New claimant could not be substituted to breach of warranty claim where purported assignment ineffective

In proceedings for breach of warranty under a share purchase agreement, the High Court dismissed an application by the purported assignee of the claimant's rights to be substituted as the claimant in the action. The court found that the assignment was rendered ineffective by a contractual prohibition on assignment in the share purchase agreement, and in any event it would have been void on grounds of public policy due to champerty: Tactus Holdings Ltd v Jordan and others [2025] EWHC 133 (Comm).

This decision shows that the courts will not allow parties to circumvent contractual prohibitions on assignment by reliance on exceptions that do not apply on the facts.

It also highlights the continued relevance in modern litigation of the doctrine of champerty and maintenance (the ancient rules against “trafficking” in litigation), at least when it comes to the assignment of claims. In recent years, those rules have been relaxed practically to the point of disappearance when it comes to agreements whereby a third party funds litigation in return for a share of the proceeds, which have become part of the litigation mainstream. However, the rules clearly still have teeth in preventing a third party pursuing a claim under an assignment: this will not be permitted unless the assignee can establish that it has a legitimate interest in the claim, which is independent of the assignment.

As the present decision demonstrates, the legitimate interest requirement will not be satisfied simply by the fact that the claimant and the assignee have directors or shareholders in common. The fact that the assignee is a creditor of the claimant may, in some cases, suggest a legitimate interest. However, the court will consider the totality of the relevant transaction and its surrounding circumstances, and it may not be satisfied where – as in this case – there are indications that the acquisition of the debt was part and parcel of the transaction assigning the cause of action.   

Background

The claimant ("Tactus") entered into a share purchase agreement (the "SPA") with the defendants (the "Sellers") under which it agreed to acquire a company. It subsequently commenced proceedings against the Sellers, claiming approximately £18 million for breach of warranty under the SPA relating to alleged accounting errors. The party applying to substitute Tactus as claimant ("Chillblast") was incorporated after the proceedings were initiated. The directors and a shareholder of Chillblast were current or former directors of Tactus, and numerous Tactus subsidiaries sold their businesses and assets to Chillblast. Shortly after incorporation, Chillblast entered into two deeds of assignment relating to Tactus's affairs:

1. an assignment by which a third party bank's rights, title and interest in respect of debts of £2.76 million owed by Tactus under a revolving credit facility were assigned to Chillblast in return for a payment of £750,000 and a 10% share of the proceeds of Tactus's claim against the Sellers (the "Debt Assignment"); and
2. an assignment by which Tactus' rights, title and interest in respect of the SPA and the proceedings were purportedly assigned to Chillblast in return for £1.05 million plus a specified share of the proceeds of the claim against the Sellers (the "Tactus Assignment").

Shortly after the Debt Assignment and the Tactus Assignment were concluded, Tactus went into administration, and Chillblast applied to be substituted for Tactus as the claimant in the proceedings. The Sellers objected on the basis that the Tactus Assignment was: (i) prohibited by the SPA and therefore ineffective; and (ii) void on grounds of public policy, being champertous.

Decision

The High Court (Peter MacDonald Eggers KC sitting as a deputy judge) held that the Tactus Assignment was not effective due to the contractual prohibition on assignment under the SPA, or in any event was void on grounds of public policy. He therefore refused the application for substitution.

Requirements and standard of proof for substitution

CPR 19.2(4) provides that the court may order a new party to be substituted for an existing one if:

1. the existing party's interest or liability has passed to the new party;
2. it is desirable to substitute the new party so that the Court can resolve the matters in dispute in the proceedings.

The court considered that these requirements must be intended to be disjunctive rather than cumulative, given that a 2023 amendment to the rule had omitted the word "and" which had originally been at the end of sub-rule (a). However, this had no bearing on the application as Chillblast sought to rely only on its rights as assignee under sub-rule (a).

To show there had been a valid assignment, the court held that Chillblast would need to demonstrate on the balance of probabilities that it had acquired Tactus's interest in the proceedings, rather than merely establishing a good arguable case (which is the standard that applies on an application to join an additional party under CPR 19.2(2)). The court acknowledged the difficulty in meeting a standard of proof this onerous at the interlocutory stage, where there has not yet been disclosure or evidence, but considered that a lower standard of proof could result in the existing party losing any right it had to pursue a claim based on an inappropriately low standard. This was a meaningful difference between an application for substitution and one for joinder.

The court suggested that the difficulty could be overcome by the court allowing a party to be joined as an additional claimant if it fell short of the "balance of probabilities" standard but could nonetheless show that it had a "good arguable case".

Contractual prohibition

The SPA provided that Tactus could not "assign, transfer, charge, make the subject of a trust or deal in any other manner with" its rights under the SPA without the consent of the Sellers unless one of two exceptions applied. One of these allowed Tactus to assign without consent to "any lender who provides financial facilities" to Tactus. Chillblast sought to rely on this exception by virtue of the rights it acquired under the Debt Assignment.

The court rejected this argument on the basis that Chillblast was not a "lender". The Debt Assignment transferred to Chillblast the bank's rights in respect of outstanding sums owed by Tactus, but it did not transfer the bank's obligations to Chillblast as there had been no novation. The court used the following analogy to illustrate this point:

"…if a lawyer, architect or broker provided services to a client, and if the bills for fees due to them for their services were assigned to a third party, that third party does not by reason of the assignment become a lawyer, architect or broker."

The court likewise held that Chillblast was not "providing financial facilities" to Tactus, as there was no indication in the Debt Assignment that Chillblast took on the burden of advancing loans. In fact, by the date of the Debt Assignment, there had been an event of default, which meant there was no continuing obligation on the part of the bank under the facility to advance loans.

Chillblast also sought to argue that insofar as the Tactus Assignment was not effective against the Sellers, it was effective at least in equity between Tactus and Chillblast. The court rejected this argument, saying it was sceptical as to whether a trust could have arisen on the facts of this case, but in any event a trust could not survive the contractual prohibition in the SPA, which was not only against assignments, but also against trusts.

Public policy considerations and champerty

Although the assignment was found to be ineffective due to the contractual prohibition in the SPA, the court went on to consider the Sellers' submission that the Tactus Assignment would in any event be void on grounds of public policy under the doctrine of champerty.

Champerty occurs where one person agrees to support litigation brought by another, whether by an assignment or other means, in exchange for a share of the proceeds, and without any "legitimate interest" in the claim being litigated. A "legitimate interest" will generally be a commercial interest, especially if the relevant right of action arises in respect of a commercial transaction.

To determine whether Chillblast had a legitimate interest in the claim, the court had to consider the totality of the relevant transaction and its surrounding circumstances. The court noted that the legitimate interest must exist independently of the assignment being challenged, and not merely arise because of the assignment. So, for example, there would ordinarily be a legitimate interest where the assignee had acquired a property interest in the property that was the subject of the litigation, but that did not apply in this case.

The court noted that Chillblast was not involved in the SPA or its performance, and in fact had been incorporated after the proceedings were commenced. That, it said, left three possible bases on which Chillblast could be said to have an interest in Tactus’ claims against the Sellers, all of which the court rejected:

1. The directors of Chillblast were directors of Tactus: The court noted that the interests of a director cannot be taken to represent the interests of the company. Merely sharing the same directors was not sufficient to justify an assignment of a right of action by one company to another.
2. There was a "common shareholding" between Chillblast and Tactus: The fact that Chillblast had acquired the business of certain companies which had belonged to Tactus did not mean Chillblast had a legitimate interest in Tactus' claims against the Sellers.
3. Chillblast had become a creditor of Tactus as a result of the Debt Assignment: The court commented that this was the most substantial ground, but it was not sufficient to establish a legitimate interest. If it were not for the Debt Assignment, Chillblast would have had no interest in Tactus’ claims against the Sellers. It was clear that a significant purpose behind that assignment was to enable Chillblast to acquire Tactus's rights of action against the Sellers, because part of the consideration Chillblast agreed to pay for it was a share of the proceeds derived from the proceedings, to which Chillblast had no entitlement unless and until it acquired the right of action from Tactus by assignment. The Debt Assignment and the Tactus Assignment were therefore "part and parcel of the same transaction", which amounted to unjustified "intermeddling" in the dispute between Tactus and the Sellers.