In Clydesdale Financial Services Ltd and others v Robert Smailes and others [2009] EWHC 3190 (Ch), the principal issues before the Court were whether the third claimant, Focus Insurance Company Ltd (Focus), had a real prospect of success in its claims to be, first, a creditor (under the Insolvency Act 1986) of the fifth defendant, Alexander Samuel LLP (LLP) in respect of unpaid premiums and, second, a “victim” under ss.423-425 of the Insolvency Act 1986 of the sale of LLP’s business to Jiva Solicitors LLP (Jiva) effected around the same time as it went into administration.

LLP was a solicitors practice, funded by loans from lenders including the first claimant, Clydesdale Financial Services Ltd (Clydesdale). Focus provided financial guarantee insurance (FGI) cover for LLP, in order to secure the loans received from Clydesdale. Richards J held that Focus did not have a real prospect of establishing its status as a creditor of LLP, the principal reason being that without the making of a loan by Clydesdale (which occurred in relation to the bulk of the policies on which Focus relied), Focus was not ‘on risk’ and therefore the premium was not recoverable.

Following the decision of Richards J that Focus could not be established as a creditor of LLP, Focus could not rely upon creditor status in order to establish that it was a “victim”. Section 423(5) defines a “victim” of a transaction as a person “who is, or is capable of being, prejudiced by it”. Richards J held that this was intended to cover “a wider category than simply creditors”.

He considered that Focus was “capable of being prejudiced” by the sale of LLP’s business to Jiva at an undervalue, because although Clydesdale was the creditor of the loans to LLP, the loss would be borne by Focus by virtue of it’s insurance obligations to Clydesdale. Accordingly, if the sale was at an undervalue, the amount directly recoverable by Clydesdale from LLP (or by Focus on a subrogated claim) would be reduced and therefore the amount claimed by Clydesdale under its insurance policies with Focus would be increased.

Richards J therefore concluded that Focus did have a real prospect of establishing that it was a “victim” of the sale.

This case shows that failure to be established as a creditor does not preclude classification as a “victim” of a transaction at an undervalue. The correct approach is to ask whether, on the facts of the case, the claimant was, or was capable of being, prejudiced by the transaction.