Pennyfeathers Ltd entered into a conditional fee agreement (CFA) with Fieldfisher Solicitors in relation to a property litigation matter. The litigation was successful and the court made a declaration and an order for costs in favour of Pennyfeathers. The costs award made by the court was not sufficient to cover Fieldfisher's fees in full and Fieldfisher later applied for an Administration Order.
Pennyfeathers' directors sought legal advice and their solicitor identified a potential negligence claim against Fieldfisher for failing to advise on the terms of the CFA. The solicitor offered to act for Pennyfeathers in relation to the claim or to purchase the claim from the Administrators for £10,000. The Administrators did not believe the claim had any real prospect of success and refused to assign the claim.
The solicitor took an assignment of a debt owed to one of the directors of Pennyfeathers and in turn assigned the debt to a company, LF2 Limited, of which he was a sole director and shareholder. LF2 consequentially became a creditor of Pennyfeathers and made an application to challenge the conduct of the Administrators in refusing to assign the claim, alleging that it unfairly harmed LF2's interests.
The application was dismissed on the basis that the claim had no real prospect of success and there was no evidence that the creditors of the Pennyfeathers would suffer unfair harm by the Administrators not assigning the claim. The Deputy ICC Judge also found that the claim against Fieldfisher was "frivolous and vexatious". A costs order was made against LF2, which ordered them to pay the costs of the Administrators and Fieldfisher solicitors.
LF2 appealed against this decision, on the basis that the claim was not frivolous or vexatious and that a costs order in favour of Fieldfisher should not have been made.
The High Court dismissed the appeal.
Although the Judge agreed that - on the available evidence - it was not possible to say whether the alleged claim was frivolous or vexatious, for the claim to succeed it would need to have been shown that there was evidence of unfair harm to Pennyfeather's creditors. LF2 had not appealed on this ground, and although they requested permission to include it as part of the Appeal at the hearing, the Court refused it as unjustifiably late.
In addition to considering the grounds of appeal submitted by LF2, the Judge also considered the approach Administrators should take when considering whether to assign a claim to a third party.
The Judge noted that "a viable claim by the company against a third party is an asset of the company. A claim which is arguably viable, is a potential asset of the company. In principle, an administrator ought to be ready to investigate whether such an asset should be preserved and pursued… If the administrator has no funds to investigate a possible claim against a third party and he receives an offer from a potential assignee of the claim to pay for an assignment, that offer will potentially constitute an asset of the company. The administrator should normally wish to preserve and pursue that asset. If it is clear to the administrator that the claim would be hopeless and that the potential assignee is bent on pursuing a hopeless claim in order to harass the third party, then the administrator should normally decline to assign the hopeless claim… But there will be other cases. One such case is where the administrator does not have a clear view that the proposed claim would be vexatious and he is offered a sum of money for the assignment of the claim. In such a case, the administrator should be prepared to obtain a proper payment for the assignment."
The Court also noted that the Administrators in this case had focused on protecting a third party (Fieldfisher) from potential harassment by litigation rather than realising assets for the benefit of the company, which should have been the correct focus.
The real interest in this case is how it affects the approach IPs should take in considering the assignment of claims in practice. Where an IP has investigated a potential claim and considers it viable, but decides not to pursue it, the IP should be prepared assign. Where an IP knows a claim is hopeless or vexatious, the IP should normally decline to assign.
This case has clarified the position for the situation where the IP is unclear whether the claim is hopeless or vexatious, either because the results of investigations are unclear or the IP does not have sufficient funds to investigate the potential claim. In those circumstances, the IP may still assign the claim for a "proper price" although we would recommend proceeding with caution. In addition to assigning the potential claim, other options should be considered too. The IP may be able to obtain funding from the proposed buyer or a litigation funder, to carry out the initial investigation and, if viable, to then proceed with the claim as a whole.