Frettens Banner Image

Blog

Services
People
News and Events
Other
Blogs

Zombie Litigation: How to survive the claims that simply will not die

View profile for Malcolm Niekirk
  • Posted
  • Author
Zombie Litigation: How to survive the claims that simply will not die

On Monday 11th October, Malcolm Niekirk held one of his popular Coffee Break Briefing Webinars.

In the webinar, Malcolm looked at Zombie Litigation (a fitting topic for October). He outlined how and why these cases break the stay and discussed the role of third parties, Atlantic Computers and CPR 31.

This is the summary from the presentation. If you’d like to watch it back, you can do so below. If not, read on for a summary.

To keep up to date with Insolvency Law and to be informed of upcoming Coffee Break Briefings, please sign up to our insolvency newsletter here.

Quick Links

Zombie Litigation - What is it?

Zombie litigation? The company did something before you became liquidator. It’s nothing to do with you. Yet the writs keep coming!

These are claims which are:

  • Being brought against the bust company
  • Arise from something that happened pre-appointment
  • Not stayed in the insolvency proceedings

Zombie Litigation – What is it not?

  • Claims that are brought against you as office holder
    • Those claims, if legitimate, are outside the statutory stay
  • Claims arising from something that’s post appointment
    • Those, if legitimate (and against the bust company), may rank as expenses
  • Claims that are stayed in the insolvency proceedings
    • Legitimate claims against the office holder are not stayed
    • Legitimate claims for expenses are not stayed
      • (They may be claims within the insolvency proceedings)

What insolvency stays apply to litigation?

Why do formal procedures stay litigation?

  1. The pari-pasu rule couldn’t work unless you stayed proceedings. If litigation were to continue it would give creditors who continue with claims an unfair advantage.
  2. It allows the liquidator to get on with their job and not have to ‘fight fires’ and deal with court process.
  3. It maximises realisations for all creditors as it avoids:
    1. Your time being wasted as liquidator
    2. The need for you to deal with cases until there is a likelihood of paying a dividend on them
    3. Creditors having to appoint lawyers.

The way that the insolvency stay works differs from one procedure to another. But, step back far enough and they all look similar.

Bankruptcy:

  • Proceedings can be stayed between petition and order (s285)
  • Enforcement is ineffective (‘void’) after the petition (s285)
  • The bankruptcy order stays all proceedings (s285)
    • The court can lift that stay (s285), conditionally, or unconditionally
    • Special rules for:
      • Incomplete execution (s346)
      • Bailiffs collecting rent arrears

Compulsory Liquidation

  • Proceedings can be stayed between petition and order (s126)
  • Enforcement is ineffective (‘void’) after the petition (s128)
  • The winding up order stays all proceedings (s130)
    • The court can lift that stay (s130(3)), conditionally, or unconditionally

Voluntary Liquidation

  • No automatic stay
    • Use s112 to activate the court’s powers, as if it were a compulsory liquidation
    • Then ask the court to impose a stay (as if s130 applied)
    • The court can lift that stay (s130(3)), conditionally, or unconditionally
  • This more likely to work for a CVL than an MVL

Administration

  • Automatic stay (para 43(6) of schedule B1)
    • Applies from the start of the appointment process
  • Can be lifted:
    • If the administrator allows
    • By a court order
    • Atlantic Computer principles apply

What types of claims are likely to break the stay?

What reasons might solicitors have for bringing claims against an insolvent company?

  • They don’t understand insolvency (unlikely to be the case, most litigation solicitors are cautious of insolvencies)
  • They want possession of an asset for their client
  • They want to enforce rights against a third party
    • Such as an insurance company
    • Under the Third Parties (Rights Against Insurers) Act 2010

Third Parties (Rights Against Insurers) Act 2010

The previous Act (1930) was replaced in 2016.

The basic principle behind the legislation is that some claims – those covered by insurance – are, in effect, taken out of the insolvency.

How does the Third Parties (Rights Against Insurers) Act 2010 work?

Think of a liquidation as being a way of providing insulation between the creditors and the assets.  The liquidator gathers in the assets and protects and preserves them.

The creditors are not entitled to make claims against the assets directly to seize them.  Instead, the liquidator mediates the claims of creditors and distributes the assets to the creditors in accordance with their entitlement.

What would happen if the legislation was not in place?

Some of the claims that the creditors are bringing might be contested claims, where liability is disputed and perhaps where quantum is disputed

These are the sort of claims that are sometimes covered by insurance.

Without this legislation, those insurance policies, and the compensation payable under them, would themselves be assets in the liquidation.

They would have to be paid to the liquidation.  The creditors whose claims are closely linked to the insurance policies would be unsecured creditors and would have to prove for a dividend on their claim.  In many cases they would receive as much compensation as they expected. 

The other creditors, who have no connection with the issues for which the insurance is being paid out, would receive a windfall which would fund a larger dividend for them.

What is the purpose of the Third Parties (Rights Against Insurers) Act 2010?

The Act takes the benefit of those insurance policies outside the liquidation.  Instead, the insurance companies pay the affected creditors directly. This removes the benefit of the insurance from the liquidation completely.

When is the act triggered?

The Act is triggered by any common insolvency procedure

  • Bankruptcy,
  • liquidation,
  • administration,
  • Vas, and others

What are the differences between the 1930 and 2010 Acts?

Under the 1930 Act, the third party had to establish liability against the insured bust company  before claiming against its insurer.

Under the 2010 Act, the third party (creditor) can choose to bring a claim only against the bust company’s insurer.  If they do that, they need not name the bust company at all in the proceedings.

Despite that, some creditors still want to bring the claim against the bust company.  That may be through an abundance of caution, or because there is a tactical benefit from doing so.  It may simply be that they do not know who the insurer is.

The legislation tries not to affect the rights of the third party, or the insurer.

Does the creditor have right to information?

Under the legislation, the creditor does have a limited right to information.

They have the right to ask for that information from:

  • The company in liquidation
  • Anybody else who may have the information, typically this may include:
    • Insurers
    • Brokers
    • Directors of the bust company
    • Liquidators

This is in addition to the normal rights to receive information that they have.

What information is the creditor entitled to?

This is the information that the creditor is entitled to, and you must give to them, within 28 days:

  • Is there an insurance policy to cover their claim?
  • If so:
    • Who is the insurer?
    • What are the terms?
    • Has the insurer denied liability?
    • Has the bust company sued the insurer?
    • If there’s a cap on the cover, how much is left?

If you can’t answer those questions, you need to explain why you don’t have the information.

What if I don’t answer these questions within 28 days?

The creditor might seek a court order from you to compel compliance.

If this is the case, they will probably get a cost order against you.

If you can’t answer the questions, I would suggest you refer the letter onto someone better equipped to answer than you. Such as the company’s broker, insurer and directors.

Inform your creditor that you have passed on the request, if this is the case.

Atlantic Computers

What does Atlantic Computers deal with?

When dealing such a request to lift a stay to be lifted, Atlantic Computers is helpful.

You will know Atlantic Computers mostly as a case about when leasing companies are entitled to repossess their goods.

In that context, Atlantic Computers deals more generally with administration moratoriums.

Atlantic Computers sets out some general principles about how an administrator should behave in balancing competing interests in such circumstances.

What are the Atlantic Computers principles?

These are some of the Atlantic Computer principles:

The creditor has to make their case, presenting you with reasons why you should allow them to sue the company in administration.

Grant permission if it won’t cause damage to the administration

Look at:

  • The purpose of administration
  • How successful it’s likely to be
  • What stage it is at

As liquidator, you’ll be looking at balancing the interests, if permission is granted, to:

  • See which party will be more damaged
  • Mitigate the damage (for example, by paying rent for continuing use of another’s property)?

Conditions may apply, if permission is granted or refused.

Further principles

  • Administrators are officers of the court, so act judicially
  • Be decisive – act quickly
  • Perhaps make an interim decision?
  • Act responsibly – don’t negotiate for partisan advantage
  • Give reasons for your decision

Civil Procedure Rules (CPR) 31

  • CPR = the court rules (High court, County Court and appeal courts)
  • CPR 31 is about disclosure
  • Disclosure is the duty on litigants to make information available to each other
  • The person bringing the claim against the bust company (the applicant) is entitled to information:
    • From you (the liquidator)
    • From the company (the respondent)

(The information they are entitled to from you is detailed earlier in this article. Click here to read it again.)

The information that they are entitled to from the company in liquidation is typically (but depending on what is relevant to their claim):

  • Client or customer files
  • Contracts and invoices
  • Board minutes
  • Procedural manuals and instructions
  • Emails and correspondence
  • Web content
  • Etc.

Who pays for the exercise of CPR 31?

For this I find it useful to think about the circumstances as a quadrant.

The vertical cut runs between:

  • Pre-action disclosure (the disclosure of information before the company has been sued)
  • And post-action disclosure (information which is disclosed after proceedings have been opened and served)

The horizontal cut divides:

  • Disclosure from the respondent who is being sued
  • Disclosure from a third party (you, the liquidator)

How to deal with a Zombie apocalypse

What to remember…

The Atlantic Computers principles

  • Be neutral
  • Be open
  • Be fair

What the other side are entitled to

The other side are entitled to specific, limited information

  • Give it to them quickly if you can
  • And, if you can’t (easily):
    • Explain why (remember Atlantic Computers); and
    • Pass them on to someone who can.

What they are not entitled to

  • But they are not entitled to more than that from you.
  • If they seek it from the company:
    • They may not be entitled to it from you (and giving it may harm other parties’ interests – remember Atlantic Computers).

If they seek it from the company

And you can give it to them:

  • Don’t harm other parties’ interests – remember Atlantic Computers.
    • Agree terms of disclosure.
  • It is probably ‘third party disclosure’ – they should pay for:
    • Your legal costs
    • Your time.
  • It may be ‘pre action disclosure’ – they should pay then too.
  • They may be seeking a Norwich Pharmacal order – they should pay then too.

Expect demands with menaces

– it’s litigators you’re dealing with.

  • But, you’ve got decent protection for your role.
  • The litigators demanding disclosure may, or may not, realise that.
  • Remember the Atlantic Computers principles.
    • Be fair
    • Be open
    • Be careful
    • Be neutral
    • Be reasonable

Insolvency Law: Coffee Break Briefings

If you would like to stay up to date with the latest developments in insolvency law, you can sign up to our mailing list. 

You will also receive invitations to all webinars, briefings and events. My next Coffee Break Briefing will be on pre-liquidation sales. Members of the email list will be sent more information soon.

Insolvency & Restructuring Solicitors near London, in Hampshire & Dorset, near Southampton and in Bournemouth, Poole, Christchurch and The New Forest

We hope you found the briefing useful. If you are an insolvency practitioner who would like to discuss the content of this article, please do not hesitate to get in touch.

Comments

    home