Ireland: Supreme Court Disregards Motive For Company's Assignment Of Cause Of Action

McCool Controls and Engineering Ltd v Honeywell Control Systems Limited [2024] IESC 5.

The Supreme Court, by majority decision, has found that an assignee of a company's interest in litigation may in principle be permitted to pursue the action by being substituted as plaintiff in place of that company even though the motive for that assignment is to avoid falling foul of a rule from 1968, known as the "rule in Battle" (from Battle v Irish Art Promotions Centre Ltd). Under the rule in Battle, a company can only be represented in court proceedings by a lawyer, not by its directors or shareholders.

The facts

McCool Controls and Engineering Limited (Company) was the original plaintiff in proceedings against Honeywell Control Systems Ltd (Honeywell) for alleged breaches of an agreement between the parties. The proceedings were commenced in 2005. Mr McCool was the Company's managing director and majority shareholder, and he brought an application to substitute himself for the Company as the plaintiff in the proceedings because the Company could no longer afford legal representation. The application was based on an assignment between the Company and Mr McCool, whereby the Company assigned the cause of action to him for the nominal consideration of €1. Honeywell successfully applied to have the substitution order discharged because the assignment was invalid and an abuse of process, as it amounted to an impermissible attempt to circumvent the rule in Battle. Mr McCool appealed this 2018 decision to the Court of Appeal (COA).

Despite the pending appeal, Mr McCool brought a second application to the High Court to be substituted as plaintiff. This application was grounded on a second assignment executed by the Company in favour of Mr McCool. Simons J refused this application on the basis that the matter was already decided by the High Court in 2018. Mr McCool also appealed this refusal to the COA. The COA, in 2022, dismissed both appeals upholding the findings of the High Court in both cases. The COA also found that the assignment was not in compliance with section 28(6) of the Supreme Court of Judicature (Ireland) Act 1877 (Judicature Ireland Act, discussed below) because it was not an absolute assignment.

Mr McCool sought and obtained leave from the Supreme Court to appeal on the narrow grounds of whether an assignee of its interest in litigation by a corporate body can pursue the action by being substituted as a plaintiff in place of the company, irrespective of the purpose of the assignment.

The Supreme Court's findings

Four judgments were delivered by the Supreme Court. In considering the validity of an assignment, Woulfe J (with whom the majority agreed) considered the wording of section 28(6) of the Judicature Ireland Act, which sets out the requirements for a valid assignment. These include that the assignment must be for a debt or other legal chose in action; there must be an absolute assignment; the assignment must be in writing; and the debtor must be given express notice of the assignment. Woulfe J noted the absence of any reference to the purpose or the intention of the assignment in section 28(6). Although the point had not previously been considered by the Irish courts, Woulfe J referred to limited English authorities to the effect that the purpose behind an assignment of a cause of action by a company is irrelevant in determining its validity.

Regardless of the prima facie validity of an assignment, it may still be invalid if it is contrary to public policy. The public policy point in this appeal was the rule in Battle.* Woulfe J accepted Mr McCool's submissions that the policy concerns behind the rule in Battle only apply where an individual seeks to represent a company as a non-party to proceedings. If an order for substitution is made following the assignment of the cause of action, the rule no longer applies. This is because the legal effect of such a substitution means that the company is removed from the litigation, together with the benefit of the limited liability afforded to the shareholders. The substituted individual is therefore exposed to all the personal risks associated with the litigation, including the possibility of a costs order against him.

An interesting dissent

Although the majority of the Supreme Court allowed the appeal, the comments of Mr Justice Charleton in dissent are interesting. He held that public policy debars the assignment of a company's right to litigate, to a director, shareholder or other person, except where the assignment is effected under the authority of an independent person such as a liquidator. In his opinion, assigning the right to litigate to Mr McCool had far broader implications than merely enabling him to speak on behalf of the Company. He found that the assignment was a "crude mechanism" allowing a director to pursue an interest of the Company. Charleton J concluded that the assignment undermined the foundations on which the separate legal personality of a company from its shareholders is built.

Conclusion

The decision is important in the very complex area of assignments of bare causes of action. Although only a limited point was under appeal to the Supreme Court, the decision nonetheless confirms that no rule of law invalidates an assignment of a legal claim by a company simply because that assignment is made to avoid the rule in Battle.

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