Edengate Homes (Butley Hall) Ltd, Re [2022] EWCA Civ 626
This case concerns the liquidation of Edengate Homes, and the liquidator’s assignment of a cause of action to a litigation funder. A former director of Edengate, who was going to be the defendant to the claim, sought to set aside the liquidator’s assignment of the claim. At first instance, it was held that the director did not have the necessary locus to bring the claim, and the decision to assign the claim was not perverse.
Manolete, the funder, agreed to purchase the claims for £20,000 and an equal division of recoveries, net of costs. There was then a negotiation with the liquidator and slightly different terms were agreed, the upfront payment changing to £30,000 and a different share of the recovery for different levels of damages.
Before engaging with Manolete, the liquidator had considered other options, but had determined that they were not economic. As the Court noted “Litigation funding companies do not purchase claims in order to put them in a drawer” and the defendants had a general awareness as to the proposed assignment of the claims. The reason that litigation funders are keen on funding office-holders is that it is difficult to impugn a decision of an office-holder – “the court will only interfere with the act of a liquidator if he has done something so utterly unreasonable and absurd that no reasonable man would have done it.” The Court stated that while it may often be sensible, or good practice, to give a defendant to a claim an opportunity to acquire (or settle) it before assigning it to a litigation funding company, failure to do so was not necessarily perverse. This is even the case if the Court does not accept at face value the reason that the liquidator gave for not approaching the defendant in the first place – as in face happened in this case.
The importance of this case is to underline the formidable nature of the test of perversity which is necessary to challenge a liquidator’s act. For this reason, insolvency litigation continues to represent a promising seam of work for litigation funders. What is perhaps an interesting aspect to this body of case law is if the liquidator decided to go with an offer that it knew to be lower than another offer available to it, or which offer was in itself perverse. The test is still a high one though, because rudimentary market testing is likely to be sufficient, and the liquidator will need to be shown to have proceeded in an inappropriate way. It is questionable whether a litigation funder would ever wish to go down this route of challenge – it is certainly unlikely to win any friends in the insolvency community and could be an example of shooting oneself in the foot.