DEALING WITH A RIGHT OF ACTION

PART 2

November 2010

DEALING WITH A RIGHT OF ACTION 

31.9.15  Scope of this Part

This Part of the Chapter gives an overview of the matters that the official receiver will have to take into account when dealing with a right of action.  Detailed discussion of the issues arising in this Part can be found in other Parts of the Chapter, by following the appropriate links.

 

31.9.16  Identifying a right of action

There is no easy way of identifying a right of action, where the director or bankrupt has not included details in the preliminary information questionnaire or statement of affairs.  Often it will be a case of putting two and two together from information provided during the interview – where, for example, the bankrupt provides information that he/she has been sacked from a job or involved in an accident.

The insolvent will often have engaged solicitors or other agents who should be written to using the standard letter [note 1] even if there is no indication of a right of action.

Sometimes, the existence of the right of action may not come to the attention of the official receiver until the other side (the defendant) writes asking for a view on the official receiver, as trustee or liquidator, carrying on the action.

 

31.9.17  Information required from the insolvent claimant

In order that the official receiver, as liquidator or trustee, can assess which is the best course of action to take in relation to the right of action, he/she should attempt to seek the following information from the claimant: 

  • The event which led to the claim.
  • The date of the event that led to the claim
  • For contract claims – the date of the contract and a copy of the contract
  • The identity of the defendant.
  • The monetary value of the claim, including a breakdown of the damages and losses being claimed.
  • A comment on the merits of the claim.
  • Copies of any legal/counsel’s opinion received in respect of the claim.
  • For employment claims – whether the action is for wrongful or unfair dismissal.
  • Any insurance policy backing the pursuit of the claim.
  • The grounds on which any solicitors are acting (for example, is there a conditional fee arrangement, or similar?).
  • Any limitation on the claim or advice received regarding the limitation date.
  • Copies of any Claim Forms.
  • Copies of any documents (for example, orders) issued by or to the court, tribunal or similar.
  • Copies of any responses received from the defendant.
  • Details of costs so far expended, and an estimate of costs required to bring the matter to a successful conclusion.
  • An estimate of the adverse costs in the event of the claim being ‘lost’.
  • Details of any counter-claim being brought by the (proposed) defendant.

The official receiver may use the letter attached at Annex A for this purpose.

 

31.9.18  Not all rights of action will vest in the official receiver – bankruptcy only

Not all rights of action will vest in the official receiver as trustee.

When dealing with a right of action, one of the first things to establish is whether the right of action is one that vests in the official receiver as trustee.

Guidance on this can be found in Part 3.

 

31.9.19  Official receiver should not pursue rights of action that are without merit

The official receiver, as liquidator or trustee, should not deal with a right of action (including selling that right of action – see paragraph 31.9.101), or otherwise dealing with it positively, which is without merit.

It is important to get a realistic view of the merits of the claim (see paragraph 31.9.20), including whether it is statute-barred (see paragraph 31.9.143).  The official receiver should not rely solely on the views of the insolvent, which are liable to be over-optimistic, and should, instead, seek to obtain independent information from third party sources (see paragraph 31.9.20).

 

31.9.20 Assessing the merits of a right of action (amended May 2015) 

In order to assist in the assessment of the merits of a right of action, the official receiver should consider any (existing) legal advice received by the company or bankrupt in respect of the action. 

Where no such legal advice exists, the official receiver may consider appointing their   own legal advisors to advise them r on the merits of the action.  If the advice is required in connection with an assignment (see paragraph 31.9.102), ideally the costs of the advice should be paid by the potential assignee (see paragraph 31.9.105); otherwise the official receiver may fund the costs from the estate.  

If the payment required is over £2,500, the guidance in paragraph 1.10e regarding the requirement to obtain the permission of Professional Standards Team should be followed before committing to any expenditure.

 

31.9.21  Basic principle for official receiver when dealing with a right of action

The official receiver has a duty, when acting as liquidator or trustee, to realise assets (of which a right of action is one type) to the maximum benefit of the creditors [note 2].  The maximum benefit of creditors might be served by an early realisation of an asset even if that means achieving a lower amount in realisation.  He/she should, however, consider the rights and interests of other parties – for example, the bankrupt or the defendant (the person against whom the bankrupt has a right of action).

See, particularly, paragraph 31.9.118 for information on circumstances where the official receiver may need to take account of the rights and interests of other parties.

 

31.9.22  Ways of dealing with a vesting right of action

There are, essentially, six ways that a right of action may be dealt with by the official receiver, as trustee or liquidator.  Four of these options might be termed ‘positive’: 

  • Litigation (take the case to court or tribunal) (see Part 7)
  • Assignment (sell the right of action) (see Part 6)
  • Settlement (do a deal with the defendant to bring the claim to an end) (see Part 5)
  • Complaints (see paragraph 31.9.11)

The remaining two options might be termed ‘negative’ (see Part 10): 

 

31.9.23 Adjournment and alternatives to an adjournment (amended May 2015) 

Often, a case will already be going through litigation when it comes to the attention of the official receiver, and it is not unusual for there to be an imminent (sometimes a very imminent) hearing.  The insolvent’s solicitors will frequently try to encourage the official receiver to seek an adjournment. 

The seeking of an adjournment of an ongoing claim - including written application – 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. 

Seeking an adjournment would constitute the bringing of legal proceedings – for which the permission of Professional Standards is required (see paragraph 1.10g) unless suitable indemnities are in place.   

In the event that the official receiver is unable to positively deal with the right of action (for example, by way of settlement – see Part 5 or assignment – see Part 6) prior to the next scheduled hearing, they  may, in advance of seeking an adjournment, request that the other side (the defendants) agree to the adjournment with each side bearing its own costs in the application. 

Alternatively, if the official receiver believes that there is no merit in seeking an adjournment, they may, instead, write to the court stating that they  do  not intend to be present or represented at the hearing as there are no funds in the estate.  The court will then make such order as it sees fit (which may well be an adjournment).

 

31.9.24  Certain actions not worth pursuing

Regardless of the rights or interests of third parties (see paragraph 31.9.21), certain rights of action are not worth pursuing as they will be of no benefit to the estate.  Examples are given in paragraphs 31.9.25 and 31.9.26).

 

31.9.25 Right of set-off (amended February 2011)

A prime example of a right of action that is unlikely to be worth pursuing is where the action is against a creditor of the company or bankrupt and the value of that creditor’s right of set-off [note 3] [note 4] (see paragraph 31.9.208) exceeds the value of the claim. 

Set-off only applies where there are mutual credit and debits as at the date of the company going into insolvency or the date of bankruptcy so, in cases where a claim is against a (former) creditor and that debt has been sold on by the creditor prior to the date of insolvency of the company or bankruptcy of the individual, set-off would not apply. 

The official receiver should note that where right of set-off applies, he/she may still pursue claim if the case was likely to pay a dividend (see Chapter 36A) and the removal or reduction of that creditor’s claim through set-off would materially increase the pro-rata payment to the other creditors.

 

31.9.26  Action against bookmaker for some gambling losses usually without merit

It has been held that an action against a bookmaker for gambling losses (where the losing gambler sues the bookmaker for causing his/her losses by failing to exclude him/her from the premises) is usually without merit [note 5].

It has been held that it would fly in the face of common sense and be a travesty of justice if a problem gambler were able to attribute liability for their financial ruin to a particular bookmaker who had failed to exclude him/her as he/she would just have taken his/her business elsewhere. 

 

31.9.27  Consulting secured creditor

It is possible that a creditor will have security over the assets of the insolvent and, in such a case, they should be consulted to establish whether and, if so, how the matter may be taken forward by them (following the advice in paragraph 31.1.45, which covers a situation substantially the same).

The existence of a secured creditor is more likely in a company case.

 

31.9.28  Official receiver to act with fairness

The official receiver, as an officer of the court, has a duty to act at all times with the utmost fairness [note 6].

He/she should not seek to withhold information from the defendant, or any other party with whom he/she is dealing in relation to the right of action.

 

31.9.29  Decision of previous trustee binding (amended March 2011)

Where a previously appointed liquidator or trustee takes a decision in relation to a right of action (for example, to assign –see Part 6 – or settle – see Part 5 – the action), that decision will be binding on any subsequently appointed liquidator or trustee [note 7].

So far as the official receiver is concerned, he/she is most likely to be the ‘outgoing’ liquidator or trustee in this context.  This being the case, the official receiver, as liquidator or trustee, should be careful to avoid taking any decision or stance that will adversely affect the position of any subsequently appointed liquidator or trustee.

 

31.9.30  Consultation with solicitors    

Where the official receiver requires preliminary advice on any matter relating to the conduct of a right of action, he/she may find that solicitors he/she normally engages locally will provide such assistance without cost. 

Of course, solicitors engaged by the bankrupt may also be willing to assist the official receiver without charge (see also paragraph 31.9.89 regarding the retention of the solicitors).

 

31.9.31  Effect on solicitors engaged by insolvent of winding-up or bankruptcy order

A contract entered into by a company would form part of the liquidation.

Similarly, any contract or arrangement that the bankrupt has entered into for representation in respect of his/her claim would form part of the bankruptcy estate – though not if the underlying right of action were not capable of vesting in the official receiver as trustee (see Part 3).  In either case, it is possible that the contract or arrangement might be ended by a clause in the document on which it is based.

Where the action vests, the official receiver should make it clear to the solicitors that he/she does not wish to continue the arrangement (except in the circumstances outlined in paragraph 31.9.89).  The official receiver may use the letter attached at Annex B for a bankruptcy (or liquidation, with suitable amendment) for this purpose.

Any debt in respect of fees for work carried out up to the date of the winding up order or bankruptcy order would be a debt in the proceedings (subject to a valid lien – see paragraph 9.118), though any liability for fees under a new post-bankruptcy arrangement entered into by the bankrupt (for example, where the bankrupt continued to employ the solicitor to advise him/her during or following an assignment or settlement) would, of course, be a post-bankruptcy debt for which the bankrupt would be liable.

 

31.9.31a Dealing with a claim for the recovery of bank charges (added February 2011)

A claim for the recovery of bank charges is restricted to those charges levied as ‘service’ charges against the account(s) of the bankrupt.  This is based on the premise that charges such as ‘default fees’ and/or ‘late payment fees’, which often resulted in a levy of in excess of £25, did not reflect the value of the ‘service’ received (that is, it did not cost the sum charged to administer the fee and/or issue notification of it by post).

The period for which charges can be recovered is limited to six years prior to the date of the claim (see paragraph 31.9.143).

To successfully pursue a claim, it is usually necessary for the claim to include copy statements highlighting the ‘excessive’ charges.  For this reason (as well as the ‘set-off’ point – see paragraph 31.9.208), there is generally no benefit in pursuing such a claim, unless the bankrupt is in possession of statements which already are, or may easily be, annotated in the required manner.

 

31.9.31b Dealing with a complaint for mis-selling of Payment Protection Insurance  (amended December 2012)

Payment Protection Insurance is an insurance policy typically sold when a personal loan or some other form of personal credit is granted. 

A complaint for mis-selling of PPI, or compensation paid as the consequence of a PPI mis-selling complain, would vest in the official receiver as trustee of the bankruptcy estate.  See Chapter 31.9A for guidance on dealing with PPI complaints.

 

 

[Back to Part 1 – General points regarding rights of actions] [On to Part 3 – Deciding whether a right of action vests]