03 Dec 2018

The practical issues of assigning a right to sue


5 min

Selling the ‘Chose in action’—will it be a game changer?

Recovering funds in an external administration, by allowing administrators to assign to a third party the right to sue (chose in action), was introduced under the Insolvency Law Reform Act 2016[1] (section 100-5 of Schedule 2 of the Corporations Act 2001).

Although an assignment of a right to sue may seem a quick and easy way to secure a recovery for an external administrator, while upholding the intentions of the law where enforceable claims are found, the practical issues must be considered before a Deed of Assignment would be entered into by a registered liquidator. These include:

  1. What rights to sue can be sold?

  2. How to determine the value of the claim/prospective claim and how much to sell it for?

  3. What information can be provided?

  4. How long will the assigned action take to conclude?

  5. Are there risks that cannot be assigned?

  1. What rights to sue can be sold?

Liquidators have always had the capacity to assign the fruits of a right to sue in relation to company property under section 477(2)(c) of the Corporations Act e.g. to a litigation funder in exchange for funding. Section 100-5 of the Schedule however, now extends that power to the rights to sue given specifically to a liquidator, which commonly are for insolvent trading and voidable transaction claims e.g. unfair preferences and uncommercial transactions.

In the recent case of Pentridge Village Pty Ltd (in liq) v Capital Finance Australia Ltd [2018] the Supreme Court of Victoria considered the liquidator’s assignment of a right to sue to the plaintiff director.

The case related to the financing of property development projects on the site of a maximum-security prison, which has since been closed in Melbourne.

The plaintiff sought damages from Capital Finance for over $200 million in lost profit over the uncompleted development by claiming it engaged in misleading or deceptive conduct and unconscionable conduct regarding the renewal of an existing facility agreement. This conduct was claimed to constitute breaches of the Trade Practices Act 1974, Corporations Act and Australian Securities and Investments Commission Act 2001.

The Court held the right to seek damages for unconscionable conduct or misleading or deceptive conduct fell within a class of right known as “personal causes of action” and that class of right is only available to the person who suffered loss or damage because of that conduct. That is, it could not be assigned to the director.

In a somewhat similar case of ours (still ongoing), the Court recently held that a right to sue could not be assigned to a defendant of that case. 

  1. How to determine the value of the claim/prospective claim and how much to sell it for?

 The second hurdle to overcome for an assignment to occur is determining the claim/prospective claim’s value and how much to sell it for.

In the limited time since the ability to assign a right to sue has been available, we have found that nominal sums are offered that provide no benefit to creditors, and potentially expose us to risks and costs that render the offers unviable.

  1. What information can be provided?

Company books and records in external administration are not ordinarily available for inspection. For example, section 486 of the Corporations Act provides that the court can order for creditors and contributories to inspect the company books, and any company books in the company’s possession may be inspected by creditors or contributories accordingly.

This raises the question as to what books and records can be provided to an assignee of a claim, especially if they are not a creditor or contributory. The cost of obtaining a court direction should be factored in when considering an offer to purchase a right to sue.

  1. How long will the assigned action take to conclude?

Australian litigation matters often take months or years to conclude. As an assignment of a right to sue involves an externally administered company, the company winding up cannot be concluded until all litigation matters are finalised. In any event, it is likely an external administrator’s ongoing involvement to maintain the proceedings will be required.

As administrative costs are continually incurred while an externally administered company remains active (e.g. annual administration returns, ASIC’s registered liquidator levy), the costs of keeping it active, or an indemnity clause, must be carefully considered before accepting an assignment offer.

  1. Are there risks that cannot be assigned?

A Deed of Assignment’s terms must be closely examined to limit/extinguish any risk.  However, it may not be possible to extinguish all the risks of an assignment.

In summary of the elements above, in Worrells Melbourne, we have not seen a great uptake of assignments of rights to sue yet; and inherently there may never be a great interest due to these practical issues!

[1] Effective March 2017

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