Chapter 31.9 – ANNEX M – FAQs
These FAQs are intended to be a useful introduction to the subject of rights of action, or to be used as a training tool, but should not be seen as a replacement for the more detailed advice given in the Chapter.
What is a right of action?
A right of action is a claim that, for example, another person has been negligent and caused bodily, financial or mental harm – for which reparation (usually, in the form of financial compensation) is sought. The claim may be brought through a formal process such as a court, but many are settled before reaching that stage.
What about causes of action and things in action?
These are just alternative names for rights of action. In fact, the Insolvency Act calls them ‘things in action’ in section 436.
Why does the Insolvency Act mention them?
It lists them as examples of property that would, for example, constitute part of a bankrupt’s estate.
I’ve heard lots of discussion regarding whether of not a right of action vests in the trustee or not. But, if the Act says that they are property then, surely, they do vest?
Unfortunately, it’s not quite as simple as that. Case law has developed since the 19th century to establish a position that some rights of action cannot be considered to be property. If they are not property they can not vest in the trustee.
What sorts of actions would not constitute property?
In short, it would be actions where the damages sought relate solely to pain felt by the bankrupt in respect of his/her mind, body or character. These are often referred to as ‘personal’ actions.
Can you give some examples of ‘personal’ actions?
Examples of personal examples include defamation, physical injury and battery. These types of claims would continue to ‘belong’ to the bankrupt.
But, surely, some claims arise as a result of the bankrupt suffering personal injury and damage to his property. For example, he/she might be in a car crash and suffer a broken arm and, also, damage to his/her vehicle. Who would ‘own’ the claim in these circumstances?
It used to be the case that the court would allow the claim to be split between ‘property’ and ‘personal’ elements and pursued separately. This position was arrived at in 1919 in a case brought by a soldier returning from the First World War who sued his bank for mismanagement of his financial affairs whilst he was away fighting, which mismanagement had caused him both financial losses and reputational damage.
More recently, in 1999, it was held that this was not the correct way to decide matters and, in 2001, the court established the principle of a ‘hybrid’ claim and how such a claim should be dealt with.
What is a hybrid claim?
A hybrid claim is a claim that has both ‘personal’ and ‘property’ elements. The court held that such a claim would vest in the trustee in bankruptcy with the ‘personal’ element being held on a constructive trust by the trustee for the bankrupt.
What is a constructive trust?
A constructive trust is a trust that is created unintentionally, by accident almost, where a party comes into possession of property belonging to another by operation of law.
What does the creation of the constructive trust mean in practical terms for the official receiver acting as trustee?
Nothing really. It simply means that monies awarded that relate to ‘personal’ damages would have to be paid to the bankrupt. In reality, the official receiver is unlikely to come into actual possession of the monies – rather they are likely to remain with the bankrupt’s (ex) solicitor.
Can’t we claim the monies as after-acquired property?
This was tried as long ago as 1878 and, in that case, it was held that the monies may only be claimed if they were to ‘change character’.
What constitutes a ‘change of character’?
The 1878 case ruled out the spending of the monies by the bankrupt on the general living needs of him/her and his/her dependants and ruled in the spending of the monies on a capital asset.
There must be grey areas?
There are. For example, the transferring of the monies from a current account to a savings account is likely to be considered a change of character (the 1878 case refers to the ‘investing’ of the monies), but there is no decided case law on the point. Technical Section can advise on the action to be taken in this regard.
What about ‘personal’ monies awarded before bankruptcy?
The official receiver, as trustee, should consider the monies to be simply ‘cash at bank’ and claim them accordingly. There would be no need for the monies to ‘change character’.
Most rights of action are ongoing, in some way or another, at the date of bankruptcy. What should be done about those?
In essence, there are five ways that a vesting right of action may be dealt with. These are to settle, assign, litigate, disclaim or do nothing.
Which is the best option?
‘Best’ would depend on the circumstances of the case. As a general ‘rule of thumb’ it is true to say that the best option is unlikely to be to litigate the right of action.
If we ‘own’ the claim, why not litigate?
There are two main reasons that it is not normally appropriate to litigate. The first is that the case may be lost and costs may be awarded against the official receiver, as trustee, (personally) and the second is that there are usually no funds in the estate with which to fund the litigation.
There is also the practical consideration that the involvement of the bankrupt may be required and will not necessarily be forthcoming.
So, if we don’t want to litigate, how should we deal with the right of action?
The creditors’ best interests are likely to be served by a settlement or assignment of a right of action.
What are settlement and assignment?
Settlement describes the process whereby the claimant and the defendant (the person against whom the claim is being brought) decide on compensation without (or separate from) any formal proceedings.
Assignment is simply the sale of the right of action.
So, which should I use to deal with the right of action?
That depends on the circumstances of the claim, but an assignment cannot be undertaken without the defendant first having the opportunity to settle the claim. The possibility of a settlement will very much depend on the attitude of the defendant. If this is not a realistic possibility, then the assignment of the claim should be explored.
Can the claim be assigned back to the bankrupt?
The claim may be assigned (back) to the bankrupt, or to the defendants (as this will, in effect, bring the claim to an end). In reality, these are the people who are most likely to be interested in the assignment, though other parties (such as a relative of the bankrupt) may seek assignment.
What does the official receiver have to consider before assigning?
There are a number of considerations for the official receiver before deciding that assignment is the correct way to proceed. He/she must, for example, establish that the claim has merit and decide on the value of the claim. He/she must also consider the effect of the assignment (for example, the chances of the assignment opening the defendant up to vexatious litigation). Legal advice should be sought on these matters.
Who will pay for this legal advice?
The person who wishes to take the assignment should, in advance of the seeking of the legal advice, remit the necessary funds to the official receiver.
What if he/she is without funds?
If the potential assignee cannot pay for the legal advice then the official receiver may incur a debit balance to obtain the advice.
But if the potential assignee is without funds to pay for the legal advice, how is he/she going to pay for the assignment?
The official receiver is allowed to negotiate a deal whereby he/she receives payment for the assignment from the ‘winnings’ of the legal action (a sale ‘on credit’, if you like). He/she should only follow this course where the action has a good chance of success, and following legal advice.
I’ve seen letters discussing assignment marked ‘subject to contract’. What is the significance of that?
Any letter sent offering the possibility of an assignment should be marked ‘subject to contact’, to avoid any assertion that the letter constitutes an equitable assignment.
What is equitable assignment?
Equitable assignment occurs where the actions of one party could lead the other party to believe that they have accrued beneficial ownership of the property. As regards a right of action, it would lead to the messy situation that the claim may only be brought by the official receiver (as owner) but to the benefit of the equitable assignee.
When would the official receiver, as trustee, disclaim a right of action?
The most likely circumstance under which a right of action may be considered to be ‘onerous’ by the official receiver (the condition under which property may be disclaimed) is where he she is under pressure to deal with a claim that appears to have no merit.
In reality it is usually more appropriate to seek an assignment or settlement.
But the bankrupt wants the official receiver to disclaim so that he/she can apply for a vesting order – won’t this be a good way to ‘get rid’ of the right of action that lawyers have told the official receiver has no merit.
Unfortunately, the bankrupt has been badly advised. The only persons who can apply to court for a vesting order in disclaimed property are those with an interest in the property. As the effect of a disclaimer is to bring the bankrupt’s interest to an end, he/she cannot apply for a vesting order.
Of course, the defendants could apply for a vesting order, which would have the effect of bringing the claim to an end.
What if the official receiver doesn’t litigate, settle, assign or disclaim. If he/she does nothing, in other words?
If the official receiver does nothing then the claim will expire for want of prosecution. Without going into too much detail, claims must be brought within a certain period after the date of the event which led to the claim. The periods are three years for personal injury, six years for contract claims and 12 years for claims under deed or statute.
Of course, the official receiver, as trustee, should attempt to deal with any claim that has merit, in the best of interests of creditors.
What about employment claims – do these vest in the official receiver as trustee?
Employment claims generally result from the employee being dismissed from his/her employment. To decide whether the claim vests of not you have to establish whether the claim is one for wrongful dismissal or one for unfair dismissal.
What is the difference between wrongful dismissal and unfair dismissal?
Wrongful dismissal is a claim that there has been a dismissal in breach of the contract of employment (where, for example, the correct disciplinary procedures were not followed). The remedy for a breach of contract is usually financial compensation.
Unfair dismissal is a claim that it was unfair to dismiss the employee – the measure of fairness being decided by the tribunal. The prime remedy for a claim for unfair dismissal is reinstatement – though, unsurprisingly perhaps, the employee usually refuses this remedy and, instead, a financial award is made.
A claim for wrongful dismissal is a vesting claim as it relates to a breach of contract, but what about unfair dismissal?
It has been held that, as the remedy in unfair dismissal in reinstatement, then the claim must remain personal to the bankrupt. The reason being that the official receiver, as trustee, cannot be reinstated to the job, so the remedy must be personal to the bankrupt.