FEDERAL COURT OF AUSTRALIA

Cant, In the matter of Novaline Pty Ltd (In Liq) [2011] FCA 898

IN THE MATTER OF NOVALINE PTY LTD (IN LIQUIDATION) (ACN 006 622 933)

THE COURT ORDERS THAT:

1.    The plaintiff and Novaline Pty Ltd (in liquidation) may enter into an assignment in the terms of the draft deed of assignment being Exhibit ARC 10 to the affidavit of the plaintiff sworn 19 May 2011.

2.    The costs of the plaintiff be costs in the liquidation.

3.    Mr Donald James Adams, a director of Novaline Pty Ltd, pay the costs of Mr Antonio Rosario Cosoleto, the other director of Novaline Pty Ltd, fixed in the sum of $4,000.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

1    The plaintiff, Anthony Robert Cant, as liquidator of Novaline Pty Ltd (the Company), has applied to the Court for an order under s 479(3) of the Corporations Act 2011 (Cth) (the Act) that he and the Company may enter into a deed of assignment of certain causes of action belonging to the Company. The approval of the Court is required under s 477(2A) and (2B) of the Act.

2    The Company was wound up on the just and equitable ground under s 461(1)(k) of the Act by the Supreme Court of Victoria on 5 October 2007. The Company operated in the cleaning products industry. The Company has two directors, Mr Antonio Cosoleto, who operated the business in Victoria, and Mr Donald Adams, who operated the business in New South Wales. The winding up order was made as a result of a dispute between the two directors. Mr Cosoleto said that Mr Adams excluded him from the business, and in May 2007, Mr Adams set up Novaline Engineering (New South Wales) Pty Ltd (Novaline Engineering).

3    In May 2008, the plaintiff conducted examinations of Mr Adams and his wife under s 596 of the Act. As a result of those examinations, and by reference to documents which had been produced to him, the plaintiff suspected that the Company may have claims against Mr Adams and Novaline Engineering. He suspected that Mr Adams had banked funds of the Company into the bank account of Novaline Engineering, that liabilities of the Company were paid from the Novaline Engineering bank account, that transactions with clients of the Company were conducted by Mr Adams in the name of Novaline Engineering and some Company funds were banked by Mr Adams into his personal account.

4    On 8 May 2009, all creditors were paid 100 cents in the dollar. On 13 August 2009, the plaintiff wrote to the directors and shareholders of the Company, being Mr Cosoleto and Mr Adams, to update them on the progress of the liquidation. He said that he had $50,000 of Company funds on account, and indicated to the parties that he thought that there were causes of action available to the Company against Mr Adams and Novaline Engineering. In response to that letter, Mr Adams proposed that he be paid $20,000, together with the release from any action against him. Mr Cosoleto, on the other hand, proposed that the $50,000, the remaining assets of the Company, be split equally between Mr Adams and Mr Cosoleto, and that he take an assignment of the causes of action belonging to the Company against Mr Adams and Novaline Engineering.

THE APPLICATION

5    The plaintiff considered that the causes of action belonging to the Company against Mr Adams and Novaline Engineering should be assigned to Mr Cosoleto. As Mr Adams was likely to oppose that course, it was desirable for the plaintiff to seek directions from the Court. In any event, the proposed assignment is to continue for more than three months, so Court approval is necessary under s 477(2B) of the Act. Consequently, the plaintiff filed an application on 20 May 2011 seeking an order that the plaintiff and the Company may enter into a deed of assignment in the terms of a draft deed of assignment in exhibit ARC-10 to the plaintiff’s affidavit sworn 19 May 2011.

6    The proposed deed of assignment provides that the Company assign to Mr Cosoleto the Company’s interest in the claims. The claims are defined in the deed of assignment as follows:

Claims means any claim, allegation, debt, dues, costs, demands, damages, losses, expenses, causes of action and liabilities of any nature however arising and whether present or future, fixed or unascertained actual or contingent, whether at law, in equity, under statute or otherwise belonging to the Company and arising from any of the matters addressed Public Examination including but not limited to claims:

(a)    against Mr Adams for breaches of his statutory and common law directors duties;

(b)    against Mr Adams for banking moneys due and payable to the Company into his own personal account;

(c)    against Novaline Engineering for the banking of moneys due and payable to the Company which were banked into the account of Novaline Engineering;

(d)    against Novaline Engineering for the issuing of invoices for work undertaken by the Company; and

(e)    against Mrs Adams and third parties related to, arising from or in connection with the matters set out above.

7    The deed of assignment further provides that Mr Cosoleto will pay the proceeds of the claims net of any legal expenses to the Company. The net proceeds would then be distributed by the plaintiff equally to Mr Cosoleto and Mr Adams as the only shareholders of the Company. The deed of assignment also provides that any legal proceedings are to be commenced within 12 months, and that Mr Cosoleto is to keep the plaintiff informed of the progress of the legal proceedings. He is only able to settle such proceedings on the express written recommendation of legal advisers, and he must provide to the plaintiff and the Company copies of the advice and the terms of settlement.

8    The plaintiff favours the entry into the deed of assignment because:

1.    it would enable the pursuit of good arguable claims against Mr Adams and Novaline Engineering;

2.    it involves no expense to the Company; and

3.    any proceeds would be split equally between Mr Adams and Mr Cosoleto.

9    Mr Cosoleto was represented at the hearing and supported the application. Mr Adams was represented at the hearing and opposed the application. Mr Hibble, who appeared for Mr Adams, opposed the application on two grounds, namely, that as a matter of discretion the Court should not approve an assignment where the subject matter was not clear and, second, that the statutory causes of action are not capable of assignment.

THE SUBJECT MATTER OF THE ASSIGNMENT

10    First, in relation to the need to identify the subject matter of the assignment, Mr Hibble argued that in order to clarify the subject matter, the plaintiff needed to identify the causes of action intended to be assigned, the allegations on which the causes of action are based, and the advice relied upon to conclude that the causes of action are available. It is insufficient, he contended, to set out the conduct which might give rise to the causes of action. Without this information, Mr Hibble suggested the Court could not be sure of what is to be assigned.

11    Applications for Court approval of assignments of causes of action are often made after proceedings have been issued. Proceedings are confined by pleadings which specify the causes of actions relied upon in the litigation. In those cases, the causes of action are defined by reference to extant proceedings: Ex Parte McGrath; Re Pan Pharmaceuticals Pty Ltd (in liq) (2008) 16 ACLC 386; [2008] FCA 563, Bank of Melbourne Ltd v HPM Pty Ltd (in liq) (1997) 26 ACSR 110, UTSA Pty Ltd (in liquidation) v Ultra Tune Australia Pty Ltd (1997) 1 VR 667 (Ultra Tune).

12    In the present case, the deed of assignment defines the claims in several ways. Some claims are defined by reference to causes of action, such as breach of statutory duty. Some claims are defined by reference to the conduct of potential parties, such as banking money of the Company into a personal account. And some claims are defined as arising from matters addressed in the public examination of Mr and Mrs Adams. The question is whether these descriptions are sufficient to identify the subject matter of the agreement between Mr Cosoleto and the plaintiff.

13    No doubt Mr Adams would like to know the precise allegations made against him. But that is a matter for later proceedings, if they eventuate. The technique of identifying the source of claims by reference to the matters addressed in the public examination is clumsy, and not particularly desirable in the interests of clarity. However, it cannot be said that the deed fails in that regard to identify the subject matter of the assignment. After all, in many cases in this area, assignments are in the most general terms, such as all claims arising out of or connected with a particular contract. Less criticism can be made of the description of the claims by reference to conduct. And no criticism can be made of the description of the causes of action. Consequently, the first ground of opposition raised by Mr Hibble should not be accepted.

THE POWER TO ASSIGN STATUTORY CAUSES OF ACTION

14    In relation to the power of the liquidator to assign statutory causes of action, Mr Hibble argued that it was not possible for the plaintiff to assign claims against Mr Adams for breaches of his statutory duties as a director (ss 180-184 of the Act). He relied on Ultra Tune, in which Hansen J said at 698:

If, as seemed to be agreed, and I think is correct, certain of the claims (those under ss 588FB, 588FC and 588FF) lie in the liquidators and are non-assignable, the proposed assignment can not operate as an assignment by UTSA or its liquidators of these claims.

15    Section 588FB concerns uncommercial transactions. Section 588FC concerns insolvent transactions. Section 588FE provides that such transactions may be voidable if a company is being wound up. Section 588FF(1) commences as follows:

Where, on the application of a company’s liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders:

16    Thus, applications under s 588FF must be brought by the liquidator. This is the reason Hansen J regarded those causes of action as unassignable. The right to enforce director’s duties is not confined in that way. Indeed, in Ultra Tune, Hansen J approved the assignment of the statutory claims against directors, the manager and financial controller, and the secretary, under ss 232(2), (4), (5) and (6) of the Corporations Law, the predecessor of ss 180-184 of the present Act.

17    The Ultra Tune judgment was upheld on appeal. Hayne JA, with whom Brooking and Phillips JJA agreed (UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd (1996) 14 ACLC 1610 at 1615) addressed the scope of the liquidators power in s 477(2)(c) as follows:

I turn then to consider s. 477(2)(c) of the Corporations Law. That section empowers a liquidator to –

“sell or otherwise dispose of, in any manner, all or any part of the property of the company”

“Property” is defined in the Law as meaning:

“any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real or personal property of any description and includes a thing in action;”

Thus, taken literally, the statute provides that a liquidator has power to sell or otherwise dispose of, in any manner, any thing in action of the company.

The appellant contends that those words are not to be read literally but are to be read as not permitting a liquidator to sell the company’s cause of action to anyone who does not already have an interest in the outcome of it because a sale to such a person will lead to maintenance or, if there is to be some sharing of the proceeds of the litigation, champerty.

…

In my view there is no warrant for reading down the general words of the law. The reference to sale or disposal “in any manner” makes plain that it is the intention of the legislature that the powers of the liquidator are to be ample.

…

I do not accept that s 477 is to be read, as counsel for the appellant contended, as doing no more than identifying the circumstances in which a liquidator can exercise powers which otherwise would rest in the company. Such a construction wholly ignores that the liquidator is to wind up the affairs of the company and distribute its property.

…

I therefore agree with the learned primary judge, substantially for the reasons that he gives, that the proposed sale of the company’s rights of action to Titan was within the power of the liquidator.

18    The scope of the Court’s consideration in Ultra Tune, on appeal, was addressed by the New South Wales Court of Appeal in Owners of Strata Plan 5290 v CGS & Co Pty Ltd [2011] NSWCA 168 at [70] - [72] (CGS) as follows:

70    UTSA v Ultra Tune did not turn on whether s 477(2)(c) of the Corporations Act empowers a liquidator to sell or dispose of an otherwise non-assignable chose in action. It does not appear to have been suggested in that case that the company’s cause of action was not assignable, provided that the proposed assignee had a sufficient interest in the proceeding. Much less was UTSA v Ultra Tune concerned with an attempt by a liquidator to sell or dispose of a chose in action that was non-assignable by virtue of an express agreement between the company and the obligor.

71.    The question in UTSA v Ultra Tune was whether the public policy reflected in the doctrines of champerty and maintenance restricted the class of persons to whom the liquidator could assign the company’s cause of action. Hayne JA applied principles well settled in the law of bankruptcy to hold that the object of the legislation would be frustrated if the public policy underlying the doctrines of champerty and maintenance prevented a liquidator discharging his or her statutory duty of realising the company’s assets to advantage: see, for example, Seear v Lawson (1880) 15 Ch D 426, at 430; per Bacon V-C; Cotterill v Bank of Singapore (Australia) Ltd (1995) 37 NSWLR 238; UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd [1997] 1 VR 667 at 682-683, per Hansen J; Campbells Cash v Carry Pty Ltd v Fostif Pty Ltd [2006] HCA 41; 229 CLR 386, at [75], per Gummow, Hayne and Crennan JJ.

72.    It is true that historically the common law’s distaste for trafficking in causes of action largely explains the non-assignability of legal choses in action: Holdsworth, A History of English Law, vol 7, at 532-535: Campbells Cash & Carry, at [75]. But as the joint judgment in Campbells Cash & Carry explained, the doctrine did not rest on solid foundations and has long been regarded as outmoded, if not obsolete: at [76]-[82]. It is therefore not surprising that UTSA held that the doctrine of champerty did not preclude assignment by a liquidator of a chose in action to a person who does not already have an interest in the litigation. That holding does not affect the question of construction of s 477(2)(c) that arises in the present case.

In that case, the Court held that s 477(2)(c) did not empower a liquidator to assign contractual rights which were expressly stated in the contract to be non-assignable.

19    It is established that a statutory right to damages, under s 82 of the Trade Practices Act 1974 (Cth), cannot be assigned. This is because the section does not allow for an award of damages not suffered by any party to the proceeding: Boston Commercial Services Pty Ltd v GE Capital Finance Australasia Pty Ltd (2006) ALR 720; [2006] FCA 1352 at [51], Tosich v Tasman Investment Management Ltd (2008) 250 ALR 274; [2008] FCA 377 at [37] (Tosich), Mijac Investments Pty Ltd v Graham (No 2) (2009) 72 ACSR 684; [2009] FCA 773 at [31].

20    One remedy for a breach of director’s duties under ss 180 to 184 is found in s 1317H of the Act, which provides:

A court may order a person to compensate a corporation … for damage suffered by the corporation … if:

(a)    the person has contravened a corporation/scheme civil penalty provision in relation to the corporation or scheme; and

 (b)    the damage resulted from the contravention.

The order must specify the amount of the compensation.

21    The reasoning applied in the s 82 cases applies equally to section 1317H. Whilst the bare right to litigate under section 1317H is thus not assignable under the general law, the question is whether a liquidator is able to assign that cause of action pursuant to the specific power in s 477(2)(c). Hansen J in Ultra Tune thought so. His judgment was upheld on appeal, although as pointed out in CGS, without direct reference to the precise issue. The judgment of Hayne JA, however, did rely on the width of the statutory power. The statutory causes of action, which Hansen J found fell outside the power of the liquidator to assign, were causes of action which the statute required the company to bring. It is therefore to be accepted that the statutory causes of action under ss 180 to 184 are capable of being assigned by a liquidator under s 477(2)(c).

22    Furthermore, there is an exception to the prohibition on the assignment of a bare right to litigate where the assignee has a genuine commercial interest in the enforcement of the claim of another and is enforcing it for his own benefit: Trendtex Trading Corporation v Credit Suisse [1982] AC 679 per Lord Wilberforce at 694D and Lord Roskill at 703F; Campbells Cash & Carry Pty Ltd v Fostif Pty Ltd (2006) 229 CLR 386; [2006] HCA 41 at [79]-[82]; TS & B Retail Systems Pty Ltd v 3Fold Resources Pty Ltd (No 3) (2007) 158 FCR 444; [2007] FCA 151 at 80-81, Tosich (2008) FCA 377 at [31]-[33].

23    In the present case, Mr Cosoleto has a genuine commercial interest in the enforcement of the Company’s claim for his own benefit. The proceeds of the successful claim would be paid to the Company and form part of its assets for distribution to the contributories in the liquidation. As a 50 percent contributory, he would be entitled to 50 percent of those assets. The assets would have been derived from wrongs done to the Company of which he is a director and 50 percent shareholder.

DISCRETIONARY FACTORS

24    Finally, the Court must consider the discretionary factors relevant to this application. The Court will not approve an assignment which would lead to frivolous or oppressive litigation. However, an application for Court approval of an assignment of a cause of action is not the occasion for a preliminary trial of the action. It is only necessary for the Court at this stage to be satisfied that the cause of action has a reasonable prospect of success.

25    In an affidavit sworn on 19 May 2011, the plaintiff explained that he inspected the books of the Company and also conducted the public examinations of Mr and Mrs Adams. As a result of that investigation, he came to the view that the Company may have certain claims against Mr Adams and Novaline Engineering. Those were the claims referred to earlier in these reasons. The transcript of the public examination of Mr and Mrs Adams provides support for the plaintiff’s suspicions. There is sufficient basis for the claims against Mr Adams and Novaline Engineering for the Court to approve the assignment. Further, the Company is protected by provisions in the deed of assignment which ensure that the cost of the proceedings will be borne by Mr Cosoleto. The deed also provides for supervision by the plaintiff of the progress of the case. Although this will be at the cost of the Company it is an appropriate burden for the Company to bear in the circumstances because it ensures a degree of transparency in the conduct of the litigation. Finally, the deed requires Mr Cosoleto to institute proceedings within 12 months. If he fails to do so the claims will be reassigned to the Company.

CONCLUSION

26    Consequently, there will be an order that the plaintiff and the Company may enter into the assignment in the terms of the draft deed of assignment being exhibit ARC-10 to the affidavit of the plaintiff sworn on 19 May 2011.

Associate:

Dated:    8 August 2011