Imagine uncovering hidden financial misconduct, only to face legal hurdles in using the evidence. This was the crux of the landmark case Asertis Ltd & Anor v Melhuish & Ors [2024], which explored whether assignees of insolvency claims could utilise documents obtained under section 236 of the Insolvency Act 1986 (IA). Litigator Helen Rainford looks into the details and implications of this pivotal decision.
Section 246ZD of the Insolvency Act 1986 (IA) provides the administrator or liquidator the right to assign a claim including claims such as fraudulent tradining, wrongful trading or transactions at an undervalue. However, the court was asked in Asertis Ltd & Anor v Melhuish & Ors [2024] to consider if that meant that on such assignment, whether the assignee could make use of the documents obtained by the administrator/liquidator under section 236 IA in pursuing the assigned cause of action.
Background to the case
When Solstice Limited entered liquidation in January 2020, a liquidator was appointed to investigate the company’s affairs, and sought various orders under section 236 IA 1986 for the production of documents relevant to the investigation.
On 19 March 2021, an order was made requiring the Secretary of State/Insolvency Service and Aviva Insurance Limited to produce certain documents, including bank statements. During the course of their investigation, the liquidator identified potential claims, including allegations of the diversion of company funds to the personal accounts of two former directors. Despite sending letters before action, no substantive response was received from the former directors. The liquidator subsequently assigned the claims to Asertis, which commenced proceedings against three directors in January 2023.
The dispute over the use of section 236 IA documents
A key issue in the litigation was whether Asertis, as assignee, was entitled to rely on documents obtained by the liquidator under section 236 IA 1986. One of the defendants, Mrs. Melhuish, objected to Asertis using the bank statements, arguing that she had been asked to provide them to the liquidator and refused but had never consented to their use in subsequent proceedings. As a result, she sought clarification regarding how the statements had been utilised. Asertis contended that the bank statements were critical to the case and enabled the claimant to satisfy the necessary burden of proof. The bank statement supported the allegations that funds had been diverted through non-company accounts and so the claim depended upon the use of these statements.
The court’s analysis
The court considered several authorities including Soden v Burns, in which the court described the duty of confidence as a qualified duty, referring to Lord Browne-Wilkinson in Re Arrows Limited, that “The Liquidator cannot be under any duty of confidence which will prevent the performance of these statutory duties.”
In Re Esal (Commodities) Ltd (No 2) Millett J said: “[T]o make use of material obtained by the use or under the threat of sec. 268 proceedings, then, save in exceptional circumstances, leave should be granted only if the use proposed to be made is within the purpose of the statutory procedure, that is to say, that the use proposed to be made of the material is to assist the beneficial winding-up of the company.”
Judgment
The court found on behalf of Asertis and found that the materials obtained as a result of the s236 IA should be made available to them for the purpose of proving their case. The court considered this approach to be consistent with the intention of Parliament. However, it ordered that the bank statements be redacted to disclose only the relevant payments while concealing other personal information.
In reaching its decision, the court emphasised the importance of preserving confidentiality and clarified that the liquidator must seek permission to provide confidential information to an assignee, and the assignee must decide if court permission is required to use such information.
The court noted that these proceedings are “particularly reliant on the documents obtained under section 236 IA 1986. The discussion in Parliament in 2014 demonstrates it was alive to the issue of confidence and chose not to include an override provision.” Furthermore, the court found that “there will be a greater potential benefit to creditors than the price received on sale, due to the profit sharing provisions in the assignment. Accordingly, there is a public interest in ensuring the free flow of information between assignor and assignee.” As such, the judge took a commercial approach and understood that practically, any entity which purchased a cause of action would require the liquidator to provide all documents required to substantiate the claim. However, it distinguished between the positions of an assignee and a liquidator, stating:
“[T]he 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.”
The court emphasised the importance of preserving confidentiality where appropriate and taking practical steps to do so. It noted that such steps “need not be set down in stone as each case will depend on their own facts.”
Finally, the court clarified the respective responsibilities of the officeholder and assignee:
“It is for the office-holder to decide whether to seek permission to provide confidential information to a prospective assignee or assignee. Similarly the assignee must decide if the permission of the court is required to use any confidential information. Ordinarily the office-holder and assignee will agree if and when an application for permission is to be made. In my judgment permission will be the usual course but each case will be fact sensitive. The Liquidator were right to seek permission in this case.”
Conclusion
The decision in Asertis v Melhuish provides useful clarification on the extent to which an assignee of an insolvency claim may rely on documents obtained by the officeholder under section 236 IA 1986. While the court recognised the practical necessity of making such documents available to an assignee, it also reaffirmed the importance of preserving confidentiality where required.
In doing so, it highlighted the need for assignees to take appropriate steps, including seeking the court’s permission where necessary, before relying on such documents in litigation. Whilst each case will be fact- specific, the court would therefore typically grant permission where it is necessary for the provision of the documents to enable assignee to prove the claim.
Moving forward, insolvency practitioners and litigation funders alike must carefully consider the handling of confidential materials in the assignment of claims to avoid potential challenges from defendants.
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.