding independently required dismissal of the appeal. The challenge to Fieldfisher’s costs also failed.
2. Assignment of causes of action. A cause of action is property within paragraph 2 of Schedule 1 to the Insolvency Act 1986. A viable claim is an asset and an arguably viable claim is a potential asset. An administrator should normally investigate whether it should be preserved and pursued. If the administrator lacks funds, creditors may provide them.
3. An administrator should normally decline to assign only where it is clear that the claim is hopeless and that the proposed assignee intends to use it to harass the third party. Where the merits are uncertain and money is offered, the administrator should seek proper value, potentially through rival bids or an auction. Limitation pressures may require protective proceedings or rapid negotiations.
4. The court rejected the suggested burden on the proposed assignee to prove that the claim was not frivolous or vexatious. The approach in Re Papaloizou and Cummings v The Official Receiver was read too broadly. The more accurate approach, reflected in Citicorp Australia v Official Trustee in Bankruptcy, places the evidential burden on the party asserting that the proposed claim has no prospect of success.
5. It may be undesirable for a paragraph 74 application to become a lengthy merits hearing. After assignment, the proposed defendant can seek strike-out or reverse summary judgment, and can ordinarily seek security for costs. A proposed defendant may be heard, but has no right to participate; the court must control its participation and may exclude it where privileged material is involved, applying the guidance in Craig v Humberclyde Industrial Finance Group Ltd.
6. On the material before the Deputy Judge, it was not open to him to conclude that the claim against Fieldfisher was frivolous or vexatious. The evidence did not establish what advice had been given about the practical consequences of the funding arrangements and the suitability of the CFA. The proposed claim and its causation case were arguable, although the court made no final decision on their merits.
7. CPR 46.2 did not apply to the costs order. Under the Insolvency Rules 2016, Fieldfisher was a person affected by the insolvency application and the applicable rules did not require it to be made a party solely for costs.

• High Court (Chancery Division): Deputy ICC Judge Barnett dismissed LF2’s paragraph 74 application on 8 May 2018 and ordered it to pay the administrators’ and Fieldfisher’s costs.
• High Court (Chancery Division): The appeal was dismissed. The finding that the claim was not frivolous or vexatious did not overcome the unchallenged alternative finding that the administrators’ conduct caused no unfair harm. The order for Fieldfisher’s costs was not disturbed.