In re Edengate Homes (Butley Hall) Ltd (in liquidation), Lock v Stanley

The Court of Appeal dismissed Mrs Lock's challenge to the liquidator's assignment of the company's claim to a litigation funder under section 168(5) of the Insolvency Act 1986. The court affirmed a two-stage approach to standing: first whether the applicant is a "person aggrieved" within the statutory words and second whether the applicant has a legitimate interest aligned with the interests of creditors as a class. The appellant, although a creditor, lacked that legitimate interest because her objective (to protect herself and family from the claim) conflicted with creditors' interest in maximising realisations.

On the merits, the court applied the established perversity test (the liquidator's act must be "so utterly unreasonable and absurd that no reasonable man would so act") and held that the liquidator's decision to assign the claim to Manolete was not perverse. The court emphasised that there is no absolute duty to offer defendants an opportunity to buy a claim before assignment; whether a failure to do so is perverse depends on all the circumstances.

Background and parties. Edengate Homes (Butley Hall) Ltd went into liquidation. The liquidator, Mr Paul Stanley, concluded there were substantial claims by the company against Mrs Adele Lock, members of her family and connected entities (alleging transactions at an undervalue, preference and misfeasance). With no funds in the estate to pursue the litigation, the liquidator negotiated and entered into an assignment of those claims to Manolete Partners Plc on commercial terms.

Nature of the application. Mrs Lock (also an unsecured creditor and former director) applied under section 168(5) Insolvency Act 1986 to set aside the liquidator's assignment, alleging she and her family were not given an opportunity to buy the claims and that the assignment should be reversed.

Procedural history. The application was refused by His Honour Judge Halliwell in the Business and Property Courts, Manchester ([2021] EWHC 2970 (Ch)). Mrs Lock appealed to the Court of Appeal.

Issues framed by the court.

• Standing: whether Mrs Lock, as a creditor and defendant to the claims, had locus to apply under section 168(5).
• Merits (perversity): whether the liquidator's decision to assign the claims was so unreasonable that the court should interfere.

Court's reasoning. The court confirmed a two-stage approach: (1) statutory capacity (being a person aggrieved such as a creditor) and (2) a separate question of whether the applicant has a legitimate interest that is aligned with the interests of the class of creditors. Authorities (including Re Edennote and Deloitte & Touche AG v Johnson) were analysed to show that a creditor who seeks relief in a way contrary to the creditors' collective interest (for example to minimise recoveries by protecting themselves as defendants) will lack the requisite legitimate interest. Applying that test the court concluded Mrs Lock's objective was to avoid or minimise liability for herself and family, a position adverse to the creditors' interest in maximising recoveries, and so she lacked standing.

On the merits, the court applied the high perversity threshold (only interfere if the liquidator's act was "so utterly unreasonable and absurd that no reasonable man would so act"). The court concluded that, on the facts, the liquidator was not obliged as a matter of law to give defendants an opportunity to buy the claim and that the available evidence showed no realistic prospect that Mrs Lock or her family would have matched the commercial terms obtained from Manolete. The judge could properly find that the assignment was not perverse.

Wider context and disposal. The court observed that setting aside the assignment would likely delay trial and be contrary to creditors' interests; the discretion under section 168(5) would therefore be exercised with caution. The appeal was dismissed.

The appeal is dismissed. The Court of Appeal held that (1) standing under section 168(5) requires not only statutory entitlement (eg being a creditor) but also a legitimate interest aligned with the interests of creditors as a class; Mrs Lock, although a creditor, lacked that legitimate interest because her position as defendant sought to protect herself and family to the detriment of creditors. (2) On the merits the liquidator’s assignment to Manolete was not perverse under the high test required to set aside a liquidator’s decision, and there was no absolute duty to offer defendants an opportunity to buy the claim before assignment.

Appeal from the High Court of Justice, Business and Property Courts in Manchester (Insolvency and Companies List (ChD)), His Honour Judge Halliwell [2021] EWHC 2970 (Ch); appeal heard in the Court of Appeal, judgment [2022] EWCA Civ 626.