In the much discussed recent case of Yan v Mainzeal property and Construction Ltd (in liq) [2023] NZSC 113, the Supreme Court recognised that creditors can take direct claims against directors and liquidators under section 301 of the Companies Act 1993.
The case of Ingenious Asset Management Ltd v McConnon [2024] NZHC 624 gives a glimpse of the Courts’ likely attitude to the assignment by creditors of claims against directors to unrelated third parties .
While the case is strictly concerned with an application for security for costs, the High Court questioned the validity of an assignment of creditors’ causes of action against directors, and sounded a warning to those who would otherwise seek to use section 301 to make a quick profit.
Background
Global Dairy Limited was placed into liquidation. The liquidators filed proceedings against the directors of Global Dairy for breach of their directors’ duties. Those director claims were settled with the liquidators for $250,000. The liquidators deducted their fees and costs from the settlement proceeds, and the balance was distributed to Global Dairy’s creditors. The creditors did not receive full repayment of their claims against Global Dairy from distributions made in the liquidation.
Three creditors purported to assign their unsatisfied claims in the liquidation to Ingenious Asset Management Ltd (IAM) for $1. IAM then commenced proceedings against the directors of Global Dairy and its liquidators. One of the causes of action by IAM was an action against the directors for breaches of directors duties, for which IAM sought a remedy under section 301 of the Companies Act.
High Court’s assessment of assignment
The High Court did not assess the merits of IAM’s claims for breach of duties or under section 301, but took a close look at the validity of the assignments.
The starting point is that while a debt can be assigned, a bare cause of action in tort, or other personal action, cannot be assigned. The totality of the situation needs to be looked at, to ensure that the substance of the transaction has not been “dressed up” as an assignment of debt.
The Court concluded that the directors and liquidators had strong arguments that the assignments were impermissible assignments of bare causes of action.
The Court reasoned that the assigning creditors had proved in the liquidation, and the liquidators’ reports confirmed that the distributions were made to the creditors as unsecured creditors. After the distributions, the creditors’ outstanding debts were prima facie worthless, and the creditors were prepared to assign them for $1. The creditors had no interest in the outcome of the proceeding. On the other hand, IAM had no interest in the debts assigned, and offered no explanation for its motivation in accepting the assignments. Arguably, in substance, all that was assigned were the creditors’ personal causes of action against the directors and liquidators. The High Court said the assignments suggested trafficking in litigation, and carried a serious risk of failure.
As above, the judgment was only in respect of whether IAM needed to pay security for costs (and the Court concluded that they did), so no final decision was reached on the assignability of the claims.
However, the judgment is a cautionary tale for would-be opportunistic third-party assignees who may plan to utilise section 301 of the Companies Act to bring claims against company directors for profit.
If you would like further information, please contact Kerry Puddle or a member of our team.
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