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 Act).
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.