Lloyd's Maritime and Commercial Law Quarterly
The proceeds of office-holder actions under the Insolvency Act: charged assets or free estate?
Adrian Walters * and John Armour **
This article poses, and seeks to answer, the question whether the proceeds of statutory insolvency-based causes of action are capable of being caught by a charge over the company’s future property. It is argued that the question, properly analysed, should be answered in the negative and that the only legal basis on which the charge-holder can claim such proceeds is a pre-insolvency proprietary entitlement. It follows that the benefit of these causes of action will generally enure to unsecured creditors.
I. INTRODUCTION
Do recoveries made by a company liquidator under insolvency-based causes of action fall into a charge over the company’s future property, or are they available for the sole benefit of the company’s unsecured creditors? Or, applying the conceptual apparatus of the House of Lords in Re Leyland Daf Ltd
, Buchler
v. Talbot
,1
do the proceeds of claims under insolvency legislation form part of the liquidator’s fund or that of the debenture-holder?
It is not hard to see the importance of this question, which has taxed commentators from a number of jurisdictions.2
Clearly the destination of recoveries will affect the liquidator’s incentives to commence and pursue actions and the creditors’ incentives to support actions through provision of “fighting funds” for the costs of litigation.3
If the various statutory causes of action are to do their work effectively, there need to be incentives in place to ensure that they are utilized. Doubts over whether secured or unsecured creditors benefit
* Geldards Professor of Corporate and Insolvency Law, Nottingham Trent University; Solicitor of the Supreme Court.
** University Senior Lecturer, Faculty of Law, and Research Associate, Centre for Business Research, University of Cambridge.
We are grateful to Roy Goode for comments on an earlier draft and to Richard Nolan for helpful discussions. The usual disclaimers apply.
1. [2004] UKHL 9; [2004] 2 AC 298.
2. See, eg, D Carlson, “Voidable Preferences and Proceeds: A Reconceptualization” (1997) 71 American Bankruptcy LJ 517; R Goode, Principles of Corporate Insolvency
, 2nd edn (1997), 437–440 (and works there cited); G Hamilton, “Are a Liquidator’s Recoveries Available to the Company’s Secured Creditors?” (2002) 20 CSLJ 25; R Parry, “The Destination of Proceeds of Insolvency Litigation” (2002) 23 Co Law 49; S Wheeler, “Swelling the Assets for Distribution in Corporate Insolvency” [1993] JBL 256.
3. It should be noted that creditor support for office-holder actions by way of direct funding or indemnities does not infringe the prohibition on maintenance and champerty because creditors are regarded as having a legitimate interest in the outcome of such actions. See further Guy
v. Churchill
(1889) LR 40 ChD 481; Re Exchange Travel (Holdings) Ltd, Katz
v. McNally
[1997] 2 BCLC 579.
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