High Court: Company set up by bankrupt O’Donnell’s children had no standing to acquire parents’ claims

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Litigation Finance Ltd (LFL) – a company incorporated by the children of Mr O’Donnell and Dr O’Donnell (the Bankrupts)– sought “…an Order pursuant to Section 61(7) and/or 71 of the Bankruptcy Act 1988 that the Official Assignee shall transfer the chose in action to the Applicant on the terms of the offer made by the Applicant”.

In view of the fact that the Bankrupts were not parties to the application and LFL was not a bankrupt, Justice Costello stated that section 71 did not apply to the application.

Section 61

Section 61 of the Bankruptcy Act 1988 sets out that the Official Assignee has the power to sell property of the bankrupt, which according to section 3 of the same Act, includes choses in action.

Section 61(7) provides: “The exercise by the Official Assignee of the powers conferred by this section shall be subject to the control of the Court, and any creditor or other person who in the opinion of the Court has an interest may apply to the Court in relation to the exercise or proposed exercise of those powers.”

LFL did not identify the chose in action it was asking to be transferred to it in the notice of motion, which proved to be the main hurdle in their application before the High Court.

Standing

Justice Costello stated that the first matter to be determined was whether or not LFL had standing to bring an application pursuant to s. 61(7) of the Bankruptcy Act 1988.

Usually in bankruptcies, assignments of claims are “sought by the bankrupt in the interests of justice”, so that the bankrupt may pursue the claim when the Official Assignee has decided for various reasons not to pursue the claim.

In this case, neither of the Bankrupts sought the assignment of these claims, and instead, a company, in which the bankrupts have no interest, sought the assignment of their asserted chose in action.

Justice Costello emphasised that a creditor of the bankrupt would automatically have standing to apply to Court pursuant to s. 61(7); however the claim before the High Court was brought by a company that was not a creditor in the estate of either of the Bankrupts.

Accordingly, in law, it was the interest of an unconnected third party who sought to buy claims of the Bankrupts; and the question of the standing of a party, other than a creditor, was a matter for assessment by the Court.

The Court must be satisfied on evidence adduced by LFL that they have an interest in relation to the exercise or proposed exercise by the Official Assignee of the powers conferred on him by s. 61 – however, Justice Costello was not satisfied that LFL had an interest in the causes of action, and sought only to acquire an interest by purchasing the chose in action from the Official Assignee.

LFL argued that its offer to purchase the chose in action was sufficient to meet the requirement established by s. 61(7) and that it had standing to bring the application based upon the offer to purchase the property of the Bankrupts without anything more.

The purpose of LFL acquiring the claims was not disclosed to the Court, therefore Justice Costello stated that it was left to the Court to assume that LFL sought to acquire the claims for the purpose of pursuing them; and if this end was to be legitimate, it must have been with a view to obtaining a return.

Public Policy

Justice Costello was cognisant of the fact that the Courts should “not assist in the proliferation of unmeritorious litigation, either by disappointed bankrupts or by third parties, by ordering the Official Assignee to assign unmeritorious causes of action pursuant to s. 61(7) to persons who wish to acquire the cause of action”.

Further, the Courts “must be alert to possible trading in litigation which could give rise to issues of maintenance or champerty, though the sale of the interest of a bankrupt in litigation by the Official Assignee is authorised by statute and therefore does not offend the rules against maintenance and champerty”.

The Court “must consider the proposed proceedings in order to satisfy itself that the assignment of the cause of action could be accepted to be legitimate or in the interests of justice”, and at a minimum, “the court ought not to order the Official Assignee to assign a claim that is bound to fail as being frivolous or vexatious”.

To avoid “a host of unmeritorious applications pursuant to s. 61(7)” that “would do violence to the language of the statute”, the Court cannot form the requisite opinion on standing if an applicant “simply makes an offer to purchase an asset from the bankrupt’s estate without giving the court any further information”.

It was incumbent on LFL to set out particulars of the claims of the Bankrupts which it wished to purchase and the value of the claims, in order for the Court to assess: whether LFL had an interest within the meaning of s. 61(7); the nature of the claim(s); that the proposed claim(s) were not bound to fail, nor was it frivolous or vexatious; some approximate assessment of the value of the claim; and any other relevant information.

Refusing LFL’s application, Justice Costello stated that she could not form an opinion that LFL had an interest within the meaning of s. 61(7); adding that if LFL wished to renew its application to take an assignment of the claims, it must set out “at least some of the information requested by the Official Assignee”.