assignment of right of action

When Assigning the Right to Pursue Relief, Always Remember to Assign Title to, Or Ownership in, The Claim

• Posted on: Oct 4 2016

Whether a party has standing to bring a lawsuit is often considered through the constitutional lens of justiciability – that is, whether there is a “case or controversy” between the plaintiff and the defendant “within the meaning of Art. III.” Warth v. Seldin, 422 U.S. 490, 498 (1975). To have Article III standing, “the plaintiff [must have] ‘alleged such a personal stake in the outcome of the controversy’ as to warrant [its] invocation of federal-court jurisdiction and to justify exercise of the court’s remedial powers on [its] behalf.” Id. at 498–99 (quoting Baker v. Carr , 369 U.S. 186, 204 (1962)).

To show a personal stake in the litigation, the plaintiff must establish three things: First, he/she has sustained an “injury in fact” that is both “concrete and particularized” and “actual or imminent.” Lujan v. Defenders of Wildlife , 504 U.S. 555, 560 (1992) (internal quotation marks omitted). Second, the injury has to be caused in some way by the defendant’s action or omission. Id . Finally, a favorable resolution of the case is “likely” to redress the injury. Id . at 561.

When a person or entity receives an assignment of claims, the question becomes whether he/she can show a personal stake in the outcome of the litigation, i.e. , a case and controversy “of the sort traditionally amenable to, and resolved by, the judicial process.’” Sprint Commc’ns Co., L.P. v. APCC Servs., Inc., 554 U.S. 269, 285 (2008) (quoting Vt. Agency of Natural Res. v. United States ex rel. Stevens, 529 U.S. 765, 777–78 (2000)).

To assign a claim effectively, the claim’s owner “must manifest an intention to make the assignee the owner of the claim.” Advanced Magnetics, Inc. v. Bayfront Partners, Inc. , 106 F.3d 11, 17 (2d Cir. 1997) (internal quotation marks and brackets omitted). A would-be assignor need not use any particular language to validly assign its claim “so long as the language manifests [the assignor’s] intention to transfer at least title or ownership , i.e., to accomplish ‘a completed transfer of the entire interest of the assignor in the particular subject of assignment.’” Id. (emphasis added) (citations omitted). An assignor’s grant of, for example, “‘the power to commence and prosecute to final consummation or compromise any suits, actions or proceedings,’” id. at 18 (quoting agreements that were the subject of that appeal), may validly create a power of attorney, but that language would not validly assign a claim, because it does “not purport to transfer title or ownership” of one. Id.

On September 15, 2016, the New York Appellate Division, First Department, issued a decision addressing the foregoing principles holding that one of the plaintiffs lacked standing to assert claims because the assignment of the right to pursue remedies did not constitute the assignment of claims.  Cortlandt St. Recovery Corp. v. Hellas Telecom., S.à.r.l. , 2016 NY Slip Op. 06051.

BACKGROUND :

Cortlandt involved four related actions in which the plaintiffs – Cortlandt Street Recovery Corp. (“Cortlandt”), an assignee for collection, and Wilmington Trust Co. (“WTC”), an indenture trustee – sought payment of the principal and interest on notes issued in public offerings. Each action alleged that Hellas Telecommunications, S.a.r.l. and its affiliated entities, the issuer and guarantor of the notes, transferred the proceeds of the notes by means of fraudulent conveyances to two private equity firms, Apax Partners, LLP/TPG Capital, L.P. – the other defendants named in the actions.

The defendants moved to dismiss the actions on numerous grounds, including that Cortlandt, as the assignee for collection, lacked standing to pursue the actions. To cure the claimed standing defect, Cortlandt and WTC moved to amend the complaints to add SPQR Capital (Cayman) Ltd. (“SPQR”), the assignor of note interests to Cortlandt, as a plaintiff. The plaintiffs alleged that, inter alia , SPQR entered into an addendum to the assignment with Cortlandt pursuant to which Cortlandt received “all right, title, and interest” in the notes.

The Motion Court granted the motions to dismiss, holding that, among other things, Cortlandt lacked standing to maintain the actions and that, although the standing defect was not jurisdictional and could be cured, the plaintiffs failed to cure the defect in the proposed amended complaint. Cortlandt St. Recovery Corp. v. Hellas Telecom., S.à.r.l. , 47 Misc. 3d 544 (Sup. Ct., N.Y. Cnty. 2014).

The Motion Court’s Ruling

As an initial matter, the Motion Court cited to the reasoning of the court in Cortlandt Street Recovery Corp. v. Deutsche Bank AG, London Branch , No. 12 Civ. 9351 (JPO), 2013 WL 3762882, 2013 US Dist. LEXIS 100741 (S.D.N.Y. July 18, 2013) (the “SDNY Action”), a related action that was dismissed on standing grounds.  The complaint in the SDNY Action, like the complaints before the Motion Court, alleged that Cortlandt was the assignee of the notes with a “right to collect” the principal and interest due on the notes. As evidence of these rights, Cortlandt produced an assignment, similar to the ones in the New York Supreme Court actions, which provided that as the assignee with the right to collect, Cortlandt could collect the principal and interest due on the notes and pursue all remedies with respect thereto. In dismissing the SDNY Action, Judge Oetken found that the complaint did not allege, and the assignment did not provide, that “title to or ownership of the claims has been assigned to Cortlandt.” 2013 WL 3762882, at *2, 2013 US Dist. LEXIS 100741, at *7. The court also found that the grant of a power of attorney (that is, the power to sue on and collect on a claim) was “not the equivalent of an assignment of ownership” of a claim. 2013 WL 3762882 at *1, 2013 US Dist. LEXIS 100741 at *5. Consequently, because the assignment did not transfer title or ownership of the claim to Cortlandt, there was no case or controversy for the court to decide ( i.e. , Cortlandt could not prove that it had an interest in the outcome of the litigation).

The Motion Court “concur[red] with” Judge Oeken’s decision, holding that “the assignments to Cortlandt … were assignments of a right of collection, not of title to the claims, and are accordingly insufficient as a matter of law to confer standing upon Cortlandt.”  In so holding, the Motion Court observed that although New York does not have an analogue to Article III, it is nevertheless analogous in its requirement that a plaintiff have a stake in the outcome of the litigation:

New York does not have an analogue to article III. However, the New York standards for standing are analogous, as New York requires “[t]he existence of an injury in fact—an actual legal stake in the matter being adjudicated.”

Under long-standing New York law, an assignee is the “real party in interest” where the “title to the specific claim” is passed to the assignee, even if the assignee may ultimately be liable to another for the amounts collected.

Citations omitted.

Based upon the foregoing, the Motion Court found that Cortlandt lacked standing to pursue the actions.

Cortlandt appealed the dismissal. With regard to the Motion Court’s dismissal of Cortlandt on standing grounds, the First Department affirmed the Motion Court’s ruling, holding:

The [IAS] court correctly found that plaintiff Cortlandt Street Recovery Corp. lacks standing to bring the claims in Index Nos. 651693/10 and 653357/11 because, while the assignments to Cortlandt for the PIK notes granted it “full rights to collect amounts of principal and interest due on the Notes, and to pursue all remedies,” they did not transfer “title or ownership” of the claims.

The Takeaway

Cortlandt limits the ability of an assignee to pursue a lawsuit when the assignee has no direct interest in the outcome of the litigation. By requiring an assignee to have legal title to, or an ownership interest in, the claim, the Court made clear that only a valid assignment of a claim will suffice to fulfill the injury-in-fact requirement. Cortlandt also makes clear that a power of attorney permitting another to conduct litigation on behalf of others as their attorney-in-fact is not a valid assignment and does not confer a legal title to the claims it brings. Therefore, as the title of this article warns: when assigning the right to pursue relief, always remember to assign title to, or ownership in, the claim.

Tagged with: Business Law

Assignment of Rights Agreement: Everything You Need to Know

An assignment of rights agreement refers to a situation in which one party, known as the assignor, shifts contract rights to another party, known as assignee. 3 min read updated on February 01, 2023

An assignment of rights agreement refers to a situation in which one party, known as the assignor, shifts contract rights to another party. The party taking on the rights is known as the assignee.

An Assignment of Rights Agreement

The following is an example of an assignment of rights agreement. Dave decides to buy a bicycle from John for $100 and after agreeing on the price, Dave and John draw up a written agreement. Let's suppose that there will be a one week wait before the bicycle is ready for delivery to Dave and before anything is passed between them.

Meanwhile, John accepts that he will transfer his right to be paid $100 from Dave to Rob, in exchange for Rob paying John $90 immediately. Let's assume that John's motivation is an immediate need for cash. In this context, John is regarded as the assignor and Rob is the assignee.

John is the assignor as he is giving the assignment to Rob and Rob is the assignee because he is acquiring the assignment from John. To put it simply, the assignee is the party who gets something. In this case, Rob will receive $100.

Rules of Assignments

Assignments frequently occur in contracts. It's important to note the following points:

• The assignor (e.g. John) is accountable according to the contract unless the parties make an agreement that states otherwise.
• This means that if Dave does not receive the bicycle, he can sue John for it.
• Assignments are allowed in almost every type of agreement unless the contract includes an explicit ban on assignments or unless a specific exception is applicable.
• The assignor does not need to speak to the other contract party in order to create the assignment. For example, John would not need to ask Dave if John can transfer his right to be paid to Rob.

Exceptions Where a Contract Cannot be Assigned

• Some exceptions dictate that a contract cannot be assigned .
• Unenforceable assignments include the following: a personal services agreement, changing the contract duties, changing the material provisions of the agreement (e.g. time, amount, location, etc.).
• An example of a personal services agreement, which cannot be assigned, would be if you decided to employ a particular professional writer to write a book for you.
• That writer would not be allowed to take your payment and then give the work to another writer because you employed that particular writer to write the book, rather than someone else.
• Some kinds of assignments have to be in writing in order to be enforceable such as assignments of actual property (e.g. selling your house), loans, or debts.
• It's best to look at the statute of frauds for more information on the kinds of agreements that must be in writing.

Delegations and Novations

A delegation is very similar to an assignment in terms of what it involves. A delegation takes place when a party moves his or her obligations (or liabilities) under an agreement to a different party. Assignments, on the other hand, involve the transfer of rights.

If the parties in our previous example had created a novation , Rob would be entirely accountable to Dave and John would be clear of responsibility. A novation replaces the earliest party with a new party.

Contract Assignment

An Assignment Agreement can also be called a Contract Assignment. Another example of this would be if you're a contractor who needs assistance finishing a job. You could give those tasks and rights to a subcontractor, but only if the original agreement does not prohibit the assignment of these rights and responsibilities.

Creating an Assignment Agreement

In an Assignment Agreement, it is important to include details such as:

• The name of the person assigning the responsibilities (known as the assignor)
• The name of the of the party who is taking the rights and responsibilities (the assignee)
• The other party to the first agreement (known as the obligor)
• The name of the agreement and its expiration date
• Whether the first contract necessitates the obligor's approval before assigning rights
• The date of the obligor's consent
• When the contract will be put into effect
• Which state's laws will regulate the contract

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Content Approved by UpCounsel

• Assignment of Rights Example
• Assignment of Contract Rights
• Assignment of Rights and Obligations Under a Contract
• Partial Assignment of Contract
• Assignment Contract Law
• What Is the Definition of Assigns
• Assignment Law
• Assignment Of Contracts
• Legal Assignment
• Delegation vs Assignment

Assignment Of Rights Agreement

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What is an assignment of rights agreement.

​​An assignment of rights agreement is a written document in which one party, the assignor, assigns to another party all or part of their rights under an existing contract. The most common example of this would be when someone wants to sell their shares of stock in a company.

When you buy shares from someone else (the seller), they agree to transfer them over and give up any control they had on that share. This way, another party can take ownership without going through the trouble of trying to buy the whole company themselves.

Common Sections in Assignment Of Rights Agreements

Below is a list of common sections included in Assignment Of Rights Agreements. These sections are linked to the below sample agreement for you to explore.

Assignment Of Rights Agreement Sample

Reference : Security Exchange Commission - Edgar Database, EX-99.(H)(7) 5 dex99h7.htm FORM OF ASSIGNMENT AGREEMENT , Viewed December 20, 2021, View Source on SEC .

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Meet some of our Assignment Of Rights Agreement Lawyers

Travis counsels individuals and businesses on a broad range of complex topics. His practice centers on producing efficient, client-driven results. He concentrates his practice on real estate, construction, and general business matters with an emphasis on assisting clients both before and after problems occur by drafting contracts designed to best position clients to avoid disputes and litigating matters to a final resolution if problems emerge. Born and raised in Oklahoma, Travis is a triple graduate of the University of Oklahoma, having obtained his Bachelor of Arts, Master of Business Administration, and Juris Doctor degrees from OU. Prior to practicing law, Travis managed the finances and business operations of a successful construction supply company for several years. This insight into sophisticated business dealings, contractual issues, and strategic planning makes him uniquely qualified to handle a wide range of legal matters. Travis lives in Norman with his wife, Haley, dogs, Walter and Poppy, and cat, Ernest. Outside of the office, Travis enjoys playing golf and reading.

Justin Camper is a small business and trademark attorney, entrepreneur, public speaker, and writer. Justin has been practicing law close to 5 years and has done various areas of law from criminal work as a Prosecutor, to business and civil litigation at private law firms.

Domonick G.

I am a licensed attorney who specializes in business law, personal injury and contracts.

Williamson Health Law is an established and trusted law firm focused on representing hospitals, health plans, physician groups, physicians, physical therapy businesses, psychologists and other health care providers and businesses in all aspects of health law. including the Stark law, the Anti-Kickback Statute (“AKS”), the Health Insurance Portability and Accountability Act (“HIPAA”), regulatory compliance, Medicare and Blue Cross audits and overpayment appeals, payer departicipation and disaffiliation appeals, payer and provider disputes, reimbursement and billing, compliance plans, health care industry contracts and professional licensure. We represent clients throughout Michigan and the U.S. with certain federal matters such as federal regulatory analysis and Medicare audits.

Bolaji O. Okunnu is an entertainment lawyer and founder of the Okunnu Law Group, PLLC based in New York, New York. His practice includes work in the area of copyright, trademark, contract, intellectual property and business law. As an entertainment attorney, Bolaji represents a diverse roster of celebrities, record labels, music publishers, artists, bands, entrepreneurs, authors, songwriters, artist managers, record producers and entertainment executives concerning their intellectual property, business affairs and creative assets. He is an expert at solving complex and sophisticated legal and business issues relating to contracts, copyrights and trademarks. With his background in both the law and the music business, he brings a broad perspective to problem-solving and business plan strategies. He also has an extraordinary ability to speak to the hearts of creatives while helping them discover their voice and clarify their creative dreams and assignments.

I love to learn, and I love solving problems. That's why I became a lawyer, and learned to solve legal problems for individuals and businesses and help them fix things when there's a snag. Touch base if you think I could have something to offer for you or your company. Experienced, results-oriented legal professional whose background and education have established him as a valuable resource in areas of corporate law, franchising, litigation, compliance, mortgages and banking, and more. Practice Areas Include: Corporate law, Franchising, Litigation, real estate, corporate law, civil disputes, insurance representation, corporate counseling, dispute resolution, risk management, regulatory counsel, compliance. Experience involves sophisticated as well as routine corporate structuring and transactions, simple and complex litigation, and written and oral advocacy such as depositions, mediated settlement conferences, trials, appeals, written pleadings and discovery, and case strategy and analysis. Experience managing and litigating disputes between parties and negotiating settlements across the spectrum of civil litigation, including probative discovery, successful motions practice, legal research and writing, appellate practice, and legal consultation to individuals and business entities. Further experience includes digesting and monitoring updates to the legal landscape to advise clients or departments and successfully adapt policies and procedures to assure compliance with applicable laws and regulations as well as to manage risk effectively. For those needing a skilled commercial or corporate lawyer, or for individuals whose rights need persuasive advocacy, I am a valuable resource. Representative work also has involved success on the appellate level, as in Baker Construction Company, Inc. v. City of Burlington and Hawthorne, LLC, North Carolina COA09-13.

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I am the CEO and attorney at my law firm that I started in June 2020 (as other businesses were shuttering due to Covid-19). I am currently seeking contract work to supplement my case load as I recently finalized numerous family law cases within a short timeframe.

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• assignments basic law

Assignments: The Basic Law

The assignment of a right or obligation is a common contractual event under the law and the right to assign (or prohibition against assignments) is found in the majority of agreements, leases and business structural documents created in the United States.

As with many terms commonly used, people are familiar with the term but often are not aware or fully aware of what the terms entail. The concept of assignment of rights and obligations is one of those simple concepts with wide ranging ramifications in the contractual and business context and the law imposes severe restrictions on the validity and effect of assignment in many instances. Clear contractual provisions concerning assignments and rights should be in every document and structure created and this article will outline why such drafting is essential for the creation of appropriate and effective contracts and structures.

The reader should first read the article on Limited Liability Entities in the United States and Contracts since the information in those articles will be assumed in this article.

Basic Definitions and Concepts:

An assignment is the transfer of rights held by one party called the “assignor” to another party called the “assignee.” The legal nature of the assignment and the contractual terms of the agreement between the parties determines some additional rights and liabilities that accompany the assignment. The assignment of rights under a contract usually completely transfers the rights to the assignee to receive the benefits accruing under the contract. Ordinarily, the term assignment is limited to the transfer of rights that are intangible, like contractual rights and rights connected with property. Merchants Service Co. v. Small Claims Court , 35 Cal. 2d 109, 113-114 (Cal. 1950).

An assignment will generally be permitted under the law unless there is an express prohibition against assignment in the underlying contract or lease. Where assignments are permitted, the assignor need not consult the other party to the contract but may merely assign the rights at that time. However, an assignment cannot have any adverse effect on the duties of the other party to the contract, nor can it diminish the chance of the other party receiving complete performance. The assignor normally remains liable unless there is an agreement to the contrary by the other party to the contract.

The effect of a valid assignment is to remove privity between the assignor and the obligor and create privity between the obligor and the assignee. Privity is usually defined as a direct and immediate contractual relationship. See Merchants case above.

Further, for the assignment to be effective in most jurisdictions, it must occur in the present. One does not normally assign a future right; the assignment vests immediate rights and obligations.

No specific language is required to create an assignment so long as the assignor makes clear his/her intent to assign identified contractual rights to the assignee. Since expensive litigation can erupt from ambiguous or vague language, obtaining the correct verbiage is vital. An agreement must manifest the intent to transfer rights and can either be oral or in writing and the rights assigned must be certain.

Note that an assignment of an interest is the transfer of some identifiable property, claim, or right from the assignor to the assignee. The assignment operates to transfer to the assignee all of the rights, title, or interest of the assignor in the thing assigned. A transfer of all rights, title, and interests conveys everything that the assignor owned in the thing assigned and the assignee stands in the shoes of the assignor. Knott v. McDonald’s Corp ., 985 F. Supp. 1222 (N.D. Cal. 1997)

The parties must intend to effectuate an assignment at the time of the transfer, although no particular language or procedure is necessary. As long ago as the case of National Reserve Co. v. Metropolitan Trust Co ., 17 Cal. 2d 827 (Cal. 1941), the court held that in determining what rights or interests pass under an assignment, the intention of the parties as manifested in the instrument is controlling.

The intent of the parties to an assignment is a question of fact to be derived not only from the instrument executed by the parties but also from the surrounding circumstances. When there is no writing to evidence the intention to transfer some identifiable property, claim, or right, it is necessary to scrutinize the surrounding circumstances and parties’ acts to ascertain their intentions. Strosberg v. Brauvin Realty Servs., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998)

The general rule applicable to assignments of choses in action is that an assignment, unless there is a contract to the contrary, carries with it all securities held by the assignor as collateral to the claim and all rights incidental thereto and vests in the assignee the equitable title to such collateral securities and incidental rights. An unqualified assignment of a contract or chose in action, however, with no indication of the intent of the parties, vests in the assignee the assigned contract or chose and all rights and remedies incidental thereto.

More examples: In Strosberg v. Brauvin Realty Servs ., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998), the court held that the assignee of a party to a subordination agreement is entitled to the benefits and is subject to the burdens of the agreement. In Florida E. C. R. Co. v. Eno , 99 Fla. 887 (Fla. 1930), the court held that the mere assignment of all sums due in and of itself creates no different or other liability of the owner to the assignee than that which existed from the owner to the assignor.

And note that even though an assignment vests in the assignee all rights, remedies, and contingent benefits which are incidental to the thing assigned, those which are personal to the assignor and for his sole benefit are not assigned. Rasp v. Hidden Valley Lake, Inc ., 519 N.E.2d 153, 158 (Ind. Ct. App. 1988). Thus, if the underlying agreement provides that a service can only be provided to X, X cannot assign that right to Y.

Novation Compared to Assignment:

Although the difference between a novation and an assignment may appear narrow, it is an essential one. “Novation is a act whereby one party transfers all its obligations and benefits under a contract to a third party.” In a novation, a third party successfully substitutes the original party as a party to the contract. “When a contract is novated, the other contracting party must be left in the same position he was in prior to the novation being made.”

A sublease is the transfer when a tenant retains some right of reentry onto the leased premises. However, if the tenant transfers the entire leasehold estate, retaining no right of reentry or other reversionary interest, then the transfer is an assignment. The assignor is normally also removed from liability to the landlord only if the landlord consents or allowed that right in the lease. In a sublease, the original tenant is not released from the obligations of the original lease.

Equitable Assignments:

An equitable assignment is one in which one has a future interest and is not valid at law but valid in a court of equity. In National Bank of Republic v. United Sec. Life Ins. & Trust Co. , 17 App. D.C. 112 (D.C. Cir. 1900), the court held that to constitute an equitable assignment of a chose in action, the following has to occur generally: anything said written or done, in pursuance of an agreement and for valuable consideration, or in consideration of an antecedent debt, to place a chose in action or fund out of the control of the owner, and appropriate it to or in favor of another person, amounts to an equitable assignment. Thus, an agreement, between a debtor and a creditor, that the debt shall be paid out of a specific fund going to the debtor may operate as an equitable assignment.

In Egyptian Navigation Co. v. Baker Invs. Corp. , 2008 U.S. Dist. LEXIS 30804 (S.D.N.Y. Apr. 14, 2008), the court stated that an equitable assignment occurs under English law when an assignor, with an intent to transfer his/her right to a chose in action, informs the assignee about the right so transferred.

An executory agreement or a declaration of trust are also equitable assignments if unenforceable as assignments by a court of law but enforceable by a court of equity exercising sound discretion according to the circumstances of the case. Since California combines courts of equity and courts of law, the same court would hear arguments as to whether an equitable assignment had occurred. Quite often, such relief is granted to avoid fraud or unjust enrichment.

Note that obtaining an assignment through fraudulent means invalidates the assignment. Fraud destroys the validity of everything into which it enters. It vitiates the most solemn contracts, documents, and even judgments. Walker v. Rich , 79 Cal. App. 139 (Cal. App. 1926). If an assignment is made with the fraudulent intent to delay, hinder, and defraud creditors, then it is void as fraudulent in fact. See our article on Transfers to Defraud Creditors .

But note that the motives that prompted an assignor to make the transfer will be considered as immaterial and will constitute no defense to an action by the assignee, if an assignment is considered as valid in all other respects.

Enforceability of Assignments:

Whether a right under a contract is capable of being transferred is determined by the law of the place where the contract was entered into. The validity and effect of an assignment is determined by the law of the place of assignment. The validity of an assignment of a contractual right is governed by the law of the state with the most significant relationship to the assignment and the parties.

In some jurisdictions, the traditional conflict of laws rules governing assignments has been rejected and the law of the place having the most significant contacts with the assignment applies. In Downs v. American Mut. Liability Ins. Co ., 14 N.Y.2d 266 (N.Y. 1964), a wife and her husband separated and the wife obtained a judgment of separation from the husband in New York. The judgment required the husband to pay a certain yearly sum to the wife. The husband assigned 50 percent of his future salary, wages, and earnings to the wife. The agreement authorized the employer to make such payments to the wife.

After the husband moved from New York, the wife learned that he was employed by an employer in Massachusetts. She sent the proper notice and demanded payment under the agreement. The employer refused and the wife brought an action for enforcement. The court observed that Massachusetts did not prohibit assignment of the husband’s wages. Moreover, Massachusetts law was not controlling because New York had the most significant relationship with the assignment. Therefore, the court ruled in favor of the wife.

Therefore, the validity of an assignment is determined by looking to the law of the forum with the most significant relationship to the assignment itself. To determine the applicable law of assignments, the court must look to the law of the state which is most significantly related to the principal issue before it.

Assignment of Contractual Rights:

Generally, the law allows the assignment of a contractual right unless the substitution of rights would materially change the duty of the obligor, materially increase the burden or risk imposed on the obligor by the contract, materially impair the chance of obtaining return performance, or materially reduce the value of the performance to the obligor. Restat 2d of Contracts, § 317(2)(a). This presumes that the underlying agreement is silent on the right to assign.

If the contract specifically precludes assignment, the contractual right is not assignable. Whether a contract is assignable is a matter of contractual intent and one must look to the language used by the parties to discern that intent.

In the absence of an express provision to the contrary, the rights and duties under a bilateral executory contract that does not involve personal skill, trust, or confidence may be assigned without the consent of the other party. But note that an assignment is invalid if it would materially alter the other party’s duties and responsibilities. Once an assignment is effective, the assignee stands in the shoes of the assignor and assumes all of assignor’s rights. Hence, after a valid assignment, the assignor’s right to performance is extinguished, transferred to assignee, and the assignee possesses the same rights, benefits, and remedies assignor once possessed. Robert Lamb Hart Planners & Architects v. Evergreen, Ltd. , 787 F. Supp. 753 (S.D. Ohio 1992).

On the other hand, an assignee’s right against the obligor is subject to “all of the limitations of the assignor’s right, all defenses thereto, and all set-offs and counterclaims which would have been available against the assignor had there been no assignment, provided that these defenses and set-offs are based on facts existing at the time of the assignment.” See Robert Lamb , case, above.

The power of the contract to restrict assignment is broad. Usually, contractual provisions that restrict assignment of the contract without the consent of the obligor are valid and enforceable, even when there is statutory authorization for the assignment. The restriction of the power to assign is often ineffective unless the restriction is expressly and precisely stated. Anti-assignment clauses are effective only if they contain clear, unambiguous language of prohibition. Anti-assignment clauses protect only the obligor and do not affect the transaction between the assignee and assignor.

Usually, a prohibition against the assignment of a contract does not prevent an assignment of the right to receive payments due, unless circumstances indicate the contrary. Moreover, the contracting parties cannot, by a mere non-assignment provision, prevent the effectual alienation of the right to money which becomes due under the contract.

A contract provision prohibiting or restricting an assignment may be waived, or a party may so act as to be estopped from objecting to the assignment, such as by effectively ratifying the assignment. The power to void an assignment made in violation of an anti-assignment clause may be waived either before or after the assignment. See our article on Contracts.

Noncompete Clauses and Assignments:

Of critical import to most buyers of businesses is the ability to ensure that key employees of the business being purchased cannot start a competing company. Some states strictly limit such clauses, some do allow them. California does restrict noncompete clauses, only allowing them under certain circumstances. A common question in those states that do allow them is whether such rights can be assigned to a new party, such as the buyer of the buyer.

A covenant not to compete, also called a non-competitive clause, is a formal agreement prohibiting one party from performing similar work or business within a designated area for a specified amount of time. This type of clause is generally included in contracts between employer and employee and contracts between buyer and seller of a business.

Many workers sign a covenant not to compete as part of the paperwork required for employment. It may be a separate document similar to a non-disclosure agreement, or buried within a number of other clauses in a contract. A covenant not to compete is generally legal and enforceable, although there are some exceptions and restrictions.

Whenever a company recruits skilled employees, it invests a significant amount of time and training. For example, it often takes years before a research chemist or a design engineer develops a workable knowledge of a company’s product line, including trade secrets and highly sensitive information. Once an employee gains this knowledge and experience, however, all sorts of things can happen. The employee could work for the company until retirement, accept a better offer from a competing company or start up his or her own business.

A covenant not to compete may cover a number of potential issues between employers and former employees. Many companies spend years developing a local base of customers or clients. It is important that this customer base not fall into the hands of local competitors. When an employee signs a covenant not to compete, he or she usually agrees not to use insider knowledge of the company’s customer base to disadvantage the company. The covenant not to compete often defines a broad geographical area considered off-limits to former employees, possibly tens or hundreds of miles.

Another area of concern covered by a covenant not to compete is a potential ‘brain drain’. Some high-level former employees may seek to recruit others from the same company to create new competition. Retention of employees, especially those with unique skills or proprietary knowledge, is vital for most companies, so a covenant not to compete may spell out definite restrictions on the hiring or recruiting of employees.

A covenant not to compete may also define a specific amount of time before a former employee can seek employment in a similar field. Many companies offer a substantial severance package to make sure former employees are financially solvent until the terms of the covenant not to compete have been met.

Because the use of a covenant not to compete can be controversial, a handful of states, including California, have largely banned this type of contractual language. The legal enforcement of these agreements falls on individual states, and many have sided with the employee during arbitration or litigation. A covenant not to compete must be reasonable and specific, with defined time periods and coverage areas. If the agreement gives the company too much power over former employees or is ambiguous, state courts may declare it to be overbroad and therefore unenforceable. In such case, the employee would be free to pursue any employment opportunity, including working for a direct competitor or starting up a new company of his or her own.

It has been held that an employee’s covenant not to compete is assignable where one business is transferred to another, that a merger does not constitute an assignment of a covenant not to compete, and that a covenant not to compete is enforceable by a successor to the employer where the assignment does not create an added burden of employment or other disadvantage to the employee. However, in some states such as Hawaii, it has also been held that a covenant not to compete is not assignable and under various statutes for various reasons that such covenants are not enforceable against an employee by a successor to the employer. Hawaii v. Gannett Pac. Corp. , 99 F. Supp. 2d 1241 (D. Haw. 1999)

It is vital to obtain the relevant law of the applicable state before drafting or attempting to enforce assignment rights in this particular area.

Conclusion:

In the current business world of fast changing structures, agreements, employees and projects, the ability to assign rights and obligations is essential to allow flexibility and adjustment to new situations. Conversely, the ability to hold a contracting party into the deal may be essential for the future of a party. Thus, the law of assignments and the restriction on same is a critical aspect of every agreement and every structure. This basic provision is often glanced at by the contracting parties, or scribbled into the deal at the last minute but can easily become the most vital part of the transaction.

As an example, one client of ours came into the office outraged that his co venturer on a sizable exporting agreement, who had excellent connections in Brazil, had elected to pursue another venture instead and assigned the agreement to a party unknown to our client and without the business contacts our client considered vital. When we examined the handwritten agreement our client had drafted in a restaurant in Sao Paolo, we discovered there was no restriction on assignment whatsoever…our client had not even considered that right when drafting the agreement after a full day of work.

One choses who one does business with carefully…to ensure that one’s choice remains the party on the other side of the contract, one must master the ability to negotiate proper assignment provisions.

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Assignment is a legal term whereby an individual, the “assignor,” transfers rights, property, or other benefits to another known as the “ assignee .”   This concept is used in both contract and property law.  The term can refer to either the act of transfer or the rights /property/benefits being transferred.

Contract Law   

Under contract law, assignment of a contract is both: (1) an assignment of rights; and (2) a delegation of duties , in the absence of evidence otherwise.  For example, if A contracts with B to teach B guitar for $50, A can assign this contract to C.  That is, this assignment is both: (1) an assignment of A’s rights under the contract to the $50; and (2) a delegation of A’s duty to teach guitar to C.  In this example, A is both the “assignor” and the “delegee” who d elegates the duties to another (C), C is known as the “ obligor ” who must perform the obligations to the assignee , and B is the “ assignee ” who is owed duties and is liable to the “ obligor ”.

(1) Assignment of Rights/Duties Under Contract Law

There are a few notable rules regarding assignments under contract law.  First, if an individual has not yet secured the contract to perform duties to another, he/she cannot assign his/her future right to an assignee .  That is, if A has not yet contracted with B to teach B guitar, A cannot assign his/her rights to C.  Second, rights cannot be assigned when they materially change the obligor ’s duty and rights.  Third, the obligor can sue the assignee directly if the assignee does not pay him/her.  Following the previous example, this means that C ( obligor ) can sue B ( assignee ) if C teaches guitar to B, but B does not pay C $50 in return.

            (2) Delegation of Duties

If the promised performance requires a rare genius or skill, then the delegee cannot delegate it to the obligor.  It can only be delegated if the promised performance is more commonplace.  Further, an obligee can sue if the assignee does not perform.  However, the delegee is secondarily liable unless there has been an express release of the delegee.  That is, if B does want C to teach guitar but C refuses to, then B can sue C.  If C still refuses to perform, then B can compel A to fulfill the duties under secondary liability.

Lastly, a related concept is novation , which is when a new obligor substitutes and releases an old obligor.  If novation occurs, then the original obligor’s duties are wiped out. However, novation requires an original obligee’s consent .  

Property Law

Under property law, assignment typically arises in landlord-tenant situations.  For example, A might be renting from landlord B but wants to another party (C) to take over the property.   In this scenario, A might be able to choose between assigning and subleasing the property to C.  If assigning , A would be giving C the entire balance of the term, with no reversion to anyone whereas if subleasing , A would be giving C for a limited period of the remaining term.  Significantly, under assignment C would have privity of estate with the landlord while under a sublease, C would not. 

[Last updated in May of 2020 by the Wex Definitions Team ]

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The Law of Assignment (3rd Edition)

Marcus smith, nico leslie.

This book is the leading text on the law relating to intangible property or choses in action. Its clear and approachable structure covers all forms of intangible property (debts, rights under contract, securities, intellectual property, leases, rights/causes of action, and equitable rights), considering the nature of intangible property, how it comes into being, and how it is transferred or assigned. The first part of the book analyses the general principles regarding intangibles and their transfer, and the second examines the practical considerations relating to particular types of intangibles, securities, insurance contracts, leases, and intellectual property under the law. This new edition includes new chapters on powers of attorney and factoring, areas particularly important to legal practice. Other significant developments include the expansion of the chapter on leases to include leasing of chattels, and more material on securities, especially regarding the operation of settlement systems.

Bibliographic Information

Affiliations are at time of print publication..

Marcus Smith, author

Nico Leslie, author

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Assignability of Causes of Action – A Divergence between the Federal and State Jurisdictions

A brief history

As a general proposition, a purported assignment of a cause of action that savours of maintenance will be void. A bare right of litigation, for example a right to recover damages in tort, has traditionally been considered not to be assignable either at law or in equity. 2 The cases have sometimes drawn a distinction between a so-called “personal right to litigate” as against an “impersonal right” in the nature of a proprietary right. 3 However, the distinction between so-called “personal rights” and “impersonal rights” is often elusive.

Historically, the courts have been reluctant to condone assignments of causes of action generally. Parker J in Glegg v. Bromley 4 observed:

“Equity on the grounds of public policy did not give validity to the assignment of what is in the cases referred to as a bare right of action, and this was so whether the bare rights were legal or equitable. I have looked at a good many authorities on that point, and I am satisfied that the real reason why equity did not allow the assignment of a bare right of action, whether legal or equitable, was on the grounds that it savoured of or was likely to lead to maintenance.”

The trial was heard by Fullagar J in the High Court. His Honour held that if there had been a tortious taking of the wool by the Commonwealth, the growers’ rights of action in tort against the Commonwealth could not be assigned at law or in equity to Mr Poulton. However, his Honour’s conclusions in that regard were obiter , given that his Honour found that the relevant regulations were valid and thus there had been no tort committed.

An appeal to the Full Court constituted by Williams, Webb and Kitto JJ was dismissed. At page 602, the Full Court said:

“. . . If it were true that the Commonwealth were guilty of conversion of the [growers’] wool, it would be the [growers] alone who could elect to waive the tort and take the proceeds of sale. This would be so, both because there was not in fact any purported assignment to the plaintiff of the right of action for the tort, and because, according to well established principle, the right was incapable of assignment either at law or in equity . . . ”.

Modern developments

In 1981, the House of Lords in Trendtex Trading Corporation v. Credit Suisse 6 liberalised the hitherto relatively strict rules against assignment of causes of action. Roskill LJ delivered the leading judgment. His Honour re-stated that it is a fundamental principle of English law that one cannot assign a bare right to litigate. However, if the assignment is of a property right or interest, or if the assignee has a genuine commercial interest in taking the assignment and in enforcing it for his or her own benefit, there is no reason why the agreement should be struck down as an assignment of a bare cause of action, or as savouring of maintenance. 7

Trendtex was a decision relating to the assignment of a contractual cause of action. In Giles v. Thompson, 8 the House of Lords extended the application of the Trendtex principle to tortious causes of action. The House of Lords determined that the question was whether there had been “wanton and officious intermeddling with the disputes of others in which the meddler has no interest whatever and where the assistance he renders to one or the other party is without justification or excuse.” 9

Australian cases post- Trendtex

There is a division in the cases that have been decided in Australia since the House of Lords decision in Trendtex as to whether the Trendtex approach is to be preferred over the stricter approach set out in the dicta of the four judges of the High Court in Poulton . Decisions that support the adoption of the Trendtex principle in Australia are largely decisions in the State Supreme Courts. 10 In contrast, a number of single judges of the Federal Court have declined to apply the Trendtex approach and, instead, have expressed the view that the dicta in Poulton ought to be followed until the High Court determines otherwise, 11 although two recent Federal Court decisions suggest that Court may also be moving towards adoption of the Trendtex approach. 12

The Federal Court decisions have generally reflected the view that it is not open to courts of first instance to depart from the considered statements of the High Court in Poulton and that, in consequence, bare rights of action in tort should be regarded as incapable of assignment, whether or not the tort is of a personal kind. This view is reflected in the observations of the authors of Equity: Doctrines and Remedies (4 th Ed, 2002) at [6-480] that “. . . it is not easy for courts below the High Court legitimately to depart from the considered dicta of three [sic] High Court justices”. In fact, the dicta in Poulton are those of four High Court justices when one includes Fullagar J, who delivered the first instance decision.

The High Court considered in some detail the history of maintenance and champerty. At para [73], Gummow, Hayne and Crennan JJ said:

“Assignment of a chose in action ‘made with the improper purpose of stirring up litigation’ would raise questions of maintenance and champerty. But the mere assignment of the proceeds of litigation would not. If the assignment stipulated that the assignee should participate in the litigation, the assignment was lawful only ‘if he have some legal interest (independent of that acquired by the assignment itself) in the property in dispute; but that where his interest is generated only by the assignment itself, such a stipulation would be improper’”. 14

Commencing at para [79] of the joint judgment, the Court referred in detail to the decision in Trendtex , without apparent approval or disapproval of the approach of the House of Lords. Gleeson CJ concurred in the reasons of Gummow, Hayne and Crennan JJ on this public policy point. Their Honours concluded that the fact that Firmstones had sought out retailers with claims and had control of the litigation and that they hoped to profit from the litigation was not sufficient to warrant condemnation of the arrangements as being contrary to public policy or as leading to any abuse of process. 15 Callinan and Heydon JJ dissented on this point and found that the arrangements did constitute an abuse of process.

The Full Court of the Federal Court in Deloitte Touche Tohmatsu v. J P Morgan Portfolio Services Ltd, 16   found the issue, like that in Fostif , was whether a litigation funding agreement constituted an abuse of process. Once again, there was no assignment of any cause of action to the litigation funder. Tamberlin and Jacobson JJ (Rares J dissenting), held that it was not an abuse of process and that the litigation funder did have a genuine commercial interest in the enforcement of the claim. Both Fostif and Trendtex were cited in support. Rares J noted that it was common ground between the parties that the causes of action in question “ were not capable of assignment to [the litigation funder]”. 17

Of the exceptions to the more restrictive approach of the Federal Court to this question are two recent cases. The first was that of Finkelstein J in TS&B Retail Systems Pty Ltd v 3 Fold Resources Pty Ltd & Ors. 18   In obiter , his Honour said:

“In Australia there is a debate whether the Trendtex principle should be adopted. The cases for and against (the latter all being decisions of the Federal Court) are collected in Rickard Constructions Pty Ltd v. Rickard Hails Moretti Pty Ltd . . .  It may be that the debate is now over for the High Court in Campbells Cash and Carry Pty Ltd v. Fostif Pty Ltd . . .  seems to have approved Trendtex . . .  In any event, my own view is that the logic of Lord Roskill’s view [in Trendtex] is inescapable. That is especially so when, as here, the cause of action is connected with, or relates to, rights or interests owned, or that will fall into the ownership, of the assignee”.

The second recent case in the Federal Court is Tosich v Tasman Investment Management Ltd 19 where Gyles J, having noted the divergence in the cases as to the application of Trendtex , expressed his view that the approach of the High Court in Fostif supported the reasoning of Finkelstein J in TS&B Retail.  

However, Heerey J as recently as October 2007 expressed a contrary view that the decision of the High Court in Poulton retains its authority, and that Trendtex is not good law in Australia. 20 Although the decision of Heerey J was appealed, the appeal was determined without reference to this point. 21

Assignment of contractual causes of action

The issue that then arises is as to whether a right to sue for unliquidated damages for breach of contract is capable of assignment. Meagher, Gummow and Lehane give a somewhat abbreviated answer in the negative, 25 and refer to cases such as  Torkington v. Magee 26 and County Hotel Co v. London and Northwestern Railways. 27 Likewise, Cheshire & Fifoot’s Law of Contract suggests that a bare right to litigate for a past breach of contract is generally not assignable, 28 although there is a suggestion that there may be exceptions to this proposition as set out in Trendtex .

If the Trendtex principle is applied, then bare rights to litigate for unliquidated damages for breach of contract may be assignable provided either:

(a)    they are annexed to a right of property;  or

(b)    the assignee has a genuine and substantial, or genuine commercial, interest in the enforcement of the cause of action.

Poulton dealt with the assignability of tortious causes of action. There is no High Court authority directly on the issue as to whether contractual causes of action may be assigned. The position so far as contractual causes of action were concerned was summarised by McDougall J in Rickard Constructions v. Rickard Hails Moretti Pty Ltd, 29 in the following terms:

“In relation to contractual causes of action, I find the distinction between liquidated and unliquidated claims difficult to follow. I have already noted that a debt is assignable even if it is overdue. As is pointed out in Meagher, Gummow and Lehane at 281 [6-480], where the debt is overdue, ‘there has been a breach of the contract to pay and . . . in fact, all that is assigned is the right to sue to recover the debt. The case of an overdue debt merely points up the problem inherent in the distinctions drawn in this breach [sic] of the law: for what is a debt but a right to sue to recover a sum certain? In what other sense is a debt to be regarded as property?’ I do not think that a rule based on public policy which encourages illogical distinctions of this sort should be applied unless there is no alternative. I do not regard the obiter statements in Poulton, limited as they are to an assignment of bare causes of action in tort, as providing a compelling reason to accept such illogical distinctions and their consequences”.

Accordingly, his Honour found that, in principle, an assignment of a cause of action in contract to recover unliquidated damages should be accepted where the assignee has a sufficient interest to support the assignment.

Assignment of causes of action in tort

A right to sue in tort is never itself property: it is a bare right of action. 30 The position of the assignability of causes of action in tort (at least non-personal causes of action) remains somewhat in a state of flux. Notwithstanding the High Court’s liberalisation of the law concerning maintenance and champerty in Fostif , the High Court has not expressly overruled the earlier strong dicta of four judges of the Court in Poulton . However, there is a sense that the march of the law is generally heading away from the strict approach exemplified by Poulton and towards a more general acceptance of the approach adopted by the House of Lords in Trendtex . 

Nevertheless, the position of the majority of the Federal Court cases is exemplified generally by the approach Rares J in Boston Commercial Services Pty Ltd v. G E Capital Finance Australasia Pty Ltd 31 where it was said:

“New Boston argued that I should not follow the decision of the High Court in Poulton . . . which denied that a right of action in tort was assignable at all. It was suggested that this was the old view of the law. New Boston argued that I should follow what was said by Debelle J in South Australian Management Corp v. Sheahan . . . namely that the decision could be explained as relating to an assignment of a claim in tort where the assignee had no genuine commercial interest. However, in Garcia v. National Australia Bank Ltd (1998) 194 CLR 395 . . . at [17] Gaudron, McHugh, Gummow and Hayne JJ made it clear that the doctrine of precedent in Australia binds me to follow the decisions of the High Court unless and until that court decides that the time is right for a change in the law. I propose to do that. There is no basis to read down the considered judgment of Williams, Webb and Kitto JJ in Poulton . . . that a right of action in tort is incapable of assignment at law or in equity. I am of opinion that Debelle J was wrong not to have applied this binding authority”.

This approach seems to have been generally reflected in the Federal Court decisions (with the exception of the decisions of Finkelstein J in T S & B Retail Systems Pty Ltd 32 and Gyles J in Tosich v Tasman Investment Management Ltd 33 ). However, the almost universal approach of the State Supreme Courts has been to apply the Trendtex doctrine and to conclude that a cause of action in tort may be assigned (at least not a personal cause of action) provided that the assignee has the necessary interest in the litigation. 34

There remains some question as to whether causes of action for personal torts (such as damages for personal injury, defamation or false imprisonment) may ever be capable of being assigned. 35

Assignment of causes of action in equity

A bare right to sue in equity has traditionally been considered not able to be assigned. 36 However, one must question the appropriateness of maintaining a distinction between equitable causes of action and contractual or tortious claims. Indeed, it may be that the courts are moving towards a position that even equitable causes of action may be assigned provided that the assignee has the necessary interest in the outcome of the litigation.

Nevertheless, this matter has not been the subject of much judicial consideration in recent times. 

Assignability of statutory causes of action

Whether a statutory cause of action is assignable will turn on the terms of the statute. To take but one example, there has been frequent litigation concerning the assignability of causes of action under sections 82 or 87 of the Trade Practices Act 1974. It is well established that causes of action for recovery of damages under either of those sections are not capable of assignment. 37 A cause of action under the corresponding provisions of the Fair Trading Act of the States is also not able to be assigned. 38

The necessary interest to support an assignment

It is clear that, even if Trendtex is good law in Australia, any assignee must have more than a mere personal interest in profiting from the proceedings. Cohen J in Monk v. Australia & New Zealand Banking Group Ltd 39 said:

“In my opinion [the interest claimed by the plaintiff] is not a genuine commercial interest in the way that the phrase has been used in the judgments. Examples may be given from the facts in the various cases concerned. For instance it was held that there was such an interest where the assignee was already a substantial creditor of the assignor with a right to enforce the debt (Trendtex, re Timothy’s) or where the assignee was the sole shareholder who was a guarantor of the overdraft of the assignor (re Daley) or where the assignee was a debenture holder with an interest in protecting the value of its security (First City Corporation)”.

Lindgren J in National Mutual Property Services (Australia) Pty Ltd v. Citibank Savings Limited 40 said:

“. . . The genuine commercial interest referred to in Trendtex is not a nebulous notion of the general commercial advantage of the assignee but something more specific and limited. In particular, it does not embrace an interest arising from an arrangement voluntarily entered into by the assignee of which the impugned assignment is an essential part, like the arrangement in the present case. Rather, the expression refers to a commercial interest which exists already or by reason of other matters, and which receives ancillary support from the assignment”.

These reasons were approved by Heerey J in Salfinger v. Nuigini Mining (Australia)Pty Ltd. 41

Mere personal interest of the assignee will therefore be insufficient. General commercial advantage will also be an insufficient ground to found an assignment. The assignee must have some commercial interest which the assignment may in some way protect.

The issue of the assignability of causes of action is an area of the law that has been in a state of some flux for many years. Notwithstanding this, it is somewhat surprising that there is little direct High Court or intermediate Appellate Court authority on the issues that have been explored in this paper.

There has been a clear divergence between the general approach of the Federal Court (preferring to adopt the approach in Poulton and eschewing the Trendtex approach) and that of the State Supreme Courts which have instead embraced the Trendtex position. There is a suggestion in some of the most recent Federal Court cases that that jurisdiction may be moving towards embracing Trendtex as good law, although this is certainly not a uniform phenomenon.

The effect of the divergence is that particular care should be taken when determining which court to proceed in if reliance is to be placed upon an assignment of causes of action, whether in contract, tort, or equitable causes of action. The Federal Court has shown a much more marked reluctance to uphold assignments of causes of action generally.

The inconsistencies between the various single court decisions will ultimately have to be resolved by a decision of the High Court. Given the decision in Fostif , where a rather more liberal view of the law of maintenance and champerty was expressed in the majority decision, one might expect that the Trendtex approach will ultimately prevail. However, until the High Court has given that pronouncement, practitioners should be alive to the differing approaches by the courts in this complex area of the law.

Matthew Brady

• The writer acknowledges the assistance obtained from the research of Mr G Gibson QC and Mr D O’Brien of counsel in the preparation of this paper – however all errors are the writer’s alone.
• See, Cheshire & Fifoot’s Law of Contract, 9 th ed, 2008, para [8.7]. 
• See, T S & B Retail Systems Pty Ltd v. 3 Fold Resources Pty Ltd & Ors (2007) 158 FCR 444 at 465. 
• [1912] 2 KB 474 at 489-490.
• [1953] 89 CLR 540. 
• [1982] AC 679. 
• At 696 – 697; 703. 
• [1994] 1 AC 142.
• At p 164 per Mustill LJ, with whom the other members of the House agreed. 
• See, Re Timothy’s Pty Ltd and The Companies Act [1981] 2 NSWLR 706; Monk v. Australia & New Zealand Banking Group Ltd (1994) 34 NSWLR 148; South Australian Management Corporation v. Shehan (1995) 16 ACSR 45 (Debelle J); Beatty v. Brashs Pty Ltd   [1998] 2 VR 201 (Smith J);  Singleton v. Freehill Hollingdale & Page   [2000] SASC 278 (Olsson J); Vangale Pty Ltd (In Liquidation) v. Kumagai Gumi Co Ltd   [2002] QSC 137 (Mullins J); Rickard Constructions Pty Ltd v. Rickard Hails Moretti Pty Ltd (2005) 220 ALR 267 (McDougall J); Scholle Industries Pty Ltd v AEP Industries (NZ) Ltd [2007] SASC 322 (Withers J). In New Zealand see First City Corporation Ltd v Downsview Nominees Ltd [1989] 3 NZLR 710 (Gault J). McMurdo J in BHP Coal Pty Ltd v O & K Orenstein & Koppel AG [2008] QSC 141 at [76] and Beech J in Corporate Systems Publishing v Lingard (No 4) [2008] WASC 21 at [53] — [58] noted the diverge in the authorities but did not express a preference.
• See, Park  v. Allied Mortgage Corporation Ltd (1993) ATPR (Digest) 46-105 (Davies J); All State Life Insurance Co v. Australia & New Zealand Banking Group Ltd (FCA, Beaumont J, No G381 of 1994, 7 November 1994, unreported, BC 9400129); National Mutual Property Services (Aust) Pty Ltd v. Citibank Savings Ltd (1995) 132 ALR 514 (Lindgren J); Chapman v. Luminis (No 4) (2001) 123 FCR 62 (von Doussa J); Deloitte Touche Tohmatsu v. Cridlands Pty Ltd   (2003) 134 FCR 474 (Selway J); Boston Commercial Services Pty Ltd v. G E Capital Finance Australasia Pty Ltd (2007) 236 ALR 720 (Rares J); Salfinger v. Nuigini Mining (Australia) Pty Ltd (No 3) [2007] FCA 1532 (Heerey J).
• See TS&B Retail Systems Pty Ltd v 3-Fold Resources (2007) 229 ALR; Tosich v Tasman Investment Management [2008] FCA 377
• (2006) 229 CLR 386 
• Footnotes omitted. 
• See, [88]. 
• (2007) 158 FCR 417.
• At para [134]. 
• [2007] FCA 151.
• [2008] FCA 377 at [29]-[33].
• Salfinger v. Nuigini Mining (Australia) Pty Ltd (No 3) [2007] FCA 1532 at [119]. 
• [2008] FCAFC 103
• See Comfort v. Betts [1891] 1 QB 737; Fitzroy v. Cave (1905) 2 KB 364;  County Hotel and Wine Co v. London & Northwestern Railway Co [1918] 2 KB 251; Re Daley;  Ex parte: National Australia Bank Ltd (1992) 37 FCR 390 at 394-5.
• Torkington v. Magee [1902] 2 KB 427.
• Rickard Constructions v. Rickard Hails Moretti Pty Ltd (supra) at 281; Camdex International Ltd v. Bank of Zambia [1998] 2 QB 22; Re Kenneth Wright Distributors Pty Ltd (In Liquidation); W J Vine Pty Ltd v. Hall [1973] VR 161. 
• See, para [6-480] at p 282. 
• Supra . 
• At para [8.7].
• (Supra) at [54]. 
• Prosser v. Edmonds (1835) 160 ER 196. 
• (2007) 236 ALR 720 at [73]. 
• Supra 
• See Supreme Court cases referred to earlier.
• See, Trendtex (supra), at 702; South Australian Management Corp v. Shehan (1995) 16 ACSR 45 at 57-58; Monk v. Australia & New Zealand Banking Group (1994) 34 NSWLR 148 at 151-153. 
• Prosser v. Edmonds (1835) 160 ER 196;  Glegg v. Bromley [1912] 3 KB 474 at 489-490. 
• See, Park v. Allied Mortgage Corporation Ltd (1993) ATPR (Digest) 46-105 at 53,467; Allstate Life Insurance Co v. Australia & New Zealand Banking Group Ltd [1994] FCA 814 at [18]; Pritchard v. Racecage Pty Ltd (1997) 72 FCR 203 at 218;  Chapman v. Luminis (No 4) (2001) 123 FCR 62 at [204] – [207];  Boston Commercial Services Pty Ltd v. G E Capital Finance Australasia Pty Ltd (supra) at [50] – [52]; Salfinger v. Nuigini Mining (Australia) Pty Ltd (No 3) (supra) at [110]. 
• See, Chapman v. Luminis Pty Ltd (supra). 
• Supra , at 153. 
• Supra , at 540.
• Supra , at [121] – [122]. 

Assignment of claims

An untraditional approach to combining the claims of plaintiffs; how it differs from class actions, joinder, consolidation, relation and coordination

A large class of plaintiffs engages you to bring a common action against a defendant or set of defendants. As counsel, you resolve to combine the plaintiffs’ various claims into a single lawsuit. In this article, we touch on some of the traditional approaches, such as a class action, joinder, consolidation, relation, and coordination. To that list, we add as an approach the assignment of claims, a procedural vehicle validated by the United States Supreme Court, but not typically employed to combine the claims of numerous plaintiffs.

Class actions

In Hansberry v. Lee (1940) 311 U.S. 32, the United States Supreme Court explained that “[t]he class suit was an invention of equity to enable it to proceed to a decree in suits where the number of those interested in the subject of the litigation is so great that their joinder as parties in conformity to the usual rules of procedure is impracticable. Courts are not infrequently called upon to proceed with causes in which the number of those interested in the litigation is so great as to make difficult or impossible the joinder of all because some are not within the jurisdiction or because their whereabouts is unknown or where if all were made parties to the suit its continued abatement by the death of some would prevent or unduly delay a decree. In such cases where the interests of those not joined are of the same class as the interests of those who are, and where it is considered that the latter fairly represent the former in the prosecution of the litigation of the issues in which all have a common interest, the court will proceed to a decree.” ( Id. at pp. 41-42.)

In California’s state courts, class actions are authorized by Code of Civil Procedure section 382, which applies when the issue is “‘one of a common or general interest, of many persons, or when the parties are numerous, and it is impracticable to bring them all before the court.’” ( Noel v. Thrifty Payless, Inc. (2019) 7 Cal.5th 955, 968; see also, e.g., Cal. Rules of Court, rules 3.760-3.771.) “The party advocating class treatment must demonstrate the existence of an ascertainable and sufficiently numerous class, a well-defined community of interest, and substantial benefits from certification that render proceeding as a class superior to the alternatives.” ( Brinker Restaurant Corp. v. Superior Court (2012) 53 Cal.4th 1004, 1021.) “The community of interest requirement involves three factors: ‘(1) predominant common questions of law or fact; (2) class representatives with claims or defenses typical of the class; and (3) class representatives who can adequately represent the class.’” ( Linder v. Thrifty Oil Co. (2000) 23 Cal.4th 429, 435; see Civ. Code, § 1750 et seq. [Consumers Legal Remedies Act]; cf. Fed. Rules Civ.Proc., rule 23(a) [prerequisites for federal class action].)

Parties, acting as co-plaintiffs, can also obtain economies of scale by joining their claims in a single lawsuit. Under California’s permissive joinder statute, Code of Civil Procedure section 378 (section 378), individuals may join in one action as plaintiffs if the following conditions are met:

(a)(1) They assert any right to relief jointly, severally, or in the alternative, in respect of or arising out of the same transaction, occurrence, or series of transactions or occurrences and if any question of law or fact common to all these persons will arise in the action; or

(2) They have a claim, right, or interest adverse to the defendant in the property or controversy which is the subject of the action.

(b) It is not necessary that each plaintiff be interested as to every cause of action or as to all relief prayed for. Judgment may be given for one or more of the plaintiffs according to their respective right to relief.

This strategy of joining multiple persons in one action has been referred to as a “mass action” in some decisions involving numerous plaintiffs. (See Aghaji v. Bank of America, N.A. (2016) 247 Cal.App.4th 1110, 1113; Petersen v. Bank of America Corp . (2014) 232 Cal.App.4th 238, 240 ( Petersen ); cf. 28 U.S.C. § 1332(d)(11)(B) [federal definition of “mass action”].)

In Petersen , for example, 965 plaintiffs who borrowed money from Countrywide Financial Corporation in the mid-2000’s banded together and filed a single lawsuit against Countrywide and related entities. ( Petersen , supra , 232 Cal.App.4th at pp.  242-243.) The plaintiffs alleged Countrywide had developed a strategy to increase its profits by misrepresenting the loan terms and using captive real estate appraisers to provide dishonest appraisals that inflated home prices and induced borrowers to take loans Countrywide knew they could not afford. ( Id. at p. 241.) The plaintiffs alleged Countrywide had no intent to keep these loans, but to bundle and sell them on the secondary market to unsuspecting investors who would bear the risk the borrowers could not repay. ( Id. at pp. 241, 245.) Countrywide and the related defendants demurred on the ground of misjoinder of the plaintiffs in violation of section 378. The trial court sustained the demurrer without leave to amend and dismissed all plaintiffs except the one whose name appeared first in the caption. ( Id . at p. 247.) The Court of Appeal reversed and remanded for further proceedings. ( Id . at p. 256.)

Petersen resolved two questions. First, it concluded the operative pleading alleged wrongs arising out of “‘the same . . . series of transactions’” that would entail litigation of at least one common question of law or fact. ( Petersen, supra, 232 Cal.App.4th at p. 241.) The appellate court noted the individual damages among the 965 plaintiffs would vary widely, but the question of liability provided a basis for joining the claims in a single action. ( Id. at p. 253.) Second, the appellate court concluded “California’s procedures governing permissive joinder are up to the task of managing mass actions like this one.” ( Id. at p. 242.)

Consolidation

Code of Civil Procedure section 1048, subdivision (a) provides that, “[w]hen actions involving a common question of law or fact are pending before the court, it may order a joint hearing or trial of any or all the matters in issue in the actions; it may order all the actions consolidated and it may make such orders concerning proceedings therein as may tend to avoid unnecessary costs or delay.” (See also Fed. Rules Civ.Proc., rule 42.)

There are two types of consolidation. The first is a consolidation for purposes of trial only, when the actions remain otherwise separate. The second is a complete consolidation or consolidation for all purposes, when the actions are merged into a single proceeding under one case number and result in only one verdict or set of findings and one judgment. ( Hamilton v. Asbestos Corp., Ltd. (2000) 22 Cal.4th 1127, 1147 ( Hamilton ).)

Consolidation is designed to promote trial convenience and economy by avoiding duplication of procedure, particularly in the proof of issues common to the various actions. (4 Witkin, Cal. Procedure (5th ed. 2008) Pleadings, § 341, p. 470.) Unless all parties in the involved cases stipulate, consolidation requires a written, noticed motion (Cal. Rules of Court, rule 3.350(a); Sutter Health Uninsured Pricing Cases (2009) 171 Cal.App.4th 495, 514), and is subject to the trial court’s discretion. ( Hamilton, supra, 22 Cal.4th at p. 1147.)

In a procedure somewhat similar to consolidation, under California Rules of Court, rule 3.300(a), a pending civil action may be related to other civil actions (whether still pending or already resolved by dismissal or judgment) if the matters “[a]rise from the same or substantially identical transactions, incidents, or events requiring the determination of the same or substantially identical questions of law or fact” or “[a]re likely for other reasons to require substantial duplication of judicial resources if heard by different judges.” ( Id. , rule 3.300(a)(2), (4).) An order to relate cases may be made only after service of a notice on all parties that identifies the potentially related cases. No written motion is required. ( Id ., rule 3.300(h)(1).) The Judicial Council provides a standard form for this purpose. When a trial court agrees the cases listed in the notice are related, all are typically assigned to the trial judge in whose department the first case was filed. ( Id ., rule 3.300(h)(1)(A).)

Related cases are not consolidated cases. Related cases maintain their separate identities but are heard by the same trial judge. Consolidated cases, in contrast, essentially merge and proceed under a single case number.

Coordination

Under Code of Civil Procedure section 404, the Chairperson of the Judicial Council is authorized to coordinate actions filed in different courts that share common questions of fact or law. (See Cal. Rules of Court, rule 3.500 et seq.) The principles underlying coordination are similar to those that govern consolidation of actions filed in a single court. (See Pesses v. Superior Court (1980) 107 Cal.App.3d 117, 123; see also 28 U.S.C. § 1407 [complex and multidistrict litigation].)

Thus, for example, in McGhan Med. Corp. v. Superior Court (1992) 11 Cal.App.4th 804 ( McGhan ), the plaintiffs petitioned for coordination of 300 to 600 breast implant cases pending in 20 different counties. Coordination was denied because the motion judge found that common questions did not predominate “in that the cases involve[d] different implants, different designs, different warnings, different defendants, different theories of defect, different modes of failure, and different injuries.” ( Id. at p. 808.) Among other factors, the trial court concluded that it was impractical to send hundreds of cases to a single county and that the benefits of coordination could be best achieved by voluntary cooperation among the judges in the counties where the cases were pending. ( Id. at p. 808, fn. 2.)

The Court of Appeal reversed in an interlocutory proceeding, ruling the trial court had misconceived the requirements of a coordinated proceeding. ( McGhan, supra, 11 Cal.App.4th at p. 811.) As the appellate court explained, Code of Civil Procedure section 404.7 gives the Judicial Council great flexibility and broad discretion over the procedure in coordinated actions. ( Id. at p. 812.) Thus, on balance, the coordinating judge would be better off confronting the coordination drawbacks (including difficulties arising from unique cases, discovery difficulties, multiple trials, the necessity of travel, and occasional delay) because the likely benefits (efficient discovery and motion practice) were so much greater. ( Id. at pp. 812-814.)

Civil Code section 954 states “[a] thing in action, arising out of the violation of a right of property, or out of an obligation, may be transferred by the owner.” The term “thing in action” means “a right to recover money or other personal property by a judicial proceeding.” (Civ. Code, § 953.) California’s Supreme Court has summarized these provisions by stating: “A cause of action is transferable, that is, assignable, by its owner if it arises out of a legal obligation or a violation of a property right. . . .” ( Amalgamated Transit Union, Local 1756, AFL-CIO v. Superior Court (2009) 46 Cal.4th 993, 1003.) The enactment of Civil Code sections 953 and 954 lifted many restrictions on assignability of causes of action. ( Wikstrom v. Yolo Fliers Club (1929) 206 Cal. 461, 464; AMCO Ins. Co. v. All Solutions Ins. Agency, LLC (2016) 244 Cal.App.4th 883, 891 ( AMCO ).)

Thus, California’s statutes establish the general rule that causes of action are assignable. ( AMCO, supra , 244 Cal.App.4th at pp. 891-892.) This general rule of assignability applies to causes of action arising out of a wrong involving injury to personal or real property. ( Time Out, LLC v. Youabian, Inc. (2014) 229 Cal.App.4th 1001, 1009; see also, e.g., Bush v. Superior Court (1992) 10 Cal.App.4th 1374, 1381 [“‘assignability of things [in action] is now the rule; nonassignability, the exception. . .’”].)

Although the assignment of claims on behalf of others to an assignee, or group of assignees, is not unique, it has not typically been used as a procedural vehicle for combining the claims of numerous plaintiffs. But, that’s not to say it can’t be done.

In fact, the United States Supreme Court has sanctioned such an approach. In Sprint Communications Co., L.P. v. APCC Services, Inc. (2008) 554 U.S. 269 ( Sprint ), approximately 1,400 payphone operators assigned legal title to their claims for amounts due from Sprint, AT&T, and other long-distance carriers to a group of collection firms described as “aggregators.” ( Id. at p. 272.) The legal issue presented to the United States Supreme Court was whether the assignees had standing to pursue the claims in federal court even though they had promised to remit the proceeds of the litigation to the assignor. ( Id . at p. 271.) The Court concluded the assignees had standing.

In support of its conclusion, the Court recognized the long-standing right to assign lawsuits:

. . . [C]ourts have long found ways to allow assignees to bring suit; that where assignment is at issue, courts — both before and after the founding — have always permitted the party with legal title alone to bring suit; and that there is a strong tradition specifically of suits by assignees for collection. We find this history and precedent ‘well nigh conclusive’ in respect to the issue before us: Lawsuits by assignees, including assignees for collection only, are ‘cases and controversies of the sort traditionally amenable to, and resolved by, the judicial process.’

( Sprint , supra , 554 U.S . at p. 285.)

On this basis, the Court concluded:

Petitioners have not offered any convincing reason why we should depart from the historical tradition of suits by assignees, including assignees for collection. In any event, we find that the assignees before us satisfy the Article III standing requirements articulated in more modern decisions of this Court.

( Sprint , supra , 554 U.S at pp. 285-286.)

The Court also considered the argument that the aggregators were attempting to circumvent the class-action requirements of Federal Rule of Civil Procedure 23. ( Sprint, supra, 554 U.S. at pp. 290-291.) The Court rejected this argument as a barrier to aggregation by assignment on the grounds that (1) class actions were permissive, not mandatory, and (2) “class actions constitute but one of several methods for bringing about aggregation of claims, i.e., they are but one of several methods by which multiple similarly situated parties get similar claims resolved at one time and in one federal forum. [Citations.]” ( Id. at p. 291.)

Granted, Sprint arose in the context of Article III, a “prudential standing” analysis. However, in reaching its decision that assignees had standing, the Court relied significantly on three California state decisions addressing assignment of rights under California law. (See Sprint, supra, 554 U.S. at pp. 294-296.)

Under California law, assignment of claims is not a panacea. Not all claims can be assigned. In California, assignment is not allowed for tort causes of action based on “wrongs done to the person, the reputation or the feelings of an injured party,” including “causes of action for slander, assault and battery, negligent personal injuries, seduction, breach of marriage promise, and malicious prosecution.” ( AMCO, supra , 244 Cal.App.4th at p. 892 [exceptions to assignment also include “legal malpractice claims and certain types of fraud claims”].) Other assignments are statutorily prohibited. (See, e.g., Civ. Code, § 2985.1 [regulating assignment of real property sales contracts]; Gov. Code, § 8880.325 [state lottery prizes not assignable].)

Likewise, because a right of action cannot be split, a partial assignment will require the joinder of the partial assignor as an indispensable party. (See, e.g., Bank of the Orient v. Superior Court (1977) 67 Cal.App.3d 588, 595 [“[W]here . . . there has been a partial assignment all parties claiming an interest in the assignment must be joined as plaintiffs . . . ”]; 4 Witkin, Cal. Procedure, supra, Pleadings, § 131(2), p. 198 [“If the assignor has made only a partial assignment, the assignor remains beneficially interested in the claim and the assignee cannot sue alone”].)

That said, California’s rules of law regarding standing and assignments do not prohibit an assignee’s aggregation of a large number of claims against a single defendant or multiple defendants into a single lawsuit. To the contrary, no limitations or conditions on this type of aggregation of assigned claims is imposed from other rules of law, such as California’s compulsory joinder statute. (See Sprint , supra , 554 U.S. at p. 292 [to address practical problems that might arise because aggregators, not payphone operators, were suing, district “court might grant a motion to join the payphone operators to the case as ‘required’ parties” under Fed. Rules Civ.Proc., rule 19].)

There are many procedural approaches to evaluate when seeking to combine the claims of multiple plaintiffs. Class actions and joinders are more traditional methods that trial counsel rely on to bring claims together. Although a largely unexplored procedural approach, assignment appears to be an expedient way of combining the claims of numerous plaintiffs. It avoids the legal requirements imposed for class actions and joinders, and it sidesteps a trial judge’s discretion regarding whether to consolidate, relate, or coordinate actions. Indeed, under the right circumstances, an assignment of claims might provide a means of bypassing class action waivers in arbitration agreements. Perhaps an assignment of claims should be added to the mix of considerations when deciding how to bring a case involving numerous plaintiffs with similar claims against a common defendant or set of defendants.

Judith Posner

Judith Posner is an attorney at Benedon & Serlin, LLP , a boutique appellate law firm.

Gerald Serlin

Gerald Serlin is an attorney at Benedon & Serlin, LLP , a boutique appellate law firm.

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Assignment of Choses in Action

Property generally may be realty (real) or personalty (personal). Realty are characterized by geographical fixity(land) while personalty are generally mobile.

Personalty is also classified into tangible/corporeal and intangible/incorporeal. The former is capable of physical handling/possession/manipulation/enjoyment while the latter is incapable of any of these.

Incorporeal property is also called a chose in action which has been defined as a legal expression used to describe all personal rights of property which can only be claimed or enforced by action (in a court) and not by taking physical possession.

A chose generally is a thing capable of being owned. Choses in action may be legal or equitable. Legal choses in action are rights which were enforceable or recoverable only by an action at Common law. This category of choses includes debts, benefits under a contract, insurance policies, copyrights, patents etc.

Equitable choses on the other hand are rights over property which were only enforceable/recoverable/cognizable by the courts of Chancery. It could only be recovered by a suit in Equity and the rights under this category include interests of a beneficiary in a Trust, a legacy/reversionary interest under a will etc.

Choses in action may also be in respect of already existing things/property or things/property to be acquired at a future date but which are not yet in possession. The chose in action may be property in itself and it may also be a propriety right over property.

Assignment is the transfer of something from one person to another such that the assignee obtains rights of a nature that were hitherto exercisable only by the assignor. An assignment of a chose is thus the transfer of a chose in action from the assignor to the assignee such that the assignee obtains and becomes entitled to enjoy rights in respect of that chose, which were hitherto exclusively enjoyed by the assignor.

Assignment may be legal (statutory) or equitable.

Assignment and Novation

An assignment is quite distinct from a novation. Novation is essentially a legal device by which parties to a contract may legally vary/shift their obligations under the contract to third parties. Thus, A can agree with B, his creditor, that C, who owes him money, will pay that debt to B in full satisfaction of his own (A’s) debt.

Novation is however fundamentally different from assignment in three material aspects:

• The consent of the parties is sine qua non since the original contract is rescinded by the novation. There must thus be consensus ad idem. There can be no novation otherwise. This is contrary to the case in assignment where there only need be communication to the assignee, his consent and that of the trustee of the liability are immaterial.
• The original debt in novation must be totally extinguished under the new arrangement.

There is no such requirement for assignment to be valid.

• For novation to be valid, there must be consideration in all cases as it is essentially a new contract. The requirement for consideration in assignment is much more relaxed.

Assignment and Equities

The general rule as regards assignment of choses in action is that an assignee takes, subject to the equities thar already apply to the chose in action (property) in question. Thus, anyone who has an interest (legal or equitable) in an assigned chose is entitled to a higher priority than that of the assignee.

The logic here is based on a recognition that the assignee cannot acquire a better title than that of the assignor. What he essentially gains by virtue of the assignment is a right to continue in the stead of the assignor in respect of that chose and nothing better.

In Re Knapman (1881) 18 Ch. D 300 the beneficiaries of a will brought an action against the executor seeking to revoke the probate. While the matter was in court, these beneficiaries assigned the right under the will to someone else.

Their action subsequently failed in court, the court ruled that the executor had a right to set off the costs of the suit against the estate. As such, since the right to this had already been assigned, the assignee has to settle this cost since he was assigned a property that had a pre-existing liability.

Claims of equities that arise after notice of the assignment has been given to the trustee would not affect the assignee however, except where the claim is very closely related to the original transaction upon which the chose came into existence.

The rule that the assignee takes subject to equities will not apply where the trustee is estopped, either by conduct or deed, from setting up equities against the assignee. It would not also apply where the agreement occasioning the original transaction includes a clause that the assignees of the assignor would take free from all equities.

Historically, assignment of choses in action was largely unrecognized at Common law. There was the fear that allowing such assignment would bring about Maintenance and even cases of Champerty as well as the risk of encouraging a litany of contentious matters on the same res.

Maintenance arises where a person who has no legal interest in a matter provides assistance by money or otherwise to a party to the suit while Champerty marries the foregoing with the prospect of reward out of the possible spoils of the suit.

Thus, no debt could be assigned at Common law unless the debtor specifically agreed to the assignment. The only exceptions allowed by Common law were in respect of choses in action assigned by or to the King and assignment of negotiable instruments in order to promote trade.

Equity has however always recognized the assignment of choses in action, both equitable and legal. It would not however allow the assignment of bare rights without accompanying interest in property. This was to avoid, as in the case of the Common law, situations that encourage Maintenance.

Assignability

Not all choses in action are assignable. The courts would not give effect to such assignments either on grounds of public policy or on account of the nature of the subject matter of the assignment.

Choses in action that are not assignable include:

• Salaries of public officials. This is because it is perceived that if allowed to assign their salaries, they may deprive themselves of their means of sustenance and thereby impair the efficiency which is most desirable for the public service.
• Alimony is not assignable on much the same grounds as salaries of public officials as the money is meant for the maintenance of the spouse.
• Rights arising out of a contract of a personal nature i.e. contracts that require personal service like employment.
• Expectancies (future choses) are not assignable at Common law based on the maxim: Nemo dat quod non habet. They are assignable in Equity although, such assignment must be for value.

Equitable Assignment

An equitable assignment is of a flexible nature. This flexibility makes it quite distinct from legal assignments as they do not require all of the formality required under the law. It may be in respect of a legal or equitable chose. Thus, there may be an equitable assignment of an equitable chose or an equitable assignment of a legal chose.

While there is no strict formality required for equitable assignments, certain criteria are instructive as to whether it would be considered valid or not.

For an equitable assignment to be considered as having been effected, there must be a clear intent to assign. While Equity does not require that the assignment be in writing or made in any particular format, there must be a clearly deducible intent to assign on the part of the assignor.

The intent to assign here will be construed from the words used and the particular circumstances of the case. If what is construed is a mere mandate/authority to hold onto certain property, no intent to assign may be ascribed by the court.

The position that Equity does not require writing for equitable assignments has however been affected by S. 9 of the Statute of Frauds and S. 78(1)(c) of the Property and Conveyancing Law which require that the assignment of any equitable interest or trust must be in writing.

The assignment is also required to be communicated to the assignee. Although, the assignee may still take in certain instances even without communication, subject to the right of the assignee to repudiate the transfer when he becomes aware of it.

The particular chose intended to be assigned must be identified. It is insufficient to give a vague representation of what is sought to be assigned. Such vagueness may impair the court’s construction of an intent to assign in such circumstance.

Consideration in equitable assignment depends on the circumstance. Where the assignment is complete in the sense that there is nothing left for the assignor to do to perfect the assignee’s title, there would be no need for consideration.

If it is incomplete though, consideration may be required. Consideration will also be required where the assignment concerns some future chose as the agreement in such instance can only be a contract to assign and all contracts must be backed by consideration.

No consideration is however required for assignment of existing choses.

There is no real requirement for notice of the equitable assignment to be given to the trustee of the liability. Notice is however useful to the extent that it puts the trustee on guard as to the change of rights affecting the chose and may prevent him from settling in favour of the assignor instead of the assignee.

It also makes the trustee liable to the assignee where he settles in favour of the assignor in spite of the notice given to him. Again, while the assignee generally takes subject to any prior equities affecting the chose, giving notice ensures that he would not be affected by any subsequent equities.

Most importantly, notice allows the assignee to establish the priority of his interest in consequence of the rule in DEARLE v HALL.

An equitable assignment of a chose in action has bearing on the manner in which the rights can be enforced in a court of law. The effect here is largely dependent on whether the chose in question is a legal or equitable chose and if the chose was absolutely assigned or not.

Where the assignment concerns a legal chose, the assignee cannot assert his title over the property in his own name. He must join the name of the assignor either as co-plaintiff, where he agrees, or as a defendant. Where the chose is equitable though, the assignee can sue in his own name.

An assignment is absolute when the assignor transfers his whole interest in the chose to the assignee. It is however non-absolute where it is made subject to some condition at the happening of which it would become inoperable or where only a charge is made on the chose, in favour of the assignee.

In this instance, only a part of the assignor’s interest is transferred. The effect of this is that in situations where the transfer was absolute, the assignee would be able to sue in his own name. Where it is not absolute however, he must join the assignor before he can enforce his rights over the chose.

Where the chose is legal though, it is immaterial whether it is absolute or not, the assignee must join the assignor.

Legal Assignment

The Common law rule against assignment of choses in action was only lifted in 1875 and this was via the provision of the Judicature Acts, particularly S. 25(6) . This provision is impari materia with S. 150(1) Property and Conveyancing Law .

The purport of those provisions is that there can be absolute assignments by writing of any debt or other legal thing in action when express notice in writing has been given to the trustee of the liability. Also, it shall be effectual to transfer the legal right to sue in respect of such thing, along with the legal and other remedies in respect of it and the power to give a good discharge for the chose without the assignor’s permission.

The provisions clearly contain ingredients that would make a legal assignment valid and these include the following:

• The assignment must be in writing and signed by the assignor.
• It must be in respect of some existing debt or other legal thing in action and this includes equitable choses in action.
• It must be absolute.
• There must be an express notice in writing given to the debtor, trustee, or other person from whom the assignor would have been entitled to receive the debt or claim the thing in action.

The assignment takes effect from the date that notice is given. Failure to give notice at all or failure to give it in writing or failure to even execute the writing in the first place will not invalidate the assignment.

Rather, it becomes an equitable assignment instead of a legal one. Further, there is no requirement for consideration here.

The position at Common law before the Act amended it was that the assignee had no right independent of the assignor’s and was obligated to sue in the assignor’s name if he wanted to enforce his rights over the chose.

The Acts have however changed this and the assignee no longer needs to sue in the name of the assignor. He can sue all by himself.

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Technical guidance for Official Receivers

37. rights of action.

Rights of action

Table of key right of action cases

Rights of action is an area which has been largely driven by case law. To assist official receivers in understanding how the law has developed this table lists the key cases that have had some impact on rights of action. The table is in rough chronological order. The (very) brief summary of the decision in each case should not be relied on its own but should, instead, be considered alongside the more detailed information in the Chapter.

Introduction

37.1 basic overview.

A right of action is essentially a claim, a right that someone believes that they have against another to enforce a right, to recover money or property etc., often involving court proceedings. Generally speaking it will be property that the official receiver, acting as liquidator or trustee, can deal with, giving the opportunity to realise monies for the estate, but so far as bankruptcy cases are concerned there are exceptions, on which information and advice is given in this Chapter.

The Chapter also gives advice on how to deal with a right of action to maximise the benefit to creditors and includes a Part that deals with employment claims, as some of the principles are different to those applying to other types of actions.

37.2 Scope of this chapter

This chapter does not deal with claims against the insolvent, except for counterclaims and appeals. Advice on claims against the insolvent can be found in Chapter 12.

Neither does this chapter deal with claims arising as a result of the liquidation or bankruptcy (claims for preferences and transactions at an undervalue, for example). Advice on those types of claims can be found in Chapters 31 and 32.

This is an area which has been largely driven by case law. To assist official receivers in understanding how the law has developed, the ‘Table of key right of action cases’ lists the key cases that have had some impact on rights of action. The table is in rough chronological order. The (very) brief summary of the decision in each case should not be relied on its own but should, instead, be considered alongside the more detailed information in the chapter.

General points regarding rights of action

37.3 a right of action.

In simple terms, a right of action (also called a ‘cause of action’ or a ‘thing in action’) is a right to claim something from somebody where, for example, that other party has been negligent or has breached a contract. It is a claim.

37.4 Property status of a right of action – company

The Act provides that the official receiver, as liquidator, shall take into their custody all the property and things in action (which would include rights of action [Section 436]) to which the company is entitled [Section 144(1)].

Unlike in bankruptcy there can be no doubt whether a right of action belonging to a company in liquidation is one that the official receiver, as liquidator, can deal with. The official receiver should, in these circumstances, satisfy themself that the right is one that belongs to the company and not, for example, to the directors of the company.

37.5 Property status of a right of action and the vesting of the action in the official receiver as trustee - bankruptcy

The Act provides that all property belonging to or vested in the bankrupt at the commencement of the bankruptcy forms the bankrupt’s estate [Section 283(1)]. Property is defined in the Act as including ‘things in action’ (which would include rights of action) [Section 436] and the bankrupt’s estate vests in the official receiver on their appointment as trustee [Section 306].

Not all rights of action constitute property and of those that do, not all would form part of a bankrupt’s estate.

37.6 Not all rights of action form part of the estate - bankruptcy

Case law has developed principles that certain rights of action do not constitute property that would form part of the bankrupt’s estate. This concept is explored fully later in this chapter but, in short, rights of action where damages are solely to be estimated by immediate reference to pain felt by the bankrupt in respect of their body, mind or character, and without immediate reference to their rights of property, would not form part of the bankruptcy estate [Beckham v Drake (1849) 2 HL Cas 579, Ord v Upton [2000] Ch 352].

3.7 Difference between claim and counter-claim is asset

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 [Stein v Blake [1996] 1 AC 243, Rule 14.25, Section 323].

37.8 Action where right of set-off applies

A prime example of a right of action that is unlikely to be worth pursuing is where the action is against a creditor of the company or bankrupt and the value of that creditor’s right of set-off [Rule 14.25, Section 323] exceeds the value of the claim.

Set-off only applies where there are mutual credit and debits as at the date of the company going into insolvency or the date of bankruptcy so, in cases where a claim is against a (former) creditor and that debt has been sold on by the creditor prior to the date of insolvency of the company or bankruptcy of the individual, set-off would not apply.

The official receiver should note that where right of set-off applies, they may still pursue claim if the case was likely to pay a dividend and the removal or reduction of that creditor’s claim through set-off would materially increase the pro-rata payment to the other creditors.

37.9 Forum for deciding a right of action

The vast majority of rights of actions encountered by official receivers will be matters that will ultimately be decided in court or at an employment tribunal, if they are not settled outside of legal proceedings.

There are other forums for deciding rights of actions, such as arbitration and a formal complaints procedure.

37.10 Arbitration

Arbitration is a process similar to that found in a court trial in that both sides present their case, the matter is considered and a binding judgment is handed down. The difference is that the person deciding the case is not a judge, rather they is an adjudicator appointed by the sides in dispute. They may be a specialist in the area of industry (or similar) in which the dispute arose. The arbitral process may be held anywhere and at a time to suit the parties and is not a public process.

In bankruptcy, the official receiver, as trustee, may be committed to follow an arbitration process if this is provided for in the contract in relation to which the right of action has arisen [Section 349A].

The terms of an arbitration agreement may make provision for costs to be awarded against the ‘loser’ of the arbitration and, for this reason, it is unlikely that it will be appropriate for the official receiver to continue with an arbitration. Instead settlement or assignment of the action should be considered.

More information about arbitration can be found on the website of the Chartered Institute of Arbitrators http://www.ciarb.org/.

37.11 Formal complaints to ombudsmen

Many public and private sector organisations have an appointed ombudsman to decide complaints against themselves (within that sector).

A list of the different ombudsmen is available at the website of the British and Irish Ombudsman Association www.bioa.org.uk/…/FONT>.

Where a bankrupt is carrying on a complaint in this way, the official receiver may choose to continue the complaint if they believes that it has merit. In ombudsman’s cases, adverse costs are not awarded for an unsuccessful complaint and the procedure ought to be relatively straightforward to follow.

The official receiver would not continue a complaint which is personal to the bankrupt as such complaints remain vested in the bankrupt personally and do not become part of the bankruptcy estate. Most complaints to ombudsmen will be based on a contract for services and will, therefore, vest in the official receiver, as trustee.

37.12 No right of action where matter has already been litigated

Where a matter has been litigated to judgment there can be no right of action. When the final judgment is given by the court, the right of action merges with the judgment and ceases to exist.

This principle does not include appeals (see paragraph 37.43).

37.13 Joint claims

There can be no such thing as a joint claim. Where more than one party is involved in an incident leading to a claim (a road traffic accident, for example), each party will have a separate claim for their own loss(es) as a result of the incident. In practice such actions will be brought together, as in jointly, but strictly speaking there will be two (or more) separate claims. This point is of importance if one of the two claimants becomes bankrupt and the other wishes to continue with the/their claim.

37.14 Class actions

A class action is one where a large (usually) number of people have claims that are substantially the same and against the same person. The claim is usually brought by a representative group for the ease of deciding the matter – rather than having separate hearings (or settlement) for each claim.

An example of a class action might be where a multi national oil company has caused damage to the livelihood of a large number of individuals (perhaps, following an oil leak). Each claim, on its own, might be too small to be worth litigating but, taken together, the sum total of claims is worth pursuing.

Other examples might be damage caused by food contamination on a large scale or health problems caused by a faulty prescription drug.

Where an insolvent has a claim that is being brought as part of a class action, the official receiver, as liquidator or trustee, should consider assigning the action back to the bankrupt, or to the representative group.

Where the company or bankrupt is not part of the representative group, the official receiver should ensure that their interest in the claim is noted by the solicitors dealing with the matter in order that they can receive a share of any settlement or award.

Identifying a right of action and gathering information

37.15 identifying a right of action – sources of information.

There is no easy way of identifying a right of action, where the director or bankrupt has not included details in the preliminary information questionnaire or statement of affairs. Often it will be a case of putting two and two together from information provided during the interview – where, for example, the bankrupt provides information that they has been sacked from a job or involved in an accident.

The insolvent will often have engaged solicitors or other agents who should be written to using the standard letter [NORD2] even if there is no indication of a right of action.

Sometimes, the existence of the right of action may not come to the attention of the official receiver until the other side (the defendant) writes asking for a view on the official receiver, as trustee or liquidator, carrying on the action.

37.16 Information required from the insolvent claimant

In order that the official receiver, as liquidator or trustee, can assess which is the best course of action to take in relation to the right of action, they should attempt to seek the following information from the claimant:

• The event which led to the claim.
• The date of the event that led to the claim
• For contract claims – the date of the contract and a copy of the contract
• The identity of the defendant.
• The monetary value of the claim, including a breakdown of the damages and losses being claimed.
• A comment on the merits of the claim.
• Copies of any legal/counsel’s opinion received in respect of the claim.
• For employment claims – whether the action is for wrongful or unfair dismissal.
• Any insurance policy backing the pursuit of the claim.
• The grounds on which any solicitors are acting (for example, is there a conditional fee arrangement, or similar?).
• Any limitation on the claim or advice received regarding the limitation date.
• Copies of any Claim Forms.
• Copies of any documents (for example, orders) issued by or to the court, tribunal or similar.
• Copies of any responses received from the defendant.
• Details of costs so far expended, and an estimate of costs required to bring the matter to a successful conclusion.
• An estimate of the adverse costs in the event of the claim being ‘lost’.
• Details of any counter-claim being brought by the (proposed) defendant.

37.17 Getting realistic information regarding right of action

The official receiver, as liquidator or trustee, should not deal with a right of action (including selling that right of action), or otherwise dealing with it positively, which is without merit.

It is important to get a realistic view of the merits of the claim, including whether it is statute-barred. The official receiver should not rely solely on the views of the insolvent, which are liable to be over-optimistic, and should, instead, seek to obtain independent information from third party sources.

37.18 Assessing the merits of a right of action

In order to assist in the assessment of the merits of a right of action, the official receiver should consider any (existing) legal advice received by the company or bankrupt in respect of the action.

Where no such legal advice exists, the official receiver may consider appointing their own legal advisors to advise them on the merits of the action. If the advice is required in connection with an assignment, ideally the costs of the advice should be paid by the potential assignee; otherwise the official receiver may fund the costs from the estate.

If the payment required is over £2,500, the guidance in Chapter 1 regarding the requirement to obtain permission should be followed before committing to any expenditure.

Dealing with a right of action – the basics

37.19 basic principle for official receiver when dealing with a right of action.

The official receiver has a duty, when acting as liquidator or trustee, to realise assets (of which a right of action is one type) to the maximum benefit of the creditors [Shepherd v Legal Services Commission [2003] BCC 728]. The maximum benefit of creditors might be served by an early realisation of an asset even if that means achieving a lower amount in realisation. They should, however, consider the rights and interests of other parties – for example, the bankrupt or the defendant (the person against whom the bankrupt has a right of action).

See, particularly, paragraph 37.99 for information on circumstances where the official receiver may need to take account of the rights and interests of other parties.

37.20 Ways of dealing with a vesting right of action

There are, essentially, six ways that a right of action may be dealt with by the official receiver, as trustee or liquidator. Four of these options might be termed ‘positive’:

• Litigation (take the case to court or tribunal)
• Assignment (sell the right of action)
• Settlement (do a deal with the defendant to bring the claim to an end)

The remaining two options might be termed ‘negative’:

Detailed guidance on these options is given later in this Chapter.

37.21 Effect on solicitors engaged by insolvent of winding-up or bankruptcy order

A contract entered into by a company would form part of the liquidation.

Similarly, any contract or arrangement that the bankrupt has entered into for representation in respect of their claim would form part of the bankruptcy estate – though not if the underlying right of action were not capable of vesting in the official receiver as trustee. In either case, it is possible that the contract or arrangement might be ended by a clause in the document on which it is based.

Where the action vests the official receiver should make it clear to the solicitors that they does not wish to continue the arrangement (except where solicitors are to be retained to negotiate a settlement on behalf of the official receiver).

Any debt in respect of fees for work carried out up to the date of the winding up order or bankruptcy order would be a debt in the proceedings, though any liability for fees under a new post-bankruptcy arrangement entered into by the bankrupt (for example, where the bankrupt continued to employ the solicitor to advise them during or following an assignment or settlement) would, of course, be a post-bankruptcy debt for which the bankrupt would be liable.

37.22 Dealing with a claim for the recovery of bank charges

A claim for the recovery of bank charges is restricted to those charges levied as ‘service’ charges against the account(s) of the bankrupt. This is based on the premise that charges such as ‘default fees’ and/or ‘late payment fees’, which often resulted in a levy of in excess of £25, did not reflect the value of the ‘service’ received (that is, it did not cost the sum charged to administer the fee and/or issue notification of it by post).

The period for which charges can be recovered is limited to six years prior to the date of the claim.

To successfully pursue a claim, it is usually necessary for the claim to include copy statements highlighting the ‘excessive’ charges. For this reason, there is generally no benefit in pursuing such a claim, unless the bankrupt is in possession of statements which already are, or may easily be, annotated in the required manner.

37.23 Dealing with a complaint for mis-selling of Payment Protection Insurance

Payment Protection Insurance is an insurance policy typically sold when a personal loan or some other form of personal credit is granted.

A complaint for mis-selling of PPI, or compensation paid as the consequence of a PPI mis-selling complain, would vest in the official receiver as trustee of the bankruptcy estate [Ward v Official Receiver [2012] BPIR 1073]. See Chapter 38 for guidance on dealing with PPI complaints.

Deciding whether a right of action vests - bankruptcy only

37.24 scope of this part.

This Part of the chapter provides information and guidance to assist an official receiver in making a decision as to whether or not a right of action vests in them as the trustee of a bankrupt’s estate. As explained elsewhere, actions that are purely ‘personal’ do not vest.

This Part of the chapter does not deal with employment claims. Information and guidance relating to such claims can be found later in this chapter.

37.25 Property status of a right of action and the vesting of the action in the trustee

The Act provides that all property belonging to or vested in the bankrupt at the commencement of the bankruptcy forms the bankrupt’s estate [section 283(1)]. Property is defined in the Act as including ‘things in action’ [section 436] and the bankrupt’s estate vests in the official receiver on their appointment as trustee [section 306]. Case law has, however, developed to set some limits as to the extent that certain types of rights of action constitute property for this purpose and, therefore, vest in a bankrupt’s trustee.

37.26 Vesting not affected by any restriction on assignment

A provision prohibiting assignment of a right of action does not affect the vesting of a right of action in the trustee. The Act provides that property vests in the trustee without assignment [section 306(2); Re Landau (a bankrupt) [1998] Ch 223].

Since the right of action vests by operation of law, the official receiver, as trustee, is not required to give notice of the vesting to potential defendants [Weddell v JA Pearce & Major (A Firm) [1988] Ch 226].

37.27 Actions that are solely ‘personal’ do not vest

It has long been a principle of bankruptcy law that actions that are solely ‘personal’ do not vest in the trustee and therefore they remain the property of the bankrupt [Howard v Crowther 151 ER 1179; Rogers v Spence (1846) 8 ER 1586; Beckham v Drake (1849) 2 HL Cas 579].

It was held, in 1841, that, ‘Nothing is more clear than that a right of action for an injury to the property of the bankrupt will pass to his [trustee]; but it is otherwise as to an injury to his personal comfort. [Trustees] of a bankrupt are not to make a profit of a man’s wounded feelings.’ This principle still stands today.

37.28 Definition of a personal action

A personal right of action has been defined as an action ‘where the damages are to be estimated by immediate reference to the pain felt by the bankrupt in respect of his [her] body, mind or character, and without immediate reference to his [her] rights of property’ [Beckham v Drake (1849) 2 HL Cas 579].

37.29 Examples of personal actions

Examples of personal (and therefore non vesting) rights of action are:

• Slander (unless the slander was reflected on property – where, for example, slanderous comments were made against the quality of a person’s goods)
• Libel (unless the libel was reflected on property – where, for example, libellous comments were made against the quality of a person’s goods)
• Physical injury
• Mental injury (post traumatic stress disorder, for example)
• Reputational damage
• Wrongful arrest

37.30 Examples of non-personal (property) actions

Examples of non-personal (property) actions are:

• Breach of contract
• Loss of earnings
• Incurring additional expenses
• Trespass or damage to property

37.31 Special damages and general damages

Often, in correspondence or papers relating to a claim, the official receiver will see reference to ‘special damages’ and ‘general damages’.

Generally speaking, for the purposes of deciding who owns which part of any claim, special damages are ‘property’ which vest as part of a bankruptcy estate and general damages are ‘personal’ and thus remain in the ownership of the bankrupt.

37.32 Date that right arises relevant when deciding whether it vests in the trustee

Generally speaking, a right of action arises at the point of the event which leads to the claim (a vehicle accident, for example), though any action that relates to the property of the bankrupt (including a contract) would vest by virtue of the underlying property vesting, regardless of when the event took place (i.e., even after bankruptcy or after discharge).

Where there is no underlying property, a right of action arising from an event before the date of the bankruptcy would be an asset vesting in the official receiver, as trustee (assuming that the claim was not entirely ‘personal’).

Any right arising from an event after the date of bankruptcy, but before discharge, would be open to be claimed by the official receiver in their capacity as trustee as after acquired property (again, assuming the claim was not entirely ‘personal’). The decision to claim should be based on the value of the ‘property’ element of the claim and the proximity of discharge, though official receivers should be careful not to claim a right of action that they cannot then deal with. In these circumstances it might be better that the action is left with the bankrupt and any ‘property’ monies awarded during bankruptcy claimed as after-acquired.

Unless the right arises in relation to property vested in the official receiver, any right of action arising after discharge would not vest in the official receiver as trustee and would not be open to be claimed as after-acquired property.

37.33 Date that right of action arises in personal injury type claim

Generally speaking, a personal injury type claim (which would normally only concern the official receiver were it to be a hybrid claim arises at the date of the event leading to the injury, unless there is a delayed action to the injury – in which case the right arises at the date that the injury became apparent.

The solicitors acting for the bankrupt should be able to clarify when the right of action arose, as they will have had to use this date to calculate the limitation date.

37.34 Bankrupt making application for an order/declaration that action does not vest

It is open to a bankrupt to make an application to court for declaration that a right of action does not vest in the trustee of the bankruptcy estate. It has been held that such an order would have no effect on any person who was not made a party to the application [Ord v Upton [2000] Ch 352].

It would be vitally important, if the official receiver, as trustee, is served with such an application, that they oppose the application (assuming they was of the view that the action did vest), seeking legal advice if necessary.

Vesting of ‘hybrid’ claims

37.35 actions which involve damage to both the bankrupt’s person and property.

Many events lead to damage to the bankrupt’s property and their person. For example, a typical road accident may lead to an injury to the bankrupt’s body (for example, whiplash) and, also, damage to the bankrupt’s property (damage to the car) and/or the need to incur additional (and otherwise unnecessary) expenses (damage to the financial position – which is a property damage). Following the relevant case law, this may cause a problem in deciding whether the action vests in the official receiver, as trustee, or not.

It used to be the case that such an action would be, effectively, ‘split’ between the personal damage and the property damage, and each claim pursued separately (one by the bankrupt and the other by their trustee) [Wilson v United Counties Bank [1920] AC 102]. This way of deciding matters is not, however, now considered good law.

37.36 Approach to actions which involve damage to both the bankrupt’s person and property – a ‘hybrid’ claim

It has been held that where a right of action involves damage to both the person and property of the bankrupt, there is only one cause of action, with different ‘heads’ of damage [Stock v London Underground 30 July 1999 CA, Times August 13 1999].

This position was confirmed, and somewhat advanced upon, in a later case [Ord v Upton [2000] Ch 352], where such an action (referred to in the judgment as a ‘hybrid’ claim) was held to be an action that would vest in a bankrupt’s estate, with any damages awarded for the personal element of the claim being held on a constructive trust for the benefit of the bankrupt by their trustee.

37.37 The possibility of ‘splitting’ a hybrid claim

A claim for race discrimination normally causes more than one type of damage (in technical terms, this is referred to as having more than one ‘head of damage’).

In the normal way of deciding such matters, such a claim would vest in the trustee in bankruptcy (as a ‘hybrid’ claim). It has been held, however, that in a claim for race discrimination the claimant can limit their claim to one for injured feelings making the claim entirely personal and taking it out of the bankruptcy estate. In the case in point, the bankrupt was allowed to ‘drop’ the loss of earnings part of the claim and continue with the claim for ‘injured feelings’ [Khan v Trident Safeguards Limited [2004] ICR 1591].

It is thought that this approach was taken due to the seriousness of race discrimination, though it is possible that the principles would be applicable to other discrimination cases. It is not thought that the principle would be applicable to other types of ‘hybrid’ claims.

37.38 Summary of the position regarding hybrid claims

As explained above, all rights of action arising before the date of a bankruptcy order which seek to recover property vest in the trustee whether or not they contain claims for damage that relate to ‘personal’ damages to which the bankrupt is entitled. Only a right of action that is solely personal would not vest.

In this context, it is irrelevant if the ‘property’ element of the claim is the lesser part.

37.39 Examples of hybrid actions

Examples of hybrid actions are as follows:

• An assault causing a bodily injury (personal) and damage to spectacles or clothing (property).
• A car crash causing a broken ankle (personal) and the resultant need to pay a third party to carry out household tasks such as shopping/cleaning/gardening (property)
• A car crash causing whiplash (personal), damage to a vehicle (property) and the need to use public transport at additional cost whilst the car was being repaired (property).
• A fall causing a strained back (personal), the need to spend money travelling to the hospital (property) and to pay for a private physiotherapist (property).
• Medical negligence leading to an arm injury (personal) and loss of earnings (property).
• An assault on a taxi driver causing a bodily injury (personal), post traumatic stress (personal), damage to the taxi (property) and an inability to work (loss of earnings – property).
• A fall in the street leading to a broken arm (personal) and damage to a laptop computer (property).
• A wrongful arrest (personal) where the bankrupt’s front door was destroyed in the arrest (property).

An action would be a hybrid action even if the property damages were directly connected to the personal damages – as in the second and fourth examples above.

37.40 Getting the bankrupt’s advisors to agree to the position in a hybrid claim

Where the official receiver is dealing with a ‘hybrid’ claim they should, as a first step, write to the bankrupt or their legal advisors asking them to form a view on whether the claim vests in the trustee of the bankruptcy estate, or not. Ideally, the position should be agreed.

It is likely that, having read the cases referred to in the letter, the bankrupt or their legal advisors will form the view that the actions vests in them as trustee.

Examples of types of claims to assist in vesting decision

37.41 certain entitlements do not pass to trustee.

Certain statutory entitlements (such as the entitlement to receive tax credits [Tax Credits Act 2002, section 45] or the entitlement to receive benefits [Social Security Administration Act 1992, section 187]) do not pass to a trustee in bankruptcy. A right arising under such an entitlement cannot, therefore, be property which vests in the official receiver, as trustee.

37.42 Insurance claims

A claim under an insurance contract entered into by the bankrupt would vest in the official receiver as trustee as a contract claim. This would be so even if the property subject to the claim would have been exempt had it been in the possession of the bankrupt as at the date of the making of the order (for example, where the bankrupt’s vehicle was destroyed in a fire, or their tools of the trade stolen).

This is subject to any equitable charge on the monies recovered.

37.43 Right to bring an appeal

Generally the right to appeal is not ordinarily a ‘thing in action’ or, as such, an item of property falling within the definition of property given in the Act [section 436]. If it is not an item of property it will not form part of the bankrupt’s estate and will not vest in the official receiver as trustee [Re GP Aviation Group International Ltd [2013] EWHC 1447 (Ch)].

A right of appeal, however, may constitute a thing in action if the right has an economic value in its own right in the sense that damages may still be available [Morris v Morgan [1998] BPIR 754 CA]. Certainly a right of appeal relating to a vesting action would vest in the official receiver as trustee, even if that right arose after discharge [Wordsworth v Dixon [1997] BPIR 337; Cummings v Claremont Petroleum NL [1998] BPIR 187].

A right of appeal against a bankruptcy debt, including the judgement on which the order is founded, vests in the official receiver, as trustee [Heath v Tang and Another; Stevens v Peacock [1993] 1 WLR 1421]. The right to appeal the making of the bankruptcy order does not vest [Sands v Layne [2016] EWCA Civ 1159].

An appeal against a tax assessment has been held to be a vesting claim and so would vest in the official receiver, as trustee [Ahajot v Waller [2005] BPIR 82].

37.44 Claims held on trust by the bankrupt

It may be the case that the bankrupt is holding a right of action on trust for another. This may be the case where the contract from which the right of action arose specified which party had the right to bring an action under the contract, in certain circumstances.

An example may be where the bankrupt was a party to a mortgage loan to purchase a property and it later turns out that the property was not as advertised. The right to sue in relation to any property purchased with the mortgage loan may remain with the mortgagee (under the terms of the mortgage contract), being held on trust by the bankrupt for the mortgagee.

Property held on trust by a bankrupt does not form part of their bankruptcy estate [section 283(3)(a)], and so will not vest in the official receiver, as trustee.

The official receiver should, of course, satisfy themselves of the veracity of the trust.

37.45 Claim for permanent disability under a life policy

A claim for permanent disability benefit under a life policy (or similar) would vest in the official receiver, as trustee, as the claim arises from a contract. It has been held that it is of no consequence that the claim is conditional on the claimant having suffered pain and injury. The payment is dependant upon a contractual right to a sum of money and the policy proceeds do not represent recompense to the bankrupt for personal loss or damage, but rather payment on satisfaction of a contractual prospect [Cork v Rawlins [2001] Ch 792].

37.46 Claim for criminal injury compensation

A claim for compensation from the Criminal Injuries Compensation Authority has been held not to constitute property and cannot, therefore, vest in the trustee [Re Campbell [1997] Ch 14]. In short, it was held that there was no right to claim an award – the award was at the discretion of the board authority and could not, therefore, exist as property.

37.47 Actions relating to a right to hold a licence

A licence or similar, such as a pilot’s licence or a solicitor’s certificate to practice, is personal to the person to whom the licence was granted. Rights of action arising in relation to such a licence cannot, therefore, form part of a bankrupt’s estate and consequently do not vest in the official receiver, as trustee [Re Rae (a bankrupt) [1995] BCC 102; Griffiths v Civil Aviation Authority [1997] BPIR 50].

37.48 Actions under the Matrimonial Causes Act

The Matrimonial Causes Act 1973 (MCA 1973) allows a spouse to seek financial relief following divorce. Such a right does not constitute property (and even if it did, it would be property personal to the bankrupt) and cannot, therefore, form part of a bankrupt’s estate or vest in the official receiver, as trustee.

Generally speaking, any right arising from a marriage would not vest in a trustee in bankruptcy. In short, the trustee is not party to a marriage and cannot, therefore, be party to any rights arising in relation to the marriage [Robert v Woodall [2016] EWHC 538 (Ch)].

The official receiver, as trustee, might consider claiming any property awarded in a financial settlement following divorce as after acquired property if such property is awarded during bankruptcy.

Property awarded under the MCA 1973 prior to the making of the bankruptcy order would vest in the official receiver as trustee.

37.49 Claims against veterinary surgeons (vets)

A right to claim against a vet (due, for example, to death or injury caused to a pet negligently during treatment) would vest in the official receiver, as trustee, because the right to bring a claim arises from the contract between the bankrupt and the vet.

If the bankrupt is also claiming personal distress (or similar) due to the negligent death or injury (etc.) of the pet, then the claim would be hybrid and would vest in the official receiver, as trustee.

37.50 Claims against professionals such as solicitors or accountants

Generally speaking, solicitors, accountants and other professionals are engaged under a contract for services and thus a claim against that professional would be based on that contract, and would vest in the official receiver, as trustee, notwithstanding the substance of the instruction.

37.51 Bankrupt bringing a claim on behalf of a deceased estate

Where a bankrupt is bringing a claim on behalf of a deceased estate, they would be doing so in a representative capacity and the claim would not form part of the bankruptcy estate and consequently would not vest in the official receiver, as trustee.

Any monies awarded as a result of the action may end up vesting if the bankrupt was also a beneficiary under the will but this point has to be considered separately.

37.52 Claims under the Fatal Accidents Act 1976

Where a death is caused by a wrongful act or neglect such as would (if death had not ensued) have entitled the deceased to bring an action for damages, the person liable shall still be liable to an action for damages despite the death of the person [Fatal Accidents Act 1976, section 1(1)]. Such an action is for the benefit of the dependants of the person whose death was caused [Fatal Accidents Act 1976, section 1(2)].

An action may include (or consist entirely) of a claim for damages for bereavement [Fatal Accidents Act 1976 section 1A]. A claim which is entirely for bereavement is personal to the bankrupt and would not form part of the bankruptcy estate. Where a claim is partly in respect of bereavement and partly in respect of a claim for financial losses resulting from the death, it would be a hybrid claim and would vest in the official receiver, as trustee.

37.53 Claims under the Inheritance (Provision for Family and Dependants) Act 1975

A claim under the Inheritance (Provision for Family and Dependants) Act 1975 is a claim to an interest in a deceased estate on the grounds that the disposition of that estate does not make reasonable financial provision for the applicant [Inheritance (Provision for Family and Dependants) Act 1975, section 1].

Such a claim is personal and thus does not form part of the bankrupt’s estate.

37.54 Claims arising from a bankrupt’s pension

Under the relevant legislation [Welfare Reform and Pensions Act 1999, section 11], any rights of the bankrupt under an approved pension arrangement are excluded from the bankruptcy estate.

A right of action arising under a bankrupt’s pension a scheme, where the pension is an approved scheme, would not, therefore, vest in the official receiver as trustee.

Claims which are made to the Financial Services Compensation Scheme (FSCS) are not claims arising from the pension but from the conduct of a regulated financial advisor - either in respect of financial advice given in respect of a pension investment or the provision of investment advice to the pension fund. Claims to the FSCS will vest in the trustee and compensation paid to the bankruptcy estate.

Effect of a right of action vesting

37.55 bankrupt has no standing to bring or continue vesting claim.

Where a right of action vests, the bankrupt has no standing (locus standi) to bring or continue the action without the official receiver (as trustee) becoming, at least, the co-claimant. [Jackson v North Eastern Railway Company (1877) LR 5 Ch D 844; Metropolitan Bank v Pooley (1884-1885) 10 App Cas 210 HL; Heath v Tang and Another; Stevens v Peacock [1993] 1 WLR 1421; Pickthall v Hill Dickinson LLP [2009] PNLR 31; Eaton v Mitchells & Butler plc [2015] All ER].

This point should be made clear to the bankrupt and their advisors as soon as the official receiver becomes aware of a right of action that has vested in them as trustee.

37.56 Important that official receiver takes initiative in dealing with a right of action

Despite the general inability of a bankrupt to continue an action once it has vested, it has been held that a bankrupt may continue to pursue the claim where they is in ignorance of the appointment of a trustee or of the vesting of their estate (including the right of action) in the trustee, whether or not they ought to have known of the appointment and vesting.

Assuming that the official receiver follows the guidance elsewhere in this Chapter and takes proactive steps in respect of the claim (in particular issuing the standard letter), this situation is unlikely to arise.

37.57 Official receiver should not give indication that bankrupt or director may continue with claim

The official receiver should not, under any circumstances, give effective or explicit consent to a director of a company in liquidation or the bankrupt continuing with the litigation (including the issuing of proceedings) of any right of action belonging to the company in liquidation or vesting in them as trustee.

If such action were taken the director or bankrupt, as the case may be, may be considered to have been appointed as the official receiver’s agent in this matter [Vickery v Modern Security Systems Limited [1998] BPIR 164].

To do so would leave the official receiver, as trustee, in the position of being, at least, co-claimant (in a bankruptcy) and possibly exposing the company or them to an adverse costs order.

37.58 Court may award costs against solicitor who conducts proceedings on behalf of a known bankrupt

It has been held that a wasted costs order can be made against solicitors who conduct proceedings on behalf of a known bankrupt without the consent of the trustee in bankruptcy (which consent should generally not be given) [Thames Chambers Solicitors v Miah [2013] EWHC 1245 (QB)].

37.59 Bankrupt’s inability to bring a claim unaffected by having been awarded legal aid

The inability of a bankrupt to bring or continue a vesting right of action that vests in the official receiver, as trustee is unaffected by them having been granted legal aid [James v Rutherford-Hodge [2006] BPIR 973].

37.60 Bankrupt’s inability to bring a claim not contrary to human rights legislation

It has been held that the fact that a bankrupt is unable to bring a vesting action is not contrary to a bankrupt’s right to access the courts under the human rights legislation [Human Rights Act 1998]. Essentially, it was held that the right has not been denied; rather it has vested in the bankruptcy estate [Young v Official Receiver, unreported].

37.61 Claim issued when official receiver has not agreed

Where the bankrupt issues a claim in a vesting right of action without the permission of the official receiver as trustee, it is likely that the claim will be struck out as an abuse of process [Pickthall v Hill Dickinson LLP [2009] PNLR 31] or as being frivolous or vexatious [Metropolitan Bank v Pooley (1884-1885) 10 App Cas 210 HL].

The issuing of a claim by a bankrupt’s solicitors in circumstances where the solicitor is acting contrary to the advice of the official receiver is likely to be a breach of the standards of professional conduct, for which the official receiver should consider making a complaint to the Solicitors’ Regulation Authority (http://www.sra.org.uk/solicitors/solicitors.page).

Settlement of a right of action

37.62 settlement – general.

Settlement of a claim is the process by which the parties to a legal claim (the right of action) can agree to bring the claim to an end on terms – usually by the payment of a sum of money. Typically, a settlement is attempted before court proceedings are issued, though settlement is allowed after issue, subject to certain rules [Civil Procedure Rules part 36].

Settlement is likely to be the most cost-effective way to deal with a vesting claim.

37.63 Settlement to be offered before assignment

Settlement is one of the ‘positive’ ways that the official receiver can deal with a vesting right of action, and should generally always be considered before assignment.

The reason being that the official receiver, as trustee, cannot demonstrate that he has acted in the best interests of creditors (and achieved the best realisation of the right of action) if they has not attempted settlement – for which a better price may be obtained than in an assignment [Re Edennote Ltd [1996] BCC 718].

Assignment should not be promised before the defendant has had an opportunity to settle. Where the offer of settlement is likely to realise less than an assignment then, of course, the official receiver, as trustee, should explore the assignment in the best interests of creditors. But on this there is likely to be a timing issue, detrimental to the creditors. A settlement will, most likely, produce funds quickly whereas under an assignment, funds may only become available after the conclusion of litigation.

37.64 Settlement – official receiver may deal with negotiations

Where the right of action relates to a simple claim, it should be possible for the official receiver, as trustee, to conduct the settlement negotiations required. The official receiver should attempt to negotiate a payment close to the stated value of the claim (which might be apparent from the background papers provided by the company officers or bankrupt, but it may be appropriate to give a discount to reflect risk of failure in the case or risk of success in any counterclaim.

Where this is not possible or desirable, the official receiver may appoint their own legal advisors or retain those engaged by the company or bankrupt to pursue negotiations for a settlement.

37.65 ‘Ogden Tables’ may assist the official receiver in negotiating a settlement in personal injury cases

In personal injury type cases the official receiver, as trustee, may be assisted by the ‘Ogden Tables’ (https://www.gov.uk/government/publications/ogden-tables-actuarial-compensation-tables-for-injury-and-death) which give guidance on the amounts that should be awarded in cases of injury and death, including ‘property’ losses such as future medical/care expenses. But official receivers should be very wary of using such specialist information in such circumstances. The handling of personal injury claims is a specialism in its own right and is also likely to involve potentially competing interests – the trustee in bankruptcy, for the creditors on the one hand, and the bankrupt, for themselves, on the other.

37.66 Offers of settlement to be marked ‘without prejudice’

Any letter to the defendant offering (or enquiring into the possibility of) a settlement should be marked ‘without prejudice’.

This will give the official receiver a defence to any assertion that the letter was a formal offer to settle to which they is bound.

37.67 Settlement – retention of company’s or bankrupt’s solicitors

Where the official receiver, as liquidator or trustee, is dealing with a claim which is in the process of being negotiated towards settlement, they may wish to retain the solicitors engaged by the insolvent to continue to negotiate the settlement on their behalf. This would be a sensible option in that the solicitors would be aware of the value and strength of the claim and would be able to easily form a view whether any offered settlement was fair, although there may be difficulties later with this approach in ‘hybrid’ claims.

37.68 Conditions where bankrupt’s solicitors retained

In the circumstances where the insolvent’s solicitors are retained, assuming, of course, they were minded to be retained, the official receiver, as liquidator or trustee, should make it clear to the solicitors that they are being retained to negotiate (or continue to negotiate) an out of court settlement and under no circumstances should proceedings (including protective claims) be issued (whether in the name of the official receiver or the bankrupt) without express authority from the official receiver.

37.69 Payment of solicitor’s costs where bankrupt’s solicitors retained

Where the official receiver, as liquidator or trustee, chooses to attempt to retain the insolvent’s solicitors in order to negotiate a settlement, the solicitor’s reasonable costs may only be paid from the settlement (no funds will be made available from the estate and nor will the official receiver, as liquidator or trustee, pay the costs). In ‘hybrid’ claims, the costs should be deducted pro-rata from the gross claim - in effect, from each element of the settlement (and not, for example, just from the portion of the award due to the bankruptcy estate).

These points should be outlined to the retained solicitor from the outset of the instruction if they are minded to act in this way (which may benefit both parties).

37.70 Potential difficulties where bankrupt’s solicitors retained

Where the bankrupt’s solicitors are retained by the official receiver, as trustee, to negotiate a settlement, there may be difficulties where a settlement is reached in a ‘hybrid’ action and there is no apportionment of the settlement between ‘personal’ and ‘property’ damages (often called a ‘global’ settlement).

The difficulties may arise where, in such a global settlement, there is a dispute as to how the settlement monies should be apportioned between personal and property elements of the claim. In effect, the retained solicitor would be acting for both parties (the official receiver and the bankrupt) in this dispute. This is something to be borne in mind if, as seems sensible, the solicitors are instructed to act in seeking a settlement.

37.71 Appointment of the official receiver’s own solicitors to negotiate a settlement

In claims where it is not possible or proper to retain the bankrupt’s solicitors to negotiate a settlement, or to continue such a negotiation, the official receiver, as liquidator or trustee, may appoint their own legal advisors to assist in the negotiation of a settlement.

When considering this course of action, the official receiver should consider the costs of such an instruction against the amount of any potential settlement. Where necessary, the official receiver may incur a debit balance to pay the costs of such legal representation, seeking permission if necessary (see Chapter 1).

37.72 Negotiating a settlement where limitation date approaching

In circumstances where the limitation date is approaching, it may be necessary for the official receiver, as liquidator or trustee, to take some action to protect the claim. This may be by way of a protective claim or a standstill agreement. Neither process should be undertaken without first seeking legal advice.

37.73 Settlement after issue of proceedings (a Part 36 settlement)

Whilst most settlement negotiations and settlements occur before the issue of proceedings, the relevant rules [note 3] do allow the claim to be settled after that event.

This may occur where the official receiver, as liquidator or trustee, has had to take action to suspend the running of the limitation period by issuing a Claim Form, or where proceedings had already been opened by the date of the making of the bankruptcy order.

It is not envisaged that the official receiver would enter into such a procedure without legal representation.

37.74 Advance payments during settlement

Sometimes, the defendants to a claim will offer interim payments to assist the claimant with ongoing expenses, general living costs, etc. Unless there is evidence to the contrary, these payments should be apportioned pro-rata between ‘personal’ and ‘property’ elements of the claim (and claimed accordingly).

Assignment of a right of action – general overview

37.75 assignment – general.

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

Assignment is one of the ‘positive’ ways that the official receiver can deal with a vesting right of action, but such action should not be undertaken ‘automatically’ or without legal advice.

37.76 Content of this section

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, the price that should be paid for the action and the form and legality of the assignment.

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

37.77 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
• Assignment may be barred by terms in the original contract
• Assignment should not open the defendant up to vexatious litigation
• Frivolous claims (ones unlikely to succeed) should not be assigned
• Assignment should be absolute if the liquidator/trustee is to avoid being made a party to any/a/the judgment
• Liquidator/trustee is not required to assign right of action where the only offer received is derisory

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.

37.78 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 they does so in the best interests of the creditors, which means seeking good consideration for the assignment. 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.

These competing considerations will require legal advice, particularly for complex claims [Faryab v Smith [2001] BPIR 246] and, possibly, exceptionally, an application to court for directions.

37.79 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 they should seek fair payment [Cummings v Official Receiver [2002] EWHC 2894 (Ch)]. The official receiver should accept an offer for assignment if it is reasonable and does not prejudice them but not generally before seeking, or attempting again to seek, a settlement from the proposed defendant [Hamilton v Official Receiver [2002] BPIR 602; Edennote Ltd [1996] BCC 718].

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 [Khan v Official Receiver [1997] BPIR 109; Wilson v Specter Partnership [2007] BPIR 649]

37.80 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 [Faryab v Smith [2001] BPIR 246].

The official receiver, as trustee, will need advice to distinguish carefully between the value of the property and personal elements of the claim to properly account to the bankrupt if they are not the assignee. In short, the official receiver should seek the following advice from their 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.

37.81 Legal advice obtained by the company or bankrupt

It may be the case that the company or bankrupt has obtained its/their own legal advice regarding the merits of assigning the right of action. 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 in the paragraph above.

37.82 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. The legal costs of the actual assignment are likely to be in the region of £500 plus VAT.

37.83 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).

The official receiver should make it clear that they will expect the assignee to also pay the legal costs of the assignment if matters were to reach that point.

37.84 Costs of obtaining legal advice where potential assignee is without funds

In exceptional circumstances (where, for example, the assignee wishes to take on a right of action that the official receiver considers has a good prospect of success, is without funds, and there is the prospect of funds being paid into the estate from assignment), the official receiver may incur a debit balance on the estate to seek the necessary legal advice; the costs of the legal advice being recovered from the consideration payable in respect of the assignment.

37.85 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 them [section 168(5); section 303; Osborn v Cole [1999] BPIR 251]. The court will look to see that the official receiver’s decision not to assign was reasonable when deciding such an application [Shepherd v Official Receiver [2006] EWHC 2902 (Ch)].

The court will only overturn the official receiver’s decision not to assign if that decision was made in bad faith or was perverse [Hans Place Ltd [1992] BCC 737].

By following the guidance in this section, the official receiver can reduce the likelihood of being subject to such an application.

37.86 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 [rule 13.4; section 168(3); Craig v Humberclyde Industrial Finance Group Ltd [1999] BCC 378]. This should be considered to be an exceptional course of action.

Assignment to be absolute

37.87 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 the illegal trafficking of claims (known as champerty or maintenance) [Re Park Gate Waggon Works Co (1881) 17 Ch D 234; Kitson v Hardwick (1871-72) LR 7 CP 473; Seear v Lawson (1880) LR 15 Ch D 426; Law of Property Act 1925 section 136].

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 [Glegg v Bromley [1912] 3 KB 474; section 246ZD].

37.88 Liquidator or trustee permitted to assign a right of action for future consideration

The official receiver, as liquidator or trustee, is permitted to assign a cause of action for future consideration [Guy v Churchill (1889) 40 ChD 481]. The right of action may be assigned (back) to the bankrupt on this basis also [Ramsey v Hartley [1977] 1 WLR 686].

Assignment for a future share of the winnings should not be considered 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.

37.89 All assignments of rights of action should be absolute

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. [Law of Property Act 1925 section 136; Glegg v Bromley [1912] 3 KB 474; Hamilton v Official Receiver [2002] BPIR 602]

37.90 Consequences where assignment is not absolute – adverse costs

Where the official receiver as liquidator or trustee assigns a right of action on terms less than absolute (where, for example the action is assigned for a share of the ‘winnings’), they leaves the company/themself open to a claim for adverse costs from the defendants in the event that the claim is unsuccessful [Stephen Hunt (as trustee in bankruptcy of Janan George Harb) v Janan George Harb, HRH Prince Abdul Aziz Bin Fahd Abdful Aziz [2011] EWCA Civ 1239]. 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.

Equitable assignments

37.91 equitable assignments.

An equitable assignment can take place when one party makes an outward expression of its intention to assign or transfer an item [Finlan v Eyton Morris Winfield (A Firm) [2007] EWHC 914 (Ch)] or where the requirements of the law are not met [Law of Property Act 1925, section 136]. 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.

37.92 Adverse consequences of an equitable assignment

The effect of an equitable assignment is that the benefit of the right of action passes to the equitable assignee but they 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 they may find themself 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 [Three Rivers District Council v Bank of England (No. 1) [1996] QB 292].

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 [section 168(5); section 304] and a payment as compensation or in respect of a loss.

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

To avoid any assertion that an equitable assignment has taken place, 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.

Matters to consider prior to assignment

37.94 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 and establishing which other parties may be interested in purchasing the right of action (including the defendant in the form of a settlement) [Edennote Ltd [1996] BCC 718; Ultraframe (UK) Ltd v Rigby and others [2005] EWCA Civ 276].

The official receiver should not offer or accept an offer of assignment when the settlement of the claim is still possible.

37.95 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 [Hellard v Michael [2009] EWHC 2414 (Ch)].

37.96 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. 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 [Khan v Official Receiver [1997] BPIR 109].

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 [Stein v Blake [1996] 1 AC 243].

The agreed consideration should be in addition to the provision for the official receiver’s legal costs.

37.97 Assignment to the defendant

The official receiver, as trustee, may assign the action to the defendant (effectively bring the action to an end) [Official Receiver v Davis [1998] BPIR 771], but the assignment should not be used as a tool to stifle the claim [Shepherd v Legal Services Commission [2003] BCC 728].

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.

37.98 Assignment (back) to the bankrupt

The bankrupt may request the assignment of a cause of action (back) to them where the official receiver, as trustee, decides not to (or is unable) to take it on (by settlement or litigation) [Hamilton v Official Receiver [2002] BPIR 602].

The official receiver has the power to assign a right of action back to the bankrupt [Kitson v Hardwick (1871-72) LR 7 CP 473], but this should not be an ‘automatic’ action. For one thing, the official receiver should consider if a better offer may be possible and, for another, the official receiver should consider the rights of the defendant (even if the offer from the bankrupt is a good one).

37.99 Considering the rights of the defendant

The official receiver should not assign a frivolous claim (one that is unlikely to succeed) [Judd v Official Assignee [2001] BPIR 468; Citicorp and others v Official Trustee in Bankruptcy and Another [1996] FCA 1115] and should exercise their 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) [Re Papaloizu [1999] BPIR 106; Re Shettar [2003] BPIR 1055].

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.

37.100 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 [Linden Gardens Trust v Lenesta Sludge Disposals Ltd [1994] 1 AC 85; Quadmost Ltd (in liquidation) v Reorotech (Pebsham) Ltd [2001] BPIR].

Such a provision would not affect the vesting of an action in the trustee in bankruptcy as the action passes without assignment [section 306(2)], but is deemed to have been assigned [section 311(4); Re Landau [1998] Ch 223]. The official receiver, as liquidator or trustee, should peruse the contract on which the action is (to be) based to satisfy themself that there is no such clause. The legal advisors appointed by the official receiver can be asked to assess the situation if there is any doubt.

37.101 Assigning where there is a counter-claim

The fact that a claim being brought by the insolvent is subject to a counter-claim 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 [Stein v Blake [1996] AC 243; section 323; rule 4.90].

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 [Craig v Humberclyde Industrial Finance Group Ltd [1999] BCC 378].

37.102 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 [Seven Eight Six Properties Ltd v Ghafour [1997] BPIR 519].

Examples of this may be where the bankrupt is seeking to overturn a judgment on which the bankruptcy order was made [Royal Bank of Scotland plc v Farley [1996] BPIR 638] or where the action was statute barred.

37.103 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 [Haq v Singh [2001] WLR 1594].

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 that the official receiver, as liquidator or trustee, should seek to deal with the right of action, either by assignment or settlement, before the expiration of the limitation period.

37.104 Indemnifying the official receiver against adverse costs following assignment

It is possible, particularly in cases where the right of action was sold ‘on credit’, 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 themself 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 [Osborn v Cole [1999] BPIR 251; Re Shettar [2003] BPIR 1055].

By following the procedure that settlement should be offered prior to assignment, 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.

37.105 Potential problem where assignment follows issue of proceedings

Where a protective claim is issued by the liquidator or trustee 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 their name [Civil Procedure Rules, parts 19.2 and 17.1]. If the court refuses that request, the claim will be lost unless the official receiver was minded to take it forward in their own name (which, they should not do, as explained elsewhere).

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 [Pickthall v Hill Dickinson LLP [2009] EWCA Civ 543; Boston Trust Co Ltd v Verhoef [2021] EWCA Civ 1176].

37.106 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 [section 399; section 400] (assistant official receiver is not a term recognised in the legislation - see also Chapter 1).

Litigation of a right of action

37.107 litigation – general.

Litigation is one of the ‘positive’ ways that the official receiver can deal with a vesting right of action.

Litigation, in this context, can be taken to mean the issuing and pursuit of court action by the official receiver, as liquidator or trustee, as the original owner (the insolvent) would have done. For the purposes of this section of the chapter, litigation does not include the negotiation of a settlement (which is covered elsewhere in the Chapter).

37.108 Bankrupt has no standing to bring or continue vesting claim

Where a right of action vests in the trustee, the bankrupt has no standing to bring or continue the action without the official receiver (as trustee) becoming, at least, the co-claimant [Jackson v North Eastern Railway Company (1877) LR 5 Ch D 844; The Metropolitan Bank Ltd v Pooley (1885) 10 App Cas 210 HL; Heath v Tang and another; Stevens v Peacock 01993] 1 WLR 1421; Pickthall v Hill Dickinson LLP EWCA Civ 543].

A similar principle would apply where the right of action forms part of the assets of a company in liquidation.

37.109 Litigation by official receiver not normally the appropriate way to deal with a right of action

It is extremely unlikely that it would be appropriate for the official receiver, as liquidator or trustee, to litigate a right of action.

It is not possible to completely rule out the possibility of litigation, but this course of action is unlikely to be the correct, or most appropriate, course of action for an official receiver to take. Settlement or assignment should be considered first.

37.110 Reasons not to litigate a right of action

There are four main reasons that it is not normally appropriate for the official receiver, as liquidator or trustee, to litigate a right of action:

• The risk of an adverse costs order against the official receiver personally if they is trustee [Vickery v Modern Security Systems Limited [1998] 1 BCLC 428]. The official receiver acting as liquidator will normally have no personal liability for costs unless there has been some impropriety on their part [Metalloy Supplies Ltd (in liquidation) v MA (UK) Ltd [1997] 1 WLR 1613]. Any adverse costs order may result in the need for a fruitless payment to be paid by The Insolvency Service to cover the loss to creditors.
• From a practical point of view, it is difficult to bring an action where the involvement (to attend hearings, etc.) of a (possibly unwilling) director or bankrupt is required. This is particularly the case in a personal injury type claim where it might be required to have the bankrupt (who might have been the claimant) attend medical examinations, etc.
• The official receiver, as liquidator or trustee, is, generally, without funds to pursue an action and, whilst it is possible to incur a debit balance or request creditors to provide a ‘fighting fund’, the claim would have to have a high potential value to make this course of action worthwhile.
• While the litigation may have the possibility of a higher monetary return to creditors, their interests might be better served by an early realisation (by settlement or assignment) even if that is likely to realise a lower amount.

37.111 Pressure to litigate applied by solicitors

The official receiver should not allow the insolvent’s solicitors to pressure them into continuing (or bringing) the claim, unless they has received their own legal advice that that is the best way to proceed. Often, the solicitor will have been engaged on a conditional fee (‘no-win no-fee’) arrangement where they will only be paid following a successful outcome and will, therefore, have a vested interest in pursuing the matter through to a successful conclusion by way of litigation.

37.112 Insurance backed claims

An insurance policy taken out in the name of the bankrupt to, for example, cover them against an adverse costs order would vest in the official receiver as trustee. The official receiver would then have the benefit of that policy. This would apply even if the claim were to be personal to the bankrupt.

This is subject to any clause in the policy terminating it in the event of bankruptcy. Notwithstanding this, it is unlikely to materially affect the basic principle that the official receiver, as trustee, should avoid litigating a right of action, for the reasons given above.

37.113 Official receiver should not allow claim to be brought in their name on behalf of original claimant

It has been held that the official receiver should not allow himself/herself to accept engagement as a ‘hired gun’ [Re Ng (a bankrupt) [1997] BCC 507]. What this means is that the liquidator or trustee should not accept payment in return for bringing a claim.

37.114 Legal advice to be obtained before litigation

No litigation should be considered by the official receiver, as liquidator or trustee, without first seeking legal advice. Where there are no funds in the estate to pay for this advice, the official receiver could send a circular to the principal (preferential) creditors asking them to contribute towards a fighting fund.

Alternatively, the official receiver could make a payment from the estate to obtain that advice provided that it can be shown that litigation is considered to be the best course of action – supported by relevant facts and copy documents, with the decision making process recorded on the relevant ISCIS Note.

If the payment required is over £2,500, the guidance in Chapter 1 regarding the requirement to obtain prior permission should be followed before committing to any expenditure.

37.115 Information to be obtained and assessed before taking the decision to litigate a claim

Where an official receiver is considering bringing or continuing legal proceedings, they should obtain sufficient information to enable a decision to be made as to whether or not this is an appropriate course of action. The information should cover, at least, the following areas and should complement the general information obtained regarding the claim:

• Details of the events leading up to the decision to take legal action.
• Information regarding the potential success of the case (including any legal opinion obtained in this regard). On what information is this decision based?
• The estimated costs of bringing the action.
• The estimated potential costs of losing the action.
• The balance on the estate and value of potential future realisations.
• The estimated potential value to the estate of bringing the action.
• What provisions have been made to pay any adverse costs order (for example, a creditors’ fighting fund).

A note should be made on the electronic file of the above matters considered and the conclusion reached.

37.116 Seeking an adjournment

Often, a case will already be going through litigation when it comes to the attention of the official receiver, and it is not unusual for there to be an imminent (sometimes a very imminent) hearing. The insolvent’s solicitors will frequently try to encourage the official receiver to seek an adjournment.

The seeking of an adjournment of an ongoing claim - including written application – may be considered by the court to be a formal application which, particularly if opposed, could result in the court refusing to make the adjournment order and making an adverse costs order against the official receiver.

Seeking an adjournment would constitute the bringing of legal proceedings – for which permission of the Senior Official Receiver is required unless suitable indemnities are in place.

In the event that the official receiver is unable to positively deal with the right of action (for example, by way of settlement or assignment) prior to the next scheduled hearing, they may, in advance of seeking an adjournment, request that the other side (the defendants) agree to the adjournment with each side bearing its own costs in the application.

Alternatively, if the official receiver believes that there is no merit in seeking an adjournment, they may, instead, write to the court stating that they do not intend to be present or represented at the hearing as there are no funds in the estate. The court will then make such order as it sees fit (which may well be an adjournment).

37.117 Consulting creditors

Where there are no funds with which to pursue an action, or to obtain legal advice regarding the merits of pursuing an action, the official receiver, as liquidator or trustee, may circulate creditors and ask them to provide the required funding (often known as a ‘fighting fund’). It is not necessary to circulate all creditors, just the main creditors with the main financial interest in the outcome, including any creditors holding security over the relevant right of action.

It is rare for creditors to respond to such a circular in a positive manner, but such a circular does have the benefit of protecting the official receiver from criticism from creditors in the event that they subsequently decides not to litigate.

37.118 Limit on creditors’ involvement in litigation

The trustee or liquidator does not lose their right to pursue a claim/litigation in the manner they considers appropriate where creditors have provided a fighting fund. In other words, the official receiver, as liquidator or trustee, would retain control of the litigation and the creditors may not interfere [Re Exchange Travel (Holdings) Ltd (No.3) [1997] BCC 784].

37.119 Creditor may apply to carry on action (companies only)

Where the official receiver, as liquidator, is not prepared to litigate (whether they is without funds or because they has been legally advised not to), a creditor or contributory may make an application to the court for leave to carry on the action [section 167(3)]. In these circumstances, the official receiver should attend the hearing and object to the application unless it is granted on the basis that no costs fall on the company or the official receiver (which is a condition likely to be imposed by the court).

37.120 Official receiver to become claimant in bankruptcy case

In the rare event that the official receiver, as trustee, decides to continue litigation already begun by a bankrupt they would have to apply to court to be substituted as claimant [Civil Procedure Rules part 19.2(4)].

In a liquidation, the action would continue in the name of the company.

37.121 Official receiver not to pursue speculative claim

It would not normally be appropriate for the official receiver, as liquidator or trustee, to pursue a speculative claim unless the creditors were in favour of that course of action and had provided appropriate indemnities, etc. [James v Rutherford-Hodge [2006] BPIR 973].

37.122 Insurance backed claims

Any insurance policy in the name of the company to cover it against an adverse costs order would continue to be property of the company in liquidation and the company would continue to have the benefit of that policy.

An insurance policy taken out in the name of the bankrupt to cover them against an adverse costs order, for example, would vest in the official receiver as trustee of the bankrupt’s estate. The official receiver, as trustee, would then have the benefit of that policy.

This is subject to any clause in the policy terminating it in the event of formal insolvency or any assignment of the insurance to a third party – for example, the company or legal advisor assisting in the brining of the claim.

Notwithstanding this, it is unlikely to materially affect the basic principle that the official receiver, as liquidator or trustee, should avoid litigating a right of action.

37.123 Cannot bring claim again

It is not possible to litigate a matter that has already been litigated to a judgment. The defendant would have an automatic defence as what is known as cause of action estoppel.

A similar principle applies where an award has been issued following a complaint to an Ombudsman [Clark v In Focus Asset Management & Tax Solutions Ltd [2014] EWCA Civ 118].

37.124 Prosecution of a frivolous claim vexatious

A vexatious action is an action that is being brought merely for annoyance or oppression where no practical remedy is likely. A vexatious claim is likely to be stopped by the court, using a restraint order [Civil Procedure Rules part 3.11; Senior Courts Act 1981, section 42].

It has been held that the prosecution of a frivolous claim (one with no chance of succeeding) would be vexatious [Citicorp and others v Official Trustee in Bankruptcy and Another [1996] FCA 1115].

37.125 Dealing with/enforcing a judgment following successful litigation

It is likely that any solicitors engaged by the official receiver, as liquidator or trustee, to litigate a right of action will be able to provide advice on enforcing a judgment debt where payment is not made.

Information and guidance on enforcing a judgment debt can be found on GOV.UK.

Limitation periods

37.126 time limits for bringing claims.

The law sets time limits in which a claim must be brought [Limitation Act 1980]. It would not be possible to fully explore all relevant provisions here and, generally speaking, the official receiver should obtain legal advice on a case-by-case basis. That said, the basic principles are as follows:

• Personal injury claims – three years from the date the cause of action accrued; or the date of knowledge (if later) of the person injured [Limitation Act 1980, section 11].
• Contract claims – six years from the date on which the cause of action accrued [Limitation Act 1980, section 5].
• Claims under deed or statute – twelve years from the date on which the cause of action accrued [Limitation Act 1980, section 8].

37.127 Relevant date for a personal injury claim

So far as a personal injury claim is concerned, the limitation period begins with the date of the event leading to the injury [Limitation Act 1980, section 11(4)(a)], unless there is a delayed appearance of the adverse condition (as in some cases of asbestosis, for example), in which case the right accrues when the condition becomes apparent [Limitation Act 1980, section 11(4)(b)].

37.128 Relevant date for a professional negligence claim against a solicitor

Generally speaking, in professional negligence claims, where the claimant became aware that they had been negligently advised at a date later than the date that the advice was given, then there is an additional three years to bring a claim from the date that the claimant first had the knowledge of negligence required for bringing an action for damages in respect of the relevant damage [Limitation Act 1980, section 14A(5)].

The defendants may seek to challenge the claimant’s assertion as to the date that they first had knowledge [Haward v Fawcetts [2006] 1 WLR 682].

37.129 Protective claims where expiration of limitation date imminent

A protective claim (sometimes known as a protective writ) involves issuing proceedings but refraining from serving the proceedings on the defendant for a maximum period of four months [Civil Procedure Rules, part 7.5] – during which period a settlement can be negotiated. No adverse costs order can be made until the claim is served.

There are potential difficulties in bringing a protective claim. The rules for bringing claims, for example, provide that the claim form shall contain details of the nature of the claim and the remedy sought [Civil Procedure Rules, part 16.2]. This information may not be known to the official receiver, as liquidator or trustee, at the relevant time. A protective claim may be challenged if it does not meet the requirements of the relevant procedural rules [Nomura International plc v Granada Group Ltd [2008] Bus LR 1]. Legal advice should therefore be sought before such a claim is issued.

37.130 Substitution of a party after the expiration of the limitation date

The legislation places restrictions on amendments to an issued claim after the limitation period has expired [Limitation Act 1980, section 35]. One of these restrictions concerns the substitution of one party for another (as would be necessary if the official receiver, as trustee, were to continue an action already started by the bankrupt). The relevant rules [Civil Procedure Rules, part 19.5(2)] provide that, where it is not possible to properly continue the action without substituting or adding a party, then such substitution or addition may be allowed.

37.131 Issuing a claim after expiration of limitation period

It is possible for a claim to be issued after the expiration of the relevant limitation period where there was a technical defect in an earlier claim (for example, a failure of service) [Horton v Sadler [2007] 1 AC 307] but this possibility should not be taken for granted.

37.132 Standstill agreements

A standstill agreement is an agreement between the defendant and the claimant that the running of the limitation period can be suspended. This course of action may be followed where the limitation date is approaching and the official receiver, as liquidator or trustee, needs more time to consider the merits of the claim, or attempt to reach a settlement.

Such agreements should be avoided without first seeking legal advice, as a poorly worded agreement might leave the claimant unable to bring the claim when, for example, settlement negotiations break down [Gold Shipping Navigation Co SA v Lulu Maritime Ltd EWHC 1365 (Admlty)].

The official receiver could make a payment from the estate to obtain that advice provided that it can be shown that entering into such an agreement is considered to be the best course of action – supported by relevant facts and copy documents, with the decision making process recorded on the relevant ISCIS Note.

Employment claims - general

37.133 employment claims generally.

Employment claims are generally brought before an Employment Tribunal, unlike other types of claims where the usual forum is the court (though such claim may end up in the court, ultimately). An employment claim will almost certainly concern the bankrupt’s leaving of a job, in connection with which they is claiming unfair dismissal or wrongful dismissal.

Another type of employment claim often encountered is one for discrimination, which may or may not be connected with a claim for loss of a job.

37.134 Information required from the claimant

In order that the official receiver, as trustee, can assess which is the best option to take in respect of a right of action relating to an employment claim, they should, as a minimum, seek the following information from the claimant bankrupt:

• The event which led to the claim and the date of that event.
• Whether the action is for wrongful dismissal, unfair dismissal and/or something else.
• Any insurance policy that is backing the claim.
• The grounds on which any solicitors are acting (for example, is it a conditional fee arrangement, or similar?).
• Any limitation on the claim.
• Copies of any claim forms (this will, most likely, be an ET1 form).
• Copies of any documents (for example, orders) issued by or to the tribunal.

37.135 Employment Tribunals

Employment Tribunals hear claims to do with employment. They operate in a way similar to courts in that they receive submissions from both sides before considering the evidence and making a binding judgment.

More information on Employment Tribunals can be found on GOV.UK.

37.136 Time limit for bringing an employment claim

A claim relating to dismissal (wrongful or unfair) made to an Employment Tribunal must normally be made within three months of the dismissal (normally the dismissal will be the last day worked – regardless of any pay in-lieu of notice, etc.) or last discriminatory act complained of [Employment Rights Act 1996, section 111(2)(a)]. The Employment Tribunal has discretion to extend this time period [Employment Rights Act 1996 section 111(2)(b)] where the employee was unable to bring the claim or where it would not have been appropriate to do so (where, for example, the employee was completing, or believed that they was completing, the (former) employer’s internal procedures [Marks and Spencer plc v Williams-Ryan [2005] ICR 1293] or where the employee was seriously ill) [Employment Rights Act 1996, section 111(2)].

Where a claim for wrongful dismissal is brought in a court, the time limit is six years from the date of dismissal [Limitation Act 1980, section 5].

37.137 General principle regarding employment claims in bankruptcy

It is a general principle of insolvency legislation that an employment contract (one that requires the bankrupt to provide their skill and/or labour) cannot vest in the trustee in bankruptcy. The trustee cannot carry out the role of the bankrupt, nor can they force the bankrupt to remain in the job and any right of action arising from that contract must remain personal to the bankrupt [Beckham v Drake (1849) 9 ER 1213].

Where the contact has ended (whether by termination or conclusion), any right to claim under that contract would vest in the official receiver, as trustee.

Most employment claims tend to be a consequence of the bankrupt’s dismissal from a job and the ending of the contract of employment. Not all claims for dismissal vest in the official receiver, as trustee and to decide whether a claim for dismissal vests, it is necessary to decide whether the claim is one for unfair dismissal or wrongful dismissal. In short, unfair dismissal claims do not vest; wrongful dismissal claims do.

37.138 Settling an employment claim

As with any other sort of claim, an employment claim may be settled before or during the time it is submitted to the employment tribunal.

It is the normal procedure for the employment tribunal to send a copy of any claim received to the Advisory, Conciliation and Arbitration Service (ACAS) who will attempt to assist the parties in reaching a settlement, if that is what they both wish to do. The official receiver should consider such a facility if the claim is one that vests.

Unfair dismissal and wrongful dismissal

37.139 unfair dismissal versus wrongful dismissal.

In simple terms, a claim for unfair dismissal is a claim that that the bankrupt ought not to have been dismissed from their job (it was ‘unfair’ to have done so). The primary remedy for an unfair dismissal claim is to reinstate the bankrupt to the job from which they was unfairly dismissed, or re-engage them in an alternative job. Unfair dismissal is a creation of statute [Employment Rights Act 1996].

A claim for wrongful dismissal, on the other hand, is a claim that the person was dismissed in breach of their contract of employment (where, for example, a contractual notice period was not given or where an inefficiency procedure was not followed correctly). Fairness (or otherwise) is not at issue – maybe, for example, the employee was inefficient and it was ‘fair’ to dismiss them, but the correct procedure (as provided for in the contract) was not followed. The remedy for wrongful dismissal is normally financial compensation. Wrongful dismissal is a concept of common law.

37.140 Constructive dismissal

Constructive dismissal does not, of itself, give rise to a right of action, though it may lead to a claim for unfair dismissal and/or wrongful dismissal.

In simple terms, constructive dismissal describes a situation where an employee terminates their own contract of employment by reason of their employer’s conduct.

In the case of a claim for dismissal based on constructive dismissal, the tribunal or court would first need to establish that the claimed constructive dismissal was, in fact, a dismissal and not, simply, a resignation.

37.141 Unfair dismissal

Where a person believes that they have been unfairly dismissed, they may make a claim for unfair dismissal to the employment tribunal [Employment Rights Act 1996, section 111]. It is then for the employer to show that the dismissal was not unfair with regards to such reasons as the capability, conduct or redundancy of the employee [Employment Rights Act 1996, section 98].

Where the tribunal finds in favour of the employee, it will explain to them what order it can make as regards reinstatement to the job from which they was unfairly dismissed, or re-engagement to an alternative job [Employment Rights Act 1996, section 113] and ask if they wishes the tribunal to make such an order [Employment Rights Act 1996, section 112]. Perhaps unsurprisingly, it is often the case that the employee does not wish to be reinstated or re-engaged, in which case the tribunal may make an award of compensation for the unfair dismissal [Employment Rights Act 1996, sections 112 and 117]

37.142 A claim for unfair dismissal does not vest in the trustee

It has been held that a claim for unfair dismissal is personal and cannot vest in the trustee of a bankruptcy estate. This is regardless of whether the bankrupt is seeking reinstatement/re-engagement or simply compensation [Grady v HM Prison Service [2003] ICR 753].

In simple terms, the reason for this is that the primary remedy for a claim for unfair dismissal is reinstatement, and this is not something that the official receiver, as trustee, can be awarded. The trustee cannot carry on the employment.

Any compensation (including for unpaid wages) awarded in connection with a claim for unfair dismissal will be ‘personal’ to the bankrupt and will not form part of their estate in bankruptcy.

37.143 Dealing with a claim for unfair dismissal

Where the official receiver, as trustee, has notice of a claim for unfair dismissal, they should write to the solicitors or advisors acting for the bankrupt (or the bankrupt themself if there are no solicitors or advisors), copying in the relevant employment tribunal and ask them to consider whether they believe that the claim vests.

In the likely situation that they conclude that it does not vest, the claim can then proceed unhindered by the official receiver, as trustee.

37.144 Wrongful dismissal

A claim for wrongful dismissal is a claim that the dismissal was a dismissal in breach of a provision of the employment contract. In order to be able to bring an action for wrongful dismissal, the employee must show that they was engaged for a fixed period, or a period terminable by notice, and that there were insufficient grounds for their dismissal.

Apart from in exceptional cases, the correct forum for a claim for wrongful dismissal is the employment tribunal [R v East Berkshire Health Authority ex parte Walsh [1985] QB 152].

Unlike in an unfair dismissal claim, it is not the normal practice of the tribunal to enforce the employment contract (to seek to reinstate the employee) [Whitwood Chemical Co v Hardman [1891] 2 Ch 416 CA]. The normal remedy where the tribunal finds in favour of the employee is to award damages.

37.145 A claim for wrongful dismissal is a claim that there was a breach of contract and would normally vest

Where there is a claim for wrongful dismissal, it is clear that the person has been dismissed and there is, therefore, no ongoing employment contract. The employee is released from the employment contract by the employer’s actions [General Billposting Co Ltd [1909] AC 118]. The right to claim for the breach of contract would, therefore, vest in the official receiver as trustee of the bankrupt’s estate.

37.146 Dealing with a claim for wrongful dismissal – getting agreement that claim vests

Where the official receiver, as trustee, is aware that a bankrupt is bringing a claim for wrongful dismissal they should write to the solicitors or advisors acting for the bankrupt (or the bankrupt themself if there are no solicitors or advisors), copying in the relevant employment tribunal, and inform them that they believes that the right of action vests in them as trustee of the bankruptcy estate. They should seek their agreement to this.

The matter can then proceed on an ‘agreed’ basis and the official receiver can seek to deal with the right of action in line with the guidance elsewhere in this Chapter.

37.147 A claim for wrongful dismissal and a claim for unfair dismissal can arise from the same dismissal

It is possible that a bankrupt may have a claim for wrongful dismissal and unfair dismissal based on the same dismissal. Contrary to what might be thought, this would not be a ‘hybrid’ claim.

In essence, what the official receiver is dealing with is two, separate, rights of action, one that arises from statute and one that arises from a breach of contract (the wrongful dismissal claim). They can be dealt with as two, separate, claims.

Most likely, the appropriate course of action would be to seek to assign the wrongful dismissal claim back to the bankrupt.

Discrimination claims relating to employment

37.148 claims for discrimination.

Where an employee feels that they has suffered some disadvantage in connection with their employment due to their sex, race, disability, religion or belief, sexual orientation or age, they may make a claim for discrimination against the employer [Equality Act 2010].

This may be connected to, or separate from, a claim for dismissal and normally discrimination claims are heard by an Employment Tribunal.

37.149 Remedies for a claim for discrimination

The remedies in a claim for discrimination include a declaration of the rights of the parties and an order for compensation (not limited to an order for compensation to injury to feelings) [Equality Act 2010, section 124].

The declaration of rights and any compensation for injured feelings would be ‘personal’ to the bankrupt and any compensation for losses (such as wages losses) would be a ‘property’ claim, vesting in the official receiver, as trustee.

37.150 The possibility of limiting a discrimination claim to avoid it vesting

In the normal way of deciding such matters, a claim for discrimination (that is, one with more than one head of damage – a ‘hybrid’ claim) would vest in the official receiver as trustee of the bankrupt’s estate. It has been held that in a claim for race discrimination, the claimant can limit their claim to one for a declaration and compensation for injured feelings, making the claim entirely personal and taking it out of the bankruptcy estate. The claimant can limit their claim at any point (even once it is before the employment tribunal) [Khan v Trident Safeguards Limited [2004] EWCA Civ 624].

It is thought that the court took this approach due to the seriousness of race discrimination, though it is possible that the principles would be applicable to other discrimination claims. That point has yet to be tested in court. It is not thought that the principle would be applicable to other ‘hybrid’ claims.

37.151 Dealing with a claim for discrimination – getting agreement that claim vests

Where the official receiver, as trustee, is aware that a bankrupt is bringing a claim for discrimination they should write to the solicitors or advisors acting for the bankrupt (or the bankrupt themself if there are no solicitors or advisors), copying in the relevant employment tribunal and inform them that they believes that the right of action vests in them as trustee of the bankruptcy estate. They should seek their agreement to this.

The matter can then proceed on an ‘agreed’ basis and the official receiver can seek to deal with the right of action in line with guidance elsewhere in this Chapter.

37.152 Where claimant bringing a claim for discrimination and unfair dismissal

Where a claimant is bringing a claim for unfair dismissal (which does not vest) and a claim for discrimination (which, generally, does vest, it has been held that the employment tribunal can distinguish between the two claims as separate claims and not treat the claim as a ‘hybrid’ action [Grady v HM Prison Service [2003] ICR 753].

The unfair dismissal claim can then proceed unhindered by the official receiver, as trustee, leaving the discrimination claim to be dealt with as appropriate. That said, it is likely that the best outcome in this circumstance is to seek an assignment of the discrimination claim back to the bankrupt. The claims will be inextricably linked and the bankrupt (and trustee) may find it difficult to litigate each claim separately.

Other employment claims – redundancy and equal pay

37.153 a claim for redundancy.

Assuming that the contract (employment) has ended as at the date of bankruptcy, the right to claim and receive the redundancy payment vests in the official receiver, as trustee. This would apply equally to a claim for enhanced redundancy (where a redundancy payment has been made but the ex-employee is seeking to increase the amount awarded).

Where the contract (employment) has not ended as at the date of bankruptcy (where, for example, the offer of redundancy has been made and, perhaps, accepted but the employment has yet to cease) any redundancy payment made during the term of bankruptcy should be claimed as after-acquired property [section 307], except for arrears of pay (including pay in lieu of notice and holiday pay) which should be claimed under an IPA/IPO [section 310].

37.154 Equal pay claims

A claim for equal pay [Equality Act 2010, section 19] is claim that an employee (generally, a woman) has been paid less than another person of the other sex doing the same job.

Generally speaking a claim for equal pay will be brought whilst the person is still in the employment to which the claim arises and, that being the case, it would remain personal to a bankrupt and would not form part of their bankruptcy estate. However, any compensatory payment made during the term of bankruptcy would be considered income and should be claimed under a ‘lump sum’ IPO/IPA [sections 310 and 310A].

Similarly, any increase in future pay secured as a result of the action could be considered for an (increased) monthly IPO/IPA if it is awarded during the period of bankruptcy. Such a claim brought after the contract (employment) has ended would vest in the official receiver, as trustee of the bankruptcy estate and the whole amount of compensation would be due to the estate whenever paid. The bankrupt may not limit their claim to one for injured feelings (as is allowed in a claim for unfair dismissal) as compensation for non-economic losses may not be awarded in an equal pay claim [Allan v Newcastle-upon-Tyne City Council; Degnan v Redcar and Cleveland Borough Council [2005] ICR 1170].

37.155 Loss of earnings for a period after the making of the bankruptcy order

Where a court makes an award for the loss of future earnings in a vesting claim (most likely a wrongful dismissal claim but not an unfair dismissal claim), the money represents property damages and will therefore vest in the official receiver as trustee [Beckham v Drake (1849) 2 HL Cas 579; Ord v Upton [2000] BPIR 582]. This is the case even though the award was intended to compensate the bankrupt for lost earnings beyond the date of discharge [Official Receiver v Mulkerrins [2002] BPIR 582]. The logic behind this position is that the creditors rely upon the ability of a borrower to be able to work and earn money when they decide to give credit.

This view should, however, be balanced against the principle that bankruptcy is intended to provide a ‘fresh-start’ to the bankrupt. In this regard, it has become normal practice that the official receiver limit their claim over the future loss of earnings to those monies representing the lost earnings in the period ending three years after the commencement of bankruptcy. This brings the official receiver’s claim to the monies in line with the period that they would have been able to claim the monies under an IPO/IPA.

Dealing with the fruits of a right of action

37.156 dealing with the fruits of a right of action – general.

The section of the chapter gives guidance and advice on dealing with the ‘fruits’ of a right of action. Usually, this will be monies received following the settlement of a claim, but the monies may have come from the successful litigation of a claim.

Generally speaking, any dispute as to the distribution of the fruits of a legal action will arise in a bankruptcy case where the bankrupt has a personal interest in a hybrid claim and this section concentrates largely on those areas.

The advice in this section of the chapter is given on the basis that the judgment following a successful litigation has been converted into monies (whether following enforcement, or not).

Advice on enforcing a judgment is given in paragraph 37.125.

37.157 Dealing with the fruits of a right of action – ‘non-hybrid’ claims

Where the fruits of the right of action result from a right of action that is not a ‘hybrid’ right of action/claim there will be no need to apportion the funds and the official receiver should have the funds remitted to the estate, dealing with any agent’s (solicitor’s) fees and monies due to other third parties such as the DWP in the normal way.

37.158 Dealing with the fruits of a right of action – ‘hybrid’ claims

In circumstances where an award is made or settlement reached in respect of a ‘hybrid’ claim, there is the issue of apportioning the monies between ‘personal’ (where the monies are held by the official receiver, as trustee, on trust for the bankrupt) and ‘property’ elements.

37.159 Apportioning an award in a hybrid claim following litigation

Where an award is made following litigation, it ought to be possible to establish the apportionment between ‘personal’ and ‘property’ elements of the claim. Details of the award can often be found in the judgment or order given by the court or, where there is a ‘global’ award (with no breakdown), the apportionment may be calculable from the papers filed in court in respect of the claim.

37.160 Apportioning a settlement in a hybrid claim where settlement follows the issuing of proceedings

Apportioning monies in settlement of a claim may be more difficult than monies awarded following litigation. Where the settlement follows the bringing of legal proceedings, the portions into which the monies should be divided should be calculable from the papers filed in court in respect of the claim.

37.161 Apportioning a settlement in a hybrid claim where settlement precedes the issuing of proceedings

In the case that the settlement precedes the issuing of proceedings, the apportionment of the settlement monies may prove to be more problematic as the claim may not have been fully made out at the point of settlement.

Where there is evidence to show the division of the claim between ‘personal’ and ‘property’ elements, the official receiver, as trustee, should maintain a position that the settlement monies should be apportioned pro-rata in the same ratio unless this obviously looks perverse.

Where there is no such evidence, there is a principle that the monies should be divided equally between ‘personal’ and ‘property’ elements [Re Kavanagh [1950] All ER 39]. If this point is put to the solicitors acting for the bankrupt it may encourage them to assist in the formulation of figures to assist with a more accurate apportionment – particularly given that the personal element of a hybrid claim is typically greater than the property element.

37.162 Special damages and general damages

Often, in correspondence or papers relating to a claim the official receiver will see reference to ‘special damages’ and ‘general damages’.

Generally speaking, special damages are ‘property’ and general damages are ‘personal’.

37.163 Securing monies where a hybrid claim is apportioned

The official receiver, as trustee, should request that the monies awarded following litigation or following a settlement of a hybrid claim should be remitted to them whilst the apportionment is decided. The monies can be held on a suspense account pending the agreement of their division. This way, the bankrupt has an incentive to attend to matters and not to let it them drift.

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

Where the official receiver, as trustee, is unable to resolve matters of dispute or doubt connected with the ascertainment or distribution of ‘personal’ funds held on constructive trust or the apportionment of a ‘global’ settlement, they may apply to the court for directions [rule 13.4; section 168(3)].

37.165 Monies awarded for ‘personal’ elements of a claim may not be claimed

Monies awarded for ‘personal’ elements of a claim following litigation or secured in a settlement after the making of the bankruptcy order may not be claimed by the official receiver, as trustee, unless those monies change character during the period of bankruptcy [Re Wilson ex parte Vine (1878) LR 8 CH D].

There is no statutory or precedent definition of a change of character but, typically, it would be characterised by the purchase of an asset such as a motor vehicle. In that example, the vehicle may then be claimed as after acquired property. The spending of the monies on the general living costs of the bankrupt and their family would not be a change of character [section 307].

There is doubt as to whether the negotiation of the funds (for example, the movement of funds from a current account to a savings account, or similar) might constitute a change of character.

Where the action has proceeded to judgment prior to the making of the bankruptcy order, any monies awarded and paid to the bankrupt (including ‘personal’ monies) would form part of the bankruptcy estate.

37.166 Claiming a ‘personal’ award

It has been held that a part of any award of compensation in respect of a ‘personal’ right might be claimed for the bankruptcy estate. The relevant case [Grady v HM Prison Service [2003] ICR 753] did not give any indication when it would be appropriate, or correct, to claim such an award.

Whilst it is possible that the official receiver may seek to claim such an award, the position that should be taken is that ‘personal’ awards might only be claimed if they change character.

37.167 Advance payments during settlement

Sometimes, the defendants to a claim will offer interim payments to assist the claimant with ongoing expenses, general living costs, etc. Unless, there is evidence to the contrary, these payments should be apportioned pro-rata between ‘personal’ and ‘property’ elements of the claim (and claimed accordingly).

37.168 Constructive trusts

Monies awarded to a bankrupt for ‘personal’ damages in a hybrid action do not form part of the bankrupt’s estate and are, instead, held on constructive trust for the bankrupt by the official receiver, as trustee of the bankrupt’s estate.

In simple terms, a constructive trust is a trust that is not expressly created and instead comes into existence to deal with property held by a person where it would be inequitable for that person to assume full beneficial ownership of that property [Bannister v Bannister [1948] 2 All ER 133].

To relate it to the situation of a hybrid claim, the official receiver, as trustee, comes into possession of the personal monies as an inadvertent effect of them being the ‘owner’ of the right of action.

37.169 The practical effect of monies being held by the official receiver in a constructive trust

The bankruptcy estate cannot benefit from the monies held under a constructive trust in these circumstances and, therefore, the official receiver, as trustee, should pay over those monies to the bankrupt at the earliest opportunity.

In many cases, the official receiver will never come into actual possession of the monies and, in such cases, they should agree to the monies being paid to the bankrupt by those holding the funds (for example, the bankrupt’s solicitors).

37.170 A claim settled or concluded and monies paid prior to the making of the bankruptcy order

Where a claim is settled or concluded by litigation prior to the making of the bankruptcy order, the monies, received or awarded, would form part of the estate simply as ‘cash at bank’, whether or not the damages were ‘personal’ [Ord v Upton [2000] Ch 352 at 360].

37.171 A claim settled or concluded prior to the making of the bankruptcy order but monies not paid

Where a ‘property’ claim is settled or concluded by litigation prior to the making of the bankruptcy order, any monies awarded but not paid will form part of the bankruptcy estate.

The position is less certain where a ‘personal claim is settled or concluded by litigation prior to the making of the bankruptcy order. Where the official receiver encounters this situation the advice of the Senior Official Receiver’s Office should be sought.

37.172 A claim settled or concluded post-discharge

Assuming that the claim was a vesting claim, or was, unusually, claimed as after-acquired property, any monies awarded would form part of the bankrupt’s estate even if they were awarded or paid after discharge (with appropriate division for ‘hybrid’ claims) and consequently should be claimed by the official receiver, as trustee.

37.173 Monies awarded as periodic payments

A successful claim may result in a judgment or order requiring the defendant to make payments to the claimant on a periodic basis. Whether, and how, these monies may form part of the estate (or be claimed for the estate) will largely turn on the facts of the case.

Where the judgment is simply a lump sum payable by instalments then the lump sum and the right to receive the instalment payments would form part of the estate and should be claimed accordingly (split between ‘personal’ and ‘property’ elements as appropriate) [Re Bell [1998] BPIR 26].

Where the judgment is an award that provides for the damages to replace lost income on a periodic basis, it is likely that the payments would constitute income within the meaning of The Act [section 310(7)] and would, therefore, be available for inclusion of a calculation for an IPO/IPA [sections 310 and 310A].

In both cases, this would be subject to any monies being ‘personal’ to the bankrupt (for example, periodic payments being made to enable the bankrupt to have care relating to a personal injury). Whilst, technically, the income-type claim would not be affected by the restriction on claiming, it is unlikely that a court would make an IPO on those terms.

37.174 A ‘personal’ award intended to provide medical care

Where the bankrupt receives an award that is intended to allow the purchase of items to assist with their medical care, it would not be appropriate to claim these items as after-acquired property, under the ‘change of character’ situation.

37.175 An award for permanent disability under a life policy

37.176 award made where defendant in formal insolvency.

Where an award is made in a vesting right of action and the person against whom the award is made has entered into formal insolvency, the official receiver should ensure that the claim is lodged with the relevant office-holder.

Third-party interest in the fruits of a right of action

37.177 right of set-off.

In cases where the insolvent has a claim against a creditor, any award will be subject to automatic set-off and the official receiver’s claim, as liquidator or trustee, over the monies will extend only to any surplus after set-off. Set-off only applies where there are mutual credit and debits as at the date of the insolvency of the company or date of bankruptcy so, in cases where a claim is against a creditor and that debt has been sold on by the creditor prior to that date, set-off would not apply [rule 14.25; section 323].

Set-off is mandatory and will normally be automatically applied by the creditor. In some cases, the creditor may choose to forgo the right of set-off and, in such a case, the official receiver should claim the monies awarded.

37.178 Claims handling fees

It may be the case that the insolvent has engaged a claims-handling company, particularly in ‘complaint’ type cases such as those for PPI mis-selling.

It is open to the official receiver, as liquidator or trustee, to continue to retain the services of those agents, but this must be on the clear understanding that any fees must come from monies the agents secure by their actions. The fees will not be paid by the official receiver or from the estate without there being an underlying realisation. The official receiver should also confirm that the fees the agent charges/intends to charge are reasonable in the circumstances. The decision to retain the agents should be considered against the value of the service provided (including the ease with which the official receiver could successfully conduct the work himself) against the likely return to the estate.

Where the claim has come to fruition before the making of the order (or before the official receiver had knowledge of the claim), the official receiver may allow the fees to be paid on the same terms but they is not bound by the terms of the contract with the bankrupt. Where the fees are considered to be high in relation to the amount of work carried out consideration should be made to offering a lower fee based on the work carried out.

37.179 Legal fees in successful settlements

Where the official receiver, as liquidator or trustee, chooses to retain the insolvent’s solicitors in order to negotiate a settlement, the solicitors’ reasonable costs may only be paid from the settlement (no funds will be made available from the estate and nor will the official receiver, as liquidator or trustee, pay the costs). In ‘hybrid’ claims, the costs should be deducted pro-rata from each element of the settlement (and not, for example, just from the portion of the award due to the estate).

In the very unlikely event that solicitors for the insolvent have been retained to act in litigation, the same principles would apply.

37.180 Solicitor claiming lien over funds

Whilst the official receiver, as liquidator or trustee, can agree to the payment of fees incurred in bringing the right of action to a successful settlement, they should not allow the monies awarded to be used to pay a debt for fees incurred on an unrelated matter.

If it comes to it, the official receiver should point out to the solicitor claiming the funds that they are under an obligation to surrender the funds, the penalty for non-compliance being contempt of court [sections 235(2); 235(5); 312(2)].

37.181 Creditor with an equitable charge over the award

The official receiver should take care that any monies due to third parties under an equitable charge are paid over. An example of this may be where the bankrupt has been granted free use of a replacement vehicle while the loss to a vehicle is subject to an insurance claim. In such as case, the person who provided the hire vehicle may have an equitable charge over that portion of the claim.

In such cases, the official receiver should seek proof that the vehicle (or similar) was provided before agreeing that the claimed amount be deducted from the award.

It is possible that such a claim will have been assigned to the hire company prior to bankruptcy – possibly by a clause in the hire agreement.

37.182 Recovery of benefits and NHS costs

A person who is unable to work due to illness, injury or similar may receive support from the Department for Work and Pensions (DWP) in the form of benefits. Where the person is subsequently awarded monies for loss of income for the period that they were receiving benefit support, the DWP may recover those benefit monies (https://www.gov.uk/government/publications/recovery-of-benefits-and-or-lump-sum-payments-and-nhs-charges-technical-guidance). This scheme operates on the principle that the person should not be compensated twice for the same loss. The official receiver, as trustee, should not object to such a recovery.

Loss of earnings awards

37.183 loss of earnings where the employer has continued to pay wages.

In some circumstances, the bankrupt’s employer may continue to pay the bankrupt’s wages whilst they are absent from work due to the injury suffered to which the claim results.

In this context, if matters were to be looked at in the round, the bankrupt has not incurred a loss in this matter, it is the employer who has incurred the loss. It can only be fair, therefore, that the official receiver, as trustee, accepts the employer’s claim over the loss of earnings element of the claim as appropriate. The view to take is that the bankrupt is an agent for the employer’s claim. The official receiver should check, though, that the employer is not receiving any monies in excess of those they paid to the bankrupt. Any surplus would represent an asset in the bankruptcy.

37.184 Loss of earnings for a period after the making of the bankruptcy order

Where a court makes an award for the loss of future earnings, the money represents property damages and will therefore vest in the official receiver as trustee [Beckham v Drake (1849) 2 HL Cas 579; Ord v Upton [2000] BPIR 582]. This is the case despite the fact that the award was intended to compensate the bankrupt for lost earnings beyond the date of discharge [Official Receiver v Mulkerrins [2002] BPIR 582]. The logic behind this position is that the creditors rely upon the ability of a borrower to be able to work and earn money when they decide to give credit.

37.185 ‘Smith v Manchester’ awards

A ‘Smith v Manchester’ award refers to a type of award made where the claimant’s injury is not severe enough to prevent them from working but compromises their ability to undertake a full range of tasks [Smith v Manchester Corp (1974) 17 KIR 1]. The award is intended to recognise that, whilst the claimant is still able to carry out their current job (and there is, therefore, no immediate loss of earnings), they will experience difficulty in obtaining a new job were the current one to be lost, or a better job, due to their injury-related restricted ability [Morgan v UPS Ltd [2008] EWCA Civ 375].

A ‘Smith v Manchester’ type claim is a ‘property’ claim, vesting in the official receiver as trustee. As the award is speculative in nature, any such award should be claimed in full by the official receiver.

“Negative” options for dealing with a right of action

37.186 ‘negative’ options – general.

As outlined elsewhere in this Chapter there are, essentially, six ways of dealing with a right of action:

Generally speaking, it is best to take one of the first three options as these will maximise the return to creditors whilst minimising the risk to the official receiver. In some exceptional cases, the fourth option (litigation) will be appropriate – but only very rarely.

This section of the chapter concentrates on the two remaining options – to be used where it is impossible or inappropriate to take one of the four ‘positive’ options.

37.187 Circumstances where it is impossible or inappropriate to use a ‘positive’ option

The most likely scenarios where it will be impossible to use one of the ‘positive’ options for dealing with a right of action are:

• Where the official receiver, as liquidator or trustee, is of the view (perhaps, after having taken legal advice) that the claim is without merit (and cannot, therefore, be settled, sold or litigated), or
• Where the claim has merit but the official receiver, as liquidator or trustee, is without funds and/or indemnity to litigate, there is no offer of settlement, and any potential purchaser is without funds to provide legal advice or actually pay for the action.

37.188 Disclaimer of a right of action

A disclaimer is a process that allows the official receiver, as liquidator or trustee, to disclaim their interest in onerous property (in short, property which comes with an obligation to pay money or perform an act) which forms part of the estate. The effect of the disclaimer is to end the interest of the liquidator/trustee and the insolvent in the property and, also, discharges the liquidator/trustee of any liability in respect of the property (see Chapter 42 for full information on the disclaimer process).

37.189 When to use a disclaimer in a right of action

Generally speaking, a right of action cannot be described as onerous property unless it has entered the stage of being litigated when the insolvency order is made. In those circumstances, it is often the case that the parties to the claim (particularly, the defendants) will put pressure on the official receiver, as liquidator or trustee, to decide what their intentions are with regards to the claim (usually, with a hearing date imminent).

With the assistance of solicitors, it should be possible to negotiate a settlement or assignment in pretty short order. Where none of the ‘positive’ options are possible/appropriate, the official receiver may disclaim their interest in the claim (rather than seeking to discontinue or adjourn the proceedings as that may lead to an adverse costs order).

37.190 Serving notice of the disclaimer

The notice of the disclaimer should be served on the bankrupt (and their advisors), the defendants (and their advisors) and the court/tribunal at which the hearing was taking place.

37.191 Vesting orders

The legislation allows any person with an interest in disclaimed property to apply for a vesting order (effectively, an order that they become ‘owner’ of the property). The person most likely to do this is the defendant as this will have the effect of bringing the claim to an end.

The bankrupt cannot apply for a vesting order as they has no interest in the property once it has been disclaimed [Skinner v Hood [2005] EWCA Civ 1580]. This should be made clear to the bankrupt when discussing the possibility of disclaiming so that they does not get the impression that they will be able to take ownership of the claim following the disclaimer (effectively, getting a ‘cheap’ assignment).

37.192 When to do nothing

If the claim is not in the process of litigation, and none of the ‘positive’ options for dealing with the right of action are possible or appropriate, then the best course of action is for the official receiver, as liquidator or trustee, to, effectively, abandon the claim. The bankrupt cannot bring the claim and it will, eventually, become statute-barred.

37.193 Creditor may apply to carry on action (companies only)

Where the official receiver, as liquidator, is not prepared to litigate (whether they is without funds or because they has been legally advised not to), a creditor or contributory may make an application to court for leave to carry on the action [section 167(3)]. In these circumstances, the official receiver should attend the hearing and object to the application unless it is granted on the basis that no costs fall to the company or official receiver.

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• Practical Law

Assignment of a claim or cause of action

Practical law uk practice note 1-522-7861  (approx. 32 pages).

• Court proceedings: restructuring & insolvency
• Property: restructuring & insolvency
• Restructuring and Insolvency Transactions
• Regulation, Powers and Duties of Insolvency Practitioners