Liquidator granted permission to disclose bank statements to an assignee to pursue a cause of action

The High Court has recently handed down its judgment in Asertis Ltd & Anor v Melhuish & Ors [2024] EWHC 2819 (Ch), granting permission for a liquidator, who had assigned his claims against former directors, to disclose bank statements obtained under section 236 of the Insolvency Act 1986 to the assignee.

Background

On 2 January 2020, Solstice (SW) Limited (the Company) entered liquidation, with Mark Bowen (the Liquidator) being appointed as liquidator. 

The Liquidator made an application under section 236 of the Insolvency Act 1986 (the Act) for the production of various documents including bank statements. Whilst investigating the Company's affairs the Liquidator identified an overdrawn employees' loan account, unjustified withdrawals of funds and diversions of funds received from the Company's counter-parties to the personal accounts of two former directors of the Company.

The Liquidator's solicitors wrote a Letter Before Action to the Company's former directors (the Respondents) but received no substantive response. The Liquidator subsequently informed the Respondents that he would sell the claims he had identified. They were duly assigned to Asertis Limited (Asertis).

On 25 January 2023, Asertis sought remedies against the Respondents under the assigned causes of action. At a hearing on 2 September 2024, the Respondents objected to Asertis' use of the bank statements obtained by the Liquidator under section 236, arguing that they had not given consent for their use in the proceedings. However, the Liquidator provided that there was a public interest in his duty to realise assets for the benefit of creditors, and this was furthered by providing the bank statements to Asertis, given that the crux of the claim was the diversion of money through non-Company bank accounts, which could only be evidenced by the bank statements. However, the Judge directed Asertis not to rely on the bank statements until making an application to court to determine its entitlement to do so. The application was subsequently made.

Legal Analysis

The relevant sections of the Act are: (i) Section 235, which provides that the Respondents had a duty to co-operate and give information to the officeholder relating to the Company's affairs, and (ii) Section 236, which provides the court the power to require the Respondents to produce records in their possession or control relating to the Company.

In assessing these sections, Judge Briggs set out three propositions from case law:

• once an officeholder obtains documents using the compulsion powers, the officeholder is subject to an implied duty of confidentiality;
• regarding the extent of the duty of confidentiality, the Liquidator cannot be under any duty of confidence which will prevent the performance of their statutory duties;
• the question of whether permission should be permitted if the duty of confidence is relaxed and the documents or information are to be used for the purposes for which the power was conferred.

Discussion

In considering whether to grant the application for documents, the Judge then considered the policy discussions which led to Section 246ZD being incorporated into the Act, which provides officeholders the right to choose whether to assign causes of action.

The Liquidator's power to bring proceedings to collect in the assets was most recently updated in the Small Business, Enterprise and Employment Act 2015. In an impact assessment produced by the insolvency service dated 14 June 2014 it stated:

'[civil claims] can only be brought by the Liquidator in respect of fraudulent trading and wrongful trading and by the administrator or the Liquidator ("the officeholder") in respect of the other causes of action…we wish to give the officeholder the maximum opportunity and flexibility to take forward any potential claims and to get best value for creditors.'

When the Small Business, Enterprise and Employment Act 2015 came before the Public Bill Committee on 4 November 2014, Jo Swinson, the government minister, stated:

'The [insolvency practitioners] will still be bound by statutory limitations on disclosing information and the assignee will not have access to the statutory powers that exist for the insolvency practitioner. That is a particularly privileged position conferred on [insolvency practitioners], so that they can fulfil their statutory duties. It would not be right or appropriate to transfer those powers or, indeed, any information received under those powers. In making any assignment, the insolvency practitioner will need to consider carefully whether there are any legal restrictions – such as those in the Data Protection Act – on the information they can pass on.'

Section 246ZD, which provides officeholders the right to assign certain causes of action, was later incorporated into the Act. Judge Briggs explained that the purpose of this was to 'provide office-holders of insolvent estates a third option to realise an asset in the insolvency…the office-holder is provided with the freedom to choose whether to pursue a cause of action, sell the cause of action or not to pursue the cause of action.'

Judge Briggs accepted that when selling a cause of action, it is a 'commercial reality' that a purchaser would require a liquidator to provide the documents necessary to substantiate the claim and that this claim was particularly reliant on the documents obtained under section 236. The Judge summarised that the 'assignee does not step into the shoes of the assignor for all purposes and once the information or documents are cloaked in confidentiality they remain confidential unless there is a release from the person who benefits from the protection.'

Decision

Judge Briggs granted the application, ordering that the material obtained should be made available to Asertis to enable the free flow of information necessary for the purpose of satisfying the burden of proof at trial. 

Judge Briggs confirmed that the judgment was consistent with the intention of Parliament to provide an officeholder with the ability to sell causes of action that would benefit an insolvent estate. An officeholder would be hampered in obtaining the best price if he could not disclose information material to the assessment of the cause of action.

However, Judge Briggs balanced these rights by ordering that the bank statements should be redacted to hide personal information and disclose only the fact of the deposits into the account.

On the issue of permission, Judge Briggs noted that it was "for the office-holder to decide whether to seek permission to provide confidential information to a prospective assignee or assignee" and that the assignee must then decide whether the court's permission is required to use any confidential information. Judge Briggs ruled that whether permission is required is dependent on the specific facts of each case but that 'permission will be the usual course.' 

In this case, Judge Briggs ruled that it was right that permission was sought.

Comment

There are a growing number of claims being brought against former directors of insolvent companies with many of these claims being assigned from liquidators to litigation funders. The decision more clearly sets out the procedural requirements for how liquidators can use documents obtained under Section 236 of the Act. 

In particular, the judgment confirms that claims can be effectively assigned while still respecting confidentiality obligations. However, the court makes it clear that an assignee still does not inherit all the rights of the assignor and that in most cases court permission will be required before company documents are disclosed.