THE ASSIGNMENT OF A RIGHT OF ACTION

PART 6

November 2010

THE ASSIGNMENT OF A RIGHT OF ACTION 

31.9.97  Assignment – general

In basic terms, the assignment of a right of action simply means the sale of a right of action.

As outlined in paragraph 31.9.22, assignment is one of the ‘positive’ ways that the official receiver can deal with a vesting right of action.  Normally, it is the most effective way for the official receiver, as liquidator or trustee, to deal with a right of action, but such action should not be undertaken ‘automatically’ or without legal advice.

 

31.9.98  Content of this Part

In very brief summary, this Part says that the official receiver, as liquidator or trustee, may assign a right of action but, before doing so, should consider, amongst other things, the rights of those affected (see paragraph 31.9.118), the price that should be paid for the action (see paragraph 31.9.101) and the form and legality of the assignment (see paragraph 31.9.99).

It is extremely unlikely that it would be appropriate for the official receiver to offer an assignment without first receiving legal advice (see paragraph 31.9.102).

 

31.9.99  Basic principles to be considered before the assignment of a right of action

There are some basic principles that the official receiver, as liquidator or trustee, should consider before assigning a cause of action: 

  • Assignment should not be made without testing the market – including offering settlement to the defendant (see paragraph 31.9.112) 
  • Assignment may be barred by terms in the original contract (see paragraph 31.9.119) 
  • Assignment should not open the defendant up to vexatious litigation (see paragraphs 31.9.116 and 31.9.118) 
  • Frivolous claims (ones unlikely to succeed) should not be assigned (see paragraph 31.9.118)  
  • Assignment should be absolute if the  liquidator/trustee is to avoid being made a party to any/a/the judgment (see paragraph 31.9.108) 
  • Liquidator/trustee is not required to assign right of action where the only offer received is derisory (see paragraph 31.9.101) 

It can be seen that some of these principles require a careful balancing of competing interests, for which legal advice will be required, to avoid the risk of action being brought against the official receiver – see paragraph 31.9.102.

 

31.9.100  Acting in the best interests of creditors – dealing with competing interests

The basic principle for the official receiver, as liquidator or trustee, when considering whether to assign a right of action, is that he/she does so in the best interests of the creditors, which means seeking good consideration for the assignment (see paragraph 31.9.101).  Most of the law that has developed supports this principle, but there are some controls to protect the interests of the bankrupt and the defendant (see paragraphs 31.9.117 and 31.9.118).

These competing considerations will require legal advice (see paragraph 31.9.102), particularly for complex claims [note 1] and, possibly, exceptionally, an application to court for directions (see paragraph 31.9.122).

 

31.9.101  Seeking good consideration for the assignment if claim has merit

The official receiver, as liquidator or trustee, should see that the claim has merit before assigning it and if it does have merit he/she should seek fair payment [note 2].  The official receiver should accept an offer for assignment if it is reasonable and does not prejudice him/her but not before seeking, or attempting again to seek, a settlement from the proposed defendant (see paragraph 31.9.112) [note 3] [note 4].

On the other hand, the official receiver is not obliged to assign an action where the only offer is derisory and seeking other offers would be an unjustifiable expense [note 5] [note 6].

 

31.9.102  Legal advice required before and during assignment

The decision to offer an assignment of a right of action should only be taken following legal advice, particularly in complex claims [note 7] (see Chapter 32, Part 2 regarding the employment of solicitors).

In addition to the principles outlined at paragraph 31.9.98, the official receiver, as trustee,  will need advice to distinguish carefully between the value of the property and personal elements of the claim (see paragraph 31.9.38) to properly account to the bankrupt if they are not the assignee.  In short, the official receiver should seek the following advice from his/her legal advisors: 

  • Whether there is a cause of action.
  • If there is, whether (and, if so, to what extent) it vests in the trustee (bankruptcy only).
  • What merit there is to the cause of action.
  • What value there is in the cause of action.
  • What action may be taken to recover that value.
  • Whether the proposed defendant might be prepared to settle and, ultimately,
  • What it is in the best interests of creditors to do.

 

31.9.103  Legal advice obtained by the company or bankrupt

It may be the case that the company or bankrupt has obtained its/his/her own legal advice regarding the merits of assigning the right of action (see paragraph 31.9.102).  It is for the official receiver, as liquidator or trustee,  to consider the source and currency of this advice before acting upon it.  The official receiver should ensure that the advice provided covers, at least, the first five issues outlined at paragraph 31.9.102.

 

31.9.104  Legal advice – cost and source

It is likely that the costs of the official receiver obtaining initial legal advice on a claim, and its possible assignment, will be in the order of £500 - £750 plus VAT. If the official receiver does not have access to a local and competent source of legal advice on this matter, he/she should contact Technical Section for further advice on how to proceed.

 

31.9.105  Costs of obtaining legal advice to be met by potential assignee

The costs of obtaining legal advice should be met by the potential assignee and remitted to the estate prior to instructing solicitors unless arrangements are made between any solicitors acting for the potential assignee and the official receiver’s solicitors.  Where there is a solicitor acting for the potential assignee, it is acceptable to accept a written undertaking to pay the costs (where, for example, time is pressing due to an imminent expiration of a limitation period – see paragraph 31.9.143).

In exceptional circumstances (where, for example, the assignee wishes to take on a ‘winnable’ right of action, is without funds, and there is the prospect of funds being paid into the estate from the ‘winnings’), the official receiver may, with the agreement of Technical Section, incur a debit balance on the estate to seek the necessary legal advice. The costs of the legal advice being recovered from the future ‘winnings’. This is most likely to be appropriate in ‘hybrid’ cases (see paragraph 31.9.43) where there is a large ‘personal’ element to the claim.  

The official receiver may use the letter attached at Annex F (with suitable modifications for a company case) for this purpose.

 

31.9.106  Liquidator or trustee permitted to assign a cause of action

A liquidator is permitted to sell a right of action, as is a trustee in bankruptcy.  It has been held that this does not constitute champerty or maintenance (champerty and maintenance describe the illegal trafficking and funding of rights of action) [note 8] [note 9] [note 10] [note 11].

To avoid any claim of champerty or maintenance, the assignment should be absolute and the assignor should retain no control over the right of action once assigned [note 12].

The exemption to the rules on champerty and maintenance is only available for rights of action that are property of the company or bankruptcy estate and not rights arising due to the insolvency (for example, the right to bring an action to recover a preference [note 13] [note 14]) [note 15] with the consequence that the official receiver, as liquidator, or trustee will be unable to assign such an action.

 

31.9.107 Liquidator or trustee permitted to assign a right of action for future consideration (amended May 2015) 

The official receiver, as liquidator or trustee, is permitted to assign a cause of action for future consideration [note 16].  The right of action may be assigned (back) to the bankrupt on this basis also [note 17] (though see paragraph 31.9.116).  

Assignment for a future share of the winnings should not be considered due to the reason given in paragraph 31.9.108 and, instead, any assignment for future consideration should be on the terms that the assignee pays the agreed consideration whether or not the action is successful. 

The official receiver may consider assigning a right of action for future consideration where the interested potential purchasers are without funds and an otherwise ‘winnable’ right of action would have to cease. 

The official receiver’s legal advisors (see paragraph 31.9.102) should be able to provide advice on the form of such an arrangement, including a ‘premium’ to be added to the amount sought from the assignee to reflect the additional risk being incurred by the official receiver.

 

31.9.108  All assignments of rights of action should be absolute (amended April 2012)

In order that the assignment of a right of action is considered proper, it should be an absolute assignment of every part of the right of action, and no control should be retained over the action.  The assignment should include the transfer of:  

  • The legal right to the action; 
  • All legal remedies to the action; and 
  • The power to bring the action to an end (for example, by settlement) without the interference of the assignor. 

An absolute assignment must be in writing, must be made under the hand of the assignor and must provide for written notice of the assignment to be given the person against whom the assignor had the original claim.

[note 21] [note 22] [note 23].

Where the official receiver as liquidator trustee assigns a right of action on terms less than absolute (where, for example the action is assigned for a share of the ‘winnings’ – see paragraph 31.9.107), he/she leaves the company/him/herself open to a claim for adverse costs from the defendants in the event that the claim is unsuccessful [note 23a]. The court has had, for a long period of time, a wide discretion as to whom should pay the costs of an unsuccessful action.

This should be taken into account when the terms of an assignment for future consideration are agreed and the official receiver should consider staying on the side of caution even if it means a lower return to creditors (see paragraph 31.9.107).

 

31.9.109  Equitable assignments

An equitable assignment can take place when one party makes an outward expression of its intention to assign or transfer an item [note 24] or where the requirements of the law are not met (see paragraph 31.9.108) [note 25].  So far as the official receiver is concerned, this is most likely to happen in correspondence discussing the possibility of assigning the right of action, or in correspondence responding to an offer to take an assignment of the action.

An equitable assignment should be avoided (see paragraph 31.9.110).

See paragraph 31.9.111 for advice on avoiding the possibility of an equitable assignment taking place.

 

31.9.110  Adverse consequences of an equitable assignment

The effect of an equitable assignment is that only the benefit of the right of action passes to the equitable assignee and he/she cannot commence proceedings on the claim without joining in the legal owner (the official receiver in this context), as a claimant or as a defendant if they do not consent to being a claimant.

In this, the risk for the official receiver is that he/she may find him/herself liable for an adverse costs order as the court will normally require that the official receiver (as legal ‘owner’ of the claim) is joined as a party to the proceedings before judgment is given [note 26]. 

Another risk is that if the document (the letter) on which the other sides seeks to rely as evidence of an equitable assignment offers the right of action for sale at consideration that is less that its true value, the official receiver, as liquidator or trustee, may be held to that offer, leading to a claim for restitution from creditors [note 27] [note 28] and a payment as compensation or in respect of a loss.

 

31.9.111  Letters discussing assignment to be marked ‘subject to contract’

To avoid any assertion that an equitable assignment has taken place (see paragraphs 31.9.109), the official receiver, as liquidator or trustee,  should mark all letters offering assignment or discussing the possibility of offering an assignment ‘subject to contract’. This is an important point not to overlook.

 

31.9.112  Official receiver to test the market prior to agreeing an assignment

The official receiver, as liquidator or trustee, should not accept an offer of assignment without first testing the market - that is assessing the value of the claim (see paragraph 31.9.114) and establishing which other parties may be interested in purchasing the right of action (including the defendant in the form of a settlement  - see Part 5) [note 29] [note 30]. 

The official receiver should not offer or accept an offer of assignment (including an ‘accidental’ offer or acceptance – see paragraph 31.9.109) when the settlement of the claim is still possible.

 

31.9.113  Official receiver to be fair to all parties

The official receiver, as liquidator or trustee, should be fair to all potential assignees and should not, for example, put conditions on an offer of assignment to one party which are not put on an offer to another party [note 31].

 

31.9.114  Assessing the value of a claim

The official receiver, as liquidator or trustee, should, as with any other asset, seek consideration for the assignment that is as close to (or more than) the true value of the claim as circumstances allow.  The value of the right may be ascertainable from the paperwork provided by the insolvent (see paragraph 31.9.17).  In addition the official receiver’s legal advisors may be requested to advise on the value of the claim.

It has been held that the consideration required to be paid for an assignment might not be less than £1,000 [note 32].

Where there is a counter-claim, the value of the claim would be the difference between the value of the claim and the value of the counter-claim [note 33].

The agreed consideration should be in addition to the provision for the official receiver’s legal costs (see paragraph 31.9.102). 

 

31.9.115  Assignment to the defendant

The official receiver, as trustee, may assign the action to the defendant (effectively bring the action to an end) [note 34], but the assignment should not be used as a tool to stifle the claim [note 35].

If the offer from the defendant is the best offer, then that may be accepted, but not before the value of any offer from other potential assignees (particularly, the bankrupt) have been considered.

 

31.9.116  Assignment (back) to the bankrupt

The bankrupt may request the assignment of a cause of action (back) to him/her where the official receiver, as trustee, decides not to (or is unable) to take it on (by settlement or litigation) [note 36].

The official receiver has the power to assign a right of action back to the bankrupt [note 37], but this should not be an ‘automatic’ action.  For one thing, the official receiver should consider if a better offer may be possible (see paragraph 31.9.112) and, for another, the official receiver should consider the rights of the defendant (even if the offer from the bankrupt is a good one) (see paragraph 31.9.118).

 

31.9.117  Challenging the official receiver’s decision not to assign action

A potential assignee (including the bankrupt) may challenge the official receiver’s decision, as liquidator or trustee, not to assign a right of action (back) to him/her [note 38] [note 39] [note 40].  The court will look to see that the official receiver’s decision not to assign was reasonable when deciding such an application [note 41].

The court will only overturn the official receiver’s decision not to assign if that decision was made in bad faith or was perverse [note 42].

By following the guidance in this Part (and, in complex cases, obtaining legal advice - see paragraph 31.9.102), the official receiver can reduce the likelihood of being subject to such an application.

 

31.9.118  Considering the rights of the defendant

The official receiver should not assign a frivolous claim (one that is unlikely to succeed) [note 43] [note 44] and should exercise his/her power to assign with circumspection where to do so would, for example, leave the defendant open to vexatious litigation (in short, this is litigation brought for the sake of bringing litigation or litigation with no realistically achievable aim) at the whim of a bankrupt, a person against whom a successful litigant may have no opportunity to recover their costs) [note 45] [note 46].

Before putting a bankrupt ‘back in the saddle’, the official receiver, as trustee, should bear in mind the consequences on the other parties in litigation of doing so.

 

31.9.119  Action may be non-assignable due to contractual prohibition

In actions which are based on a contract (an action for breach of contract), the right of action may be non-assignable where there is an express contractual prohibition on assignment [note 47] [note 48].

Such a provision would not affect the vesting of an action in the trustee in bankruptcy as the action passes without assignment [note 49], but is deemed to have been assigned [note 50] [note 51].

The official receiver, as liquidator or trustee, should peruse the contract on which the action is (to be) based to satisfy him/herself that there is no such clause.  The legal advisors appointed by the official receiver (see paragraph 31.9.102) can be asked to assess the situation if there is any doubt.

 

31.9.120  Assigning where there is a counter-claim

The fact that a claim being brought by the insolvent is subject to a counter-claim (see paragraph 31.9.48) will not of itself stop it from being assigned.  The counter claim will, though, affect the value of the claim and, therefore, the value of the consideration that the official receiver may receive for the assignment.

Where there is a counter-claim, the value of a claim is considered to be the difference between the value of the claim and the value of the counter-claim [note 52] [note 53] [note 54].

Where the counter-claim is higher than the value of the claim this will, in effect, be a bar to the assignment of the claim [note 55].

 

31.9.121  Assignment does not confer right to bring an action where none existed previously

The assignment of a cause of action to the bankrupt does not give/him her right to bring an action where that right did not exist prior to the assignment [note 56].

Examples of this may be where the bankrupt is seeking to overturn a judgment on which the bankruptcy order was made [note 57] or where the action was statute barred (see paragraph 31.9.143).

 

31.9.122  Seeking directions of court where there are matters of dispute or doubt

Where the official receiver, as liquidator or trustee, is unable to resolve matters of dispute or doubt connected with the assignment of a right of action (if, for example, there are competing offers, dispute as to the value of the claim or the risk of a legal challenge to the decision to/not to offer assignment), the official receiver may apply to the court for directions [note 58] [note 59] [note 60].  This should be considered to be an exceptional course of action.

 

31.9.123  Right of action should be assigned before expiration of limitation period

A right of action should be assigned before the relevant limitation period has expired (see paragraph 31.9.143) [note 61].

In reality, it is unlikely that any parties would be interested in acquiring a right of action which had become statute barred.

It follows that it is in the best interests of the creditors (see paragraph 31.9.21) that the official receiver, as liquidator or trustee, should seek to deal with the right of action, either by assignment or settlement (see Part 5), before the expiration of the limitation period.

 

31.9.124  Indemnifying the official receiver against adverse costs following assignment

It is possible, particularly in cases where the right of action was sold ‘on credit’ (see paragraph 31.9.107), that the defendant may seek to join the official receiver, as liquidator or trustee, in any judgment in the action and seek costs.  They may seek do this on the basis that the official receiver stands to gain from the prosecution of the claim, or that the right of action ought not to have been assigned in the first place.

The official receiver will protect him/herself against this eventuality in two ways: 

  • The assignee will provide an indemnity as part of the assignment (the official receiver’s legal advisors should be instructed to deal with this point).  It has been held that the seeking of such an indemnity by the official receiver is not an unreasonable one [note 62] [note 63]. 
  • By following the procedure that settlement should be offered prior to assignment (see paragraph 31.9.112), the official receiver will have the defence that this was the defendant’s opportunity to settle the claim, and avoid assignment and the bringing/continuation of legal proceedings. 

 

31.9.125  Potential problem where assignment follows issue of proceedings

Where a protective claim is issued by the liquidator or trustee (see paragraph 31.9.146) followed by an assignment of the right of action, the assignee will have to apply for court to amend the proceedings to take (transfer) them into his/her name [note 64] [note 65].  If the court refuses that request, the claim will be lost unless the official receiver were minded to take it forward in his/her name (which, he/she should not do).

Issuing the claim in the potential assignee’s name in advance of the assignment would be likely to be viewed as an abuse of the process of the court and lead to the claim being struck out [note 66].

 

31.9.126  Deed of assignment signed by deputy official receiver

It is acceptable for the deed of assignment to be signed by a deputy official receiver in place of the official receiver, as liquidator or trustee, if required.

Where the official receiver is liquidator or trustee, any assistant official receiver appointed as a deputy official receiver to that official receiver has the same powers as the official receiver [note 67] [note 68] (assistant official receiver is not a term recognised in the legislation - see also Chapter 1, paragraph 1.6). 

 

[Back to Part 5 – Settlement of a right of action] [On to Part 7 – Litigation of a right of action]