Introduction

A recent decision from the High Court in Lanigan & Anor v Hyslop & Ors has reaffirmed that a defendant to an insolvency claim has no standing to challenge the liquidator’s commercial decision to assign that claim, particularly when doing so would prejudice creditors. This judgment clarifies the refined standing test under section 168(5) of the Insolvency Act 1986 (the Act) where persons “aggrieved by an act or decision” of a compulsory liquidator may apply to court and emphasises the high threshold for showing perversity.

Case overview

Styles and Wood Group Ltd (the Company) entered creditors’ voluntary liquidation on 13 July 2020. Mr Oates (who replaced Mr Dempster) and Mr Hyslop from Ernst & Young (EY) were appointed as joint liquidators. As the liquidators, Mr Hyslop and Mr Oates identified several potential pre-insolvency claims, including those against former company directors, Mr Lanigan and Mr Lenehan (respectively, the Group Finance Director and Chief Executive Officer). Due to the company’s limited resources, the liquidators assigned these claims, entering an Assignment Agreement transferring the claims to Knaresborough Investments Ltd (KIL) on 29 June 2023. Crucially, KIL was controlled by the insolvent companies’ former owner and was uniquely positioned – already holding related claims, with access to documents, funding and knowledge of the group’s affairs.

In May 2024, Mr Lanigan and Mr Lenehan applied to set aside the assignment under section 168(5) of the Act on the basis that the liquidator’s decision to enter the assignment was “perverse” (i.e., the decision to enter into it was, as described by Nourse LJ in Re Edenote Limited, “so utterly unreasonable and absurd that no reasonable man” would have made it), not properly investigated and lacked commercial sense. The directors asserted that they should be treated as creditors based on hypothetical rights of contribution or indemnity against the Company arising from Commercial Court proceedings.

Judgment & key analysis

ICC Judge Greenwood held that:

• • the directors were not acting as creditors, but rather as defendants seeking to defeat claims against themselves, which meant they lacked standing under section168(5) of the Act because their interests were not aligned with the creditor class;
  • the directors were not genuine creditors, as their purported rights arose only if they first lost the Commercial Court proceedings and therefore were acting as defendants;
  • the directors’ application was driven by a collateral purpose; they were seeking to “knock out the majority of the claim” and disrupt the action against them to the detriment of other creditors; and
  • the liquidators had acted within their commercial discretion, and their decision was not “perverse”. It was a decision that was commercially reasonable, given time pressure, lack of funds, and KIL being the only viable assignee.

Accordingly, the directors’ application was dismissed. In doing so, the court applied the refined two‑stage test for standing under section168(5) of the Act from cases such as Re Edennote Ltd, Re Edengate Homes (Butley Hall) Ltd and Brake & Another v The Chedington Court Estate Ldt. ICC Judge Greenwood’s judgment provides important clarification of that test, namely that:

• • standing under section168(5) of the Act requires a creditor to bring the application in their capacity as a creditor, not for a collateral purpose transcending the creditor class interest; and
  • a creditor’s interests do not always have to align perfectly with the entire class, but they must be genuinely creditor orientated.

Conclusions

The case confirms that former directors cannot re-characterise themselves as creditors based on hypothetical future liabilities, the courts will not interfere with the commercial decisions of liquidators unless they as “so utterly unreasonable” that they satisfy the “formidable” perversity test, and challenges geared towards derailing assigned claims will face significant judicial scepticism.

The judgment therefore ought to be a salutary warning to defendants seeking to derail assigned claims and provide comforting reassurance to liquidators that the court will not second-guess their commercial decisions absent clear unreasonableness.