Insolvency and Assignment of Causes of Action - High Court Ruling

On the basis that a bird in the hand is worth two in the bush, it is common for liquidators of insolvent companies to assign (transfer the rights to) any claims that they might wish to pursue on behalf of creditors to specialists in the field. One such assignment came under analysis in a case concerning an insolvent motor engineering business.

After the recession-hit business went into voluntary liquidation, its liquidators claimed that one of its directors had unlawfully paid himself dividends totalling £23,511 at a time when it was insolvent. Taking the view that money in hand would be more useful to creditors than engaging in speculative litigation, the liquidators assigned their claim to a company that specialises in the field for £950.

The company sought to step into the liquidators' shoes to pursue the matter. The High Court, however, rejected arguments that the director had received unlawful dividends on the basis that no such dividends had in fact been declared. He was also not guilty of misfeasance, in that the payments were remuneration for substantial work that he had carried out for the business.

The real substance of the company's claim was that the payments represented an unlawful preference that had been granted to the director over other creditors. After analysing the deed of assignment, however, the Court found that no such cause of action had been assigned by the liquidators to the company. The company's claim was therefore dismissed in its entirety.