Acquisition Of Claims By Third Party Litigation Funders

As third-party litigation funders, we are often asked by insolvency office holders whether we are interested in acquiring claims as opposed to funding them. The answer to that question depends on the type of claim because not all claims are capable of assignment.

Schedules 1, 4 and 6 of the Insolvency Act 1986 give administrators, liquidators and trustees in bankruptcy respectively the power to sell the property of the company or bankrupt. Section 436 of the IA86 contains a definition of the word "Property" which includes "things in action". As such it is quite clear that the office holder has the power to sell or assign any claim that vested in the company or the bankrupt prior to the commencement of the insolvency.

The IA86 also creates causes of action that vest in the office holder. These give the office holder the power to challenge a variety of prior transactions such as preferences, transactions at undervalue (including their Scottish equivalents), wrongful and fraudulent trading and extortionate credit transactions. Historically these office holder claims were not capable of assignment but changes to the legislation introduced by the Small Business Enterprise and Employment Act 2015 (which created a new Section 246ZD IA86) mean that liquidators and administrators can now assign office holder claims where the liquidation or administration commenced on or after 1st October 2015. However, the law has not changed in respect of trustees in bankruptcy who remain unable to assign office holder claims.

Section 212 IA86 provides a liquidator with a summary remedy against delinquent directors who are guilty of misfeasance or breach of duty. However, the section does not give rise to a new cause of action. Rather, it simply allows the liquidator to pursue a claim in place of the company. Claims under section 212 have therefore always been capable of assignment. However, for limitation purposes, time starts to run from the date of the conduct complained of, not the date of the liquidation so unless the claim can be brought within the parameters of Section 21(1)(b) Limitation Act 19801 they can become statute barred early on in the liquidation and as such not assignable.

The advantage for the funder of acquiring claims as opposed to funding them is that they take control of the litigation and as such take charge of their own destiny as opposed to assuming the passive role required of a funder in order to avoid infringing the rules against...