LITIGATION OF A RIGHT OF ACTION
As outlined in paragraph 31.9.22, litigation is one of the ‘positive’ ways that the official receiver can deal with a vesting right of action.
Litigation, in this context, can be taken to mean the issuing and pursuit of court action by the official receiver, as liquidator or trustee, as the original owner (the insolvent) would have done. For the purposes of this Part of the chapter, litigation does not include the negotiation of a settlement (this is covered in Part 5).
This Part of the chapter does not deal with employment claims. Information and guidance relating to such claims can be found in Part 8 of this chapter.
Where a right of action vests in the trustee (see Part 3), the bankrupt has no standing to bring or continue the action without the official receiver (as trustee) becoming, at least, the co-claimant [note 1] [note 2] [note 3] [note 4].
A similar principle would apply where the right of action forms part of the assets of a company in liquidation.
The official receiver should put the bankrupt and/or his/her advisors on notice of this. The official receiver may use the letter attached at Annex D for this purpose.
See Part 4 for further information of the effect on a bankrupt of a right of action vesting.
It is extremely unlikely that it would be appropriate for the official receiver, as liquidator or trustee, to litigate a right of action. Certainly, such a course should not be considered without the prior approval of Technical Section (which approval, in any case, is required to obtain sanction if the claim is to proceed – see paragraph 31.9.133).
It is not possible to completely rule out the possibility of litigation, but this course of action is unlikely to be the correct, or most appropriate, course of action for an official receiver to take. Settlement (see Part 5) or assignment (see Part 6) should be considered first.
There are four main reasons that it is not normally appropriate for the official receiver, as liquidator or trustee, to litigate a right of action:
The official receiver should not allow the insolvent’s solicitors to pressure him/her into continuing (or bringing) the claim, unless he/she has received his/her own legal advice that that is the best way to proceed (see paragraph 31.9.132). Often, the solicitor will have been engaged on a conditional fee (‘no-win no-fee’) arrangement where he/she will only be paid following a successful outcome and will, therefore, have a vested interest in pursuing the matter through to a successful conclusion by way of litigation.
No litigation should be considered by the official receiver, as liquidator or trustee, without first seeking legal advice. Where there are no funds in the estate to pay for this advice, the official receiver could send a circular to the principal (preferential) creditors (see paragraph 31.9.137) asking them to contribute towards a fighting fund.
Alternatively, the official receiver could make application to Technical Section for permission to incur a debit balance to obtain that advice. The request to Technical Section should explain why litigation is considered to be the best course of action – supported by relevant facts and copy documents.
Where the official receiver, as liquidator or trustee, wishes to bring legal proceedings in the name of the company or relating to property comprised in the bankruptcy estate (this would include litigating a right of action), he/she must obtain the sanction of the Secretary of State [note 7] [note 8] [note 9] [note 10] [note 11].
For guidance on applying for sanction please see Chapter 29.
Where the official receiver makes application to Technical Section for sanction to bring legal proceedings, he/she should provide sufficient information to enable a decision to be made as to whether or not to grant sanction. The information should cover, at least, the following areas:
The failure to obtain sanction does not preclude the official receiver, as liquidator or trustee, from bringing the action [note 12] but he/she will be unable to have his/her expenses met from the estate.
The seeking of an adjournment of an ongoing claim, including writing to the court shortly after the making of the insolvency order, may be considered by the court to be a formal application which, particularly if opposed, could result in the court refusing to make the adjournment order and making an adverse costs order against the official receiver.
See paragraph 31.9.23 for alternatives to seeking an adjournment.
Seeking an adjournment would constitute the bringing of legal proceedings – for which the sanction of the Secretary of State is required (see paragraph 31.9.133) and, instead, an early settlement or assignment should be sought.
Where there are no funds with which to pursue an action, or to obtain legal advice regarding the merits of pursuing an action, the official receiver, as liquidator or trustee, may circulate the principal (preferential) creditors and ask them to provide the required funding (often known as a ‘fighting fund’). It is not necessary to circulate all creditors, just the main (preferential) creditors with the main financial interest in the outcome, including any creditors holding security over the relevant right of action.
It is rare for creditors to respond to such a circular in a positive manner, but such a circular does have the benefit of protecting the official receiver from criticism from creditors in the event that he/she subsequently decides not to litigate.
The official receiver may use the letter at Annex G or this purpose (with suitable modification in a company case).
The trustee or liquidator does not lose his/her right to pursue a claim/litigation in the manner he/she considers appropriate where creditors have provided a fighting fund (see paragraph 31.9.137). In other words, the official receiver, as liquidator or trustee, would retain control of the litigation and the creditors may not interfere [note 13].
Where the official receiver, as liquidator, is not prepared to litigate (whether he/she is without funds or because he/she has been legally advised not to), a creditor or contributory may make an application to the court for leave to carry on the action [note 14]. In these circumstances, the official receiver should attend the hearing and object to the application unless it is granted on the basis that no costs fall on the company or the official receiver (which is a condition likely to be imposed by the court).
As stated at paragraph 31.9.129, it is envisaged that official receivers would choose to litigate a right of action only rarely. The following paragraphs (31.9.141 to 31.9.154) outline those areas that the official receiver would need to consider before embarking on such a course of action.
In the rare event that the official receiver, as trustee, decides to continue litigation already begun by a bankrupt he/she would have to apply to court to be substituted as claimant [note 15].
In a liquidation, the action would continue in the name of the company.
It would not normally be appropriate for the official receiver, as liquidator or trustee, to pursue a speculative claim unless the creditors were in favour of that course of action (see paragraph 31.9.137) [note 16].
The law sets time limits in which a claim must be brought [note 17]. It would not be possible to fully explore all relevant provisions here and, generally speaking, the official receiver should obtain legal advice on a case-by-case basis. That said, the basic principles are as follows:
So far as a personal injury claim is concerned, the limitation period begins with the date of the event leading to the injury [note 21], unless there is a delayed appearance of the adverse condition (as in some cases of asbestosis, for example), in which case the right accrues when the condition becomes apparent [note 22].
Generally speaking, in professional negligence claims, where the claimant became aware that he/she had been negligently advised at a date later than the date that the advice was given, then there is an additional three years to bring a claim from the date that the claimant first had the knowledge of negligence required for bringing an action for damages in respect of the relevant damage [note 23].
The defendants may seek to challenge the claimant’s assertion as to the date that he/she first had knowledge [note 24].
A protective claim (sometimes known as a protective writ) involves issuing proceedings but refraining from serving the proceedings on the defendant for a maximum period of four months [note 25] – during which period a settlement (see Part 5) can be negotiated. No adverse costs order can be made until a the claim is served.
There are potential difficulties in bringing a protective claim. The rules for bringing claims, for example, provide that the claim form shall contain details of the nature of the claim and the remedy sought [note 26]. This information may not be known to the official receiver, as liquidator or trustee, at the relevant time. A protective claim may be challenged if it does not meet the requirements of the relevant procedural rules [note 27].
The sanction of the Secretary of State (see paragraph 31.9.133) will be required to issue a claim.
Where a protective claim is issued (see paragraph 31.9.146) followed by an assignment of the right of action (see Part 6), the assignee will have to apply for court to amend the proceedings [note 28] [note 29] to take them into his/her name. If the court refuses that request, the claim will be lost if the official receiver is not prepared to take it forward in their own name, for example (which he/she should not do).
The legislation places restrictions on amendments to an issued claim after the limitation period has expired [note 30]. One of these restrictions concerns the substitution of one party for another (as would be necessary if the official receiver, as trustee, were to continue an action already started by the bankrupt – see paragraph 31.9.128). The relevant rules [note 31] provide that, where it is not possible to properly continue the action without substituting or adding a party, then such substitution or addition may be allowed.
It is possible for a claim to be issued after the expiration of the relevant limitation period (see paragraph 31.9.143) where there was a technical defect in an earlier claim (for example, a failure of service) [note 32] but this possibility should not be taken for granted.
A standstill agreement is an agreement between the defendant and the claimant that the running of the limitation period can be suspended. This course of action may be followed where the limitation date is approaching and the official receiver, as liquidator or trustee, needs more time to consider the merits of the claim, or attempt to reach a settlement (see Part 5).
Such agreements should be avoided without first seeking legal advice, as a poorly worded agreement might leave the claimant unable to bring the claim when, for example, settlement negotiations break down [note 33].
Technical Section can give permission to incur a debit balance to seek advice on obtaining such an agreement, if necessary.
Any insurance policy in the name of the company to cover it against an adverse costs order would continue to be property of the company in liquidation and the company would continue to have the benefit of that policy.
An insurance policy taken out in the name of the bankrupt to cover him/her against an adverse costs order, for example, would vest in the official receiver as trustee of the bankrupt’s estate. The official receiver, as trustee, would then have the benefit of that policy.
This is subject to any clause in the policy terminating it in the event of formal insolvency or any assignment of the insurance to a third party – for example, the company or legal advisor assisting in the brining of the claim.
Notwithstanding this, it is unlikely to materially affect the basic principle that the official receiver, as liquidator or trustee, should avoid litigating a right of action (see paragraph 31.9.129).
It is not possible to litigate a matter that has already been litigated to a judgment. The defendant would have an automatic defence as what is known as cause of action estoppel.
An appeal is not the same a re-litigating (see paragraph 31.9.57).
A vexatious action is an action that is being brought merely for annoyance or oppression where no practical remedy is likely. A vexatious claim is likely to be stopped by the court, using a restraint order [note 34] [note 35].
It has been held that the prosecution of a frivolous claim (one with no chance of succeeding) would be vexatious [note 36].
It is likely that any solicitors engaged by the official receiver, as liquidator or trustee, to litigate a right of action will be able to provide advice on enforcing a judgment debt where payment is not made.
Information and guidance on enforcing a judgment debt can be found in the HM Courts & Tribunals Service leaflet EX321, titled “I have a judgment but the defendant hasn’t paid- what do I do?”.