Assign o the times: Assigning statutory causes of action - Insolvency/Bankruptcy

This week's TGIF considers the decision in Pentridge Village Pty Ltd (in liq) v Capital Finance Australia Ltd [2018] VSC 633, where the Victorian Supreme Court dismissed a substitution application brought by a sole director of a company who claimed that the liquidator had assigned to him all of the company's right, title and interest in certain property, including the causes of action and claims that were already the subject of the proceeding.

WHAT HAPPENED?

The decision concerned the long series of events related to the financing for a property development projects in Melbourne's inner-northern suburbs, on the site of the (now closed) maximum security Pentridge Prison.

The plaintiff property development companies sought damages from the financier for the projects, alleging that the financier had engaged in unconscionable conduct and misleading or deceptive conduct by representing that the financier would provide funding sufficient to complete the projects, where the financier did not have reasonable grounds to make those representations. This conduct was said to constitute breaches of each of the then-applicable Trade Practices Act 1974 (Cth), the Corporations Act 2001 (Cth) and the ASIC Act 2001 (Cth).

The present complication arose in August 2017, a year or so after the proceeding had been commenced. The liquidator of one of the development companies purported to irrevocably assign certain property to the company's sole director – including the causes of action and claims the subject of the proceeding.

The rights to pursue these claims were very valuable – the director's evidence put them at well over $200 million in lost profit and lost opportunity to complete the projects and develop the land.

Subsequently, the director then applied to be substituted as a party to the proceeding, on the basis that he now held the right to prosecute the claims for unconscionable conduct and misleading or deceptive conduct. He sought to take advantage of a provision of the Court rules that allowed for a party to be substituted where the "interest of any party is assigned or transmitted to... some other person".¹

THE SUBSTITUTION ISSUE

The substitution issue raised two important and difficult questions of law:

Was it necessary to prove that the assignment was effective before the new party could be substituted in place of the party who had assigned them that cause of action?
Was it possible as a matter of law to assign statutory causes of action like those for unconscionable conduct and misleading or deceptive conduct to another person?

In relation to the second question, the director not only argued that the cause of action could be validly assigned, but also that the liquidator's broad power to sell the company's assets under s 477(2)(c) should be read as permitting the assignment of statutory causes of action even if they would otherwise be unassignable.

THE DECISION

On the first question, Connock J held that proving an effective assignment was necessary – it was a threshold condition to enliven the Court's discretionary power to substitute in the party who had received the assignment.

On the second question, Connock J held that it was not possible to assign the statutory causes of action in this case.

His Honour began with the important observation that liquidators who seek to assign rights of action by sale under s 477(2)(c) are not restricted by the old legal doctrines of "maintenance" and "champerty". These doctrines were aimed at stopping the trading and sale of rights of action, but because of their position and role of realising company property, authority confirms that liquidators are not bound by these doctrines.

But that did not answer the question at hand. Unfortunately for the director, the statutory rights of action to seek damages for unconscionable conduct or misleading or deceptive conduct sit within a class of right considered "personal causes of action". They are available only to the person who has suffered loss or damage because of that conduct and so cannot be assigned.

In contrast, certain causes of action considered "impersonal rights in the nature of a proprietary right" can be assigned. Key examples are debts, judgment debts, negotiable instruments or even shares. Their essential criterion is that they are proprietary in character, rather than a personal action available only to one particular person.

So, in this case, the director could not be substituted into the proceeding to prosecute the statutory claims, because he could not take a valid assignment of those claims. The litigation continued, however, as other subsidiary claims (such as claims for estoppel) continued to be prosecuted.

COMMENT

Like many precise legal concepts, the distinction between "personal causes of action" and "impersonal proprietary rights" can be elusive – but like in this case, the distinction can certainly be valuable and important.

The courts have dealt with these issues on many occasions over the years, and there is a strong body of law to guide those selling (and buying) rights of action. However, careful and considered advice in the specific context of the transaction is crucial to ensure that assignments are effective and valuable.

Footnote

¹ Supreme Court (General Civil Procedure) Rules 2015 (Vic), Rule 9.09(2)(a).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.