Section 100-5 of the Insolvency Practice Schedule, which was introduced in 2017, provides that an external administrator of a company may assign his or her right to sue under the Corporations Act 2001 (Cth). The Federal Court has recently considered a number of practical issues that may arise where a right to sue has been assigned, including how the ‘Harman obligation’ – i.e. the obligation not to use the documents for a purpose other than which they were given – applies to an assignee and whether it would be an abuse of process for an assignee to obtain information by way of compulsory court processes usually relied on by external administrators.
Pursuant to section 477(2B) of the Corporations Act, the creditors of 316 Group Pty Ltd authorised the company’s liquidator to enter into an assignment deed with litigation funder LCM Operations Pty Ltd. Under the assignment deed, the liquidator sold 316 Group’s claim against another company, Rabah Enterprises Pty Ltd, for the sum of $10,000 plus 15% of the net proceeds of the claim.
In order to investigate the quantum and prospects of the claim, LCM sought orders from the Federal Court to conduct public examinations and to obtain documents. On the basis of the information obtained, LCM commenced proceedings in the Supreme Court of New South Wales against Rabah for $14.8 million. LCM sought to rely on the documents produced pursuant to the examinations and summonses.
Rabah objected and the Supreme Court proceedings were stayed while the Federal Court determined whether LCM was prevented from relying on the documents due to the operation of the Harman obligation. The Federal Court was also asked whether the examinations and summonses obtained by LCM were an abuse of process because they were in pursuit of LCM’s private interests, rather than the interests of 316 Group and its creditors.
Operation of the Harman obligation
It was not in dispute that the documents were produced under the compulsory processes of the Court or that the Harman obligation not to use the documents for a purpose other than which they were given applied. Rather, the question for the court was whether LCM required leave to use the documents in the Supreme Court proceeding against Rabah, and if so, whether leave should be granted.
The Federal Court held that it was necessary, in applying the Harman obligation, to consider the purpose for which the documents were produced and the purpose for which they were intended to be used in the Supreme Court proceedings. Here, the use of the documents “to get in and realise the assets of the company in liquidation” was not a collateral or ulterior purpose. There would have been little utility in authorising LCM to conduct public examinations if they were not entitled to have regard to the information and documents produced in resulting claims.
As the predominant purpose of the examinations and orders for production of documents was to investigate the claim against Rabah, the Federal Court held that no leave was required for LCM to rely on the documents in pursuing that very claim in the Supreme Court proceeding.
Pursuit of LCM’s private interests
Rabah submitted that it was an abuse of process for LCM to obtain documents by way of examinations and summonses on the basis that LCM did so for private purposes, rather than for the benefit of 316 Group and its creditors. The Federal Court rejected this submission for a number of reasons:
The Federal Court therefore held that the documents were not obtained for a strictly private purpose. Rather, there was a mixed purpose, being “in part satisfaction of LCM’s own interests and in part the interests of the company and its creditors”.
This decision demonstrates that where an assignee under section 100-5 has obtained information and documents by way of compulsory court processes for the purpose of investigating the assigned claims, they do not require leave of the court to rely on the information and documents when pursuing those claims in subsequent proceedings.
If an assignee utilises compulsory court processes to obtain information and documents for a strictly private purpose, it is clear that this will amount to an abuse of process. However, it is not an abuse of process if an assignee is doing so for a number of purposes, one which benefits the assignee and one which benefits the creditors of the company under external administration.
The Federal Court’s reasoning raises questions as to the extent to which an assignment must benefit the company under external administration and its creditors. It leaves open the question whether the Federal Court would have reached a different conclusion had 316 Group and its creditors only received the initial sum or a less significant share of the proceeds.