The Irish Court of Appeal has recently confirmed that
the sale of a bare right of action to litigate in the Irish
courts is invalid under Irish law (SPV Optimal SUS v HSBC
Institutional Trust Services (Ireland) (2017)). This may
be unwelcome news for particular sectors of the distressed debt
market. However, the decision will be welcomed by depositaries,
managers and other fund service providers. Further, it is clear
that the decision has no impact on the regular market for the
transfer of loan portfolios and other debt (for example, as
part of collaterised loan obligation deals).
In brief, Optimal Multiadvisors (Optimal) had invested in
Bernard L Madoff Investments (Madoff). As is well known, Madoff
went bankrupt and a trustee in bankruptcy was appointed.
Optimal assigned its claim against the trustee, and all other
claims in respect of Madoff, to the plaintiff (SPV). SPV was a
special purpose company whose shares were sold into the
distressed debt market. The assigned claims included potential
claims against the defendant, HSBC, which was custodian and
administrator of the funds invested with Madoff. SPV issued
proceedings in Ireland against HSBC and others alleging losses
arising from the Madoff bankruptcy.
The Court of Appeal held that it is illegal under Irish law
to assign the benefit of a bare right of action. Therefore SPV
could not maintain its claim against HSBC and the other
defendants. The transfer of legal causes of action is contrary
to public policy because of the potential for abuse. The
technical description for this is 'maintenance' or 'champerty'.
The transfer of legal causes of action has been illegal in
Ireland since the Maintenance and Embracery Act 1634 (1634
It did not matter that SPV, having purchased the claim, had
a genuine commercial interest in the outcome of the litigation.
Such transfers are illegal because of the risk that the
purchaser might inflate the value of the claim, suppress
evidence and even suborn witnesses. It was also immaterial that
the purchaser of the claim would not engage in such activities.
The mere potential for undermining the administration of
justice was enough.
The Court of Appeal recognised that recent trends in
litigation such as after-the-event insurance and conditional
fee arrangements mean that public policy must change with the
times. However the basic rule remains in Ireland that the
assignment of a bare cause of action to litigate in Ireland is
illegal. In order for this to change in Ireland, the 1634 Act
would have to be repealed. In the meantime, the decision
underscores that in Ireland fund service providers such as
depositaries and administrators are not exposed to the
consequences of legal claims against them being assigned. And,
as already noted, the case does not impact at all on the market
for the transfer of loan portfolios or other forms of debt.