BPM 62 Rights of Action.pdf

Module 62 – Rights of action
Released under the Official Information Act

Publishing date: June 2017
2nd Edition: November 2018

New Zealand Insolvency and Trustee Service
Private Bag 4714
Christchurch 8140
New Zealand
0508 INSOLVENCY | 0508 467 658
www.insolvency.govt.nz/cms

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Insolvency and Trustee Service
Introduction
This module requires you to exercise a statutory discretion or decision.
In doing so you must make your decision in an objective manner, only
taking the relevant factors into consideration.
You must also provide clear written reasons for your decision.
Finally, remember that your decision is subject to review.
About rights of action
A right of action is a “thing in action”, and constitutes property for the purposes of insolvency law. Most
rights of action are the right to sue for damages or compensation. They may also comprise a right to
recover property.
For our purposes there are two categories of right of actions:
(i)  rights of action personal to a bankrupt, and
(ii)  rights of action vesting in the Official Assignee.
Other modules deal with specific rights of action that are conferred on the Official Assignee under the
Insolvency Act and Companies Act (eg, the right to set aside an insolvent transaction).
In New Zealand, actions falling into category (i) are fairly limited, because of s317(1) of the Accident
Compensation Act 2001, which prohibits any person from bringing civil proceedings for damages arising
directly or indirectly out of a personal injury that is covered by the Accident Compensation regime
administered by ACC. In other countries, claims for compensation for personal injury caused by the fault
of a third party (often involving motor vehicles) are frequently pursued through the Court, and any
damages recovered as a result of those proceedings, or pursuant to an out of Court settlement, can’t be
claimed by the claimant’s trustee in bankruptcy.
However, personal injury claims are not the only type of claim that are personal to a bankrupt. Other
examples are:
  claims for defamation
  damage to reputation
  harassment, and
  some (but not all) claims against an employer following dismissal from employment.
Such rights of action don’t pass to the Official Assignee on bankruptcy. The bankrupt has the right to
pursue these actions in their own name without interference from the Official Assignee, and to retain
the proceeds. Arguably, the Official Assignee won’t be entitled to claim any investment that is the
product of any damages received as a result of a personal claim brought by the bankrupt, whether those
damages were received before or after the bankruptcy. However, from a practical point of view it may
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be difficult to identify the investment as referable to the damages received.
Note: While this module provides some guidelines for dealing with
rights of action, each case must be decided on its own merits and
invariably a legal referral will be required. It’s imperative that, once
a right of action is identified, information is gathered to determine
whether the claim is valid. It’s important that the Official Assignee is
not put in the position of making a hasty and ill-informed decision.
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About this module
This module is concerned with those rights of action that pass to the Official Assignee at the date of
either bankruptcy or liquidation. Rights of action can be very complex and involved. A thorough
knowledge and understanding of the issues and parties involved is needed in order to make a
determination of what action the Official Assignee will take.
Rights of action can be a high-risk area for the Official Assignee, especially in cases where there are time
limits for filing Court proceedings (limitation), along with the risk of an award of costs where the Official
Assignee is unsuccessful in bringing Court proceedings. In addition there’s always the possibility of a
person seeking to challenge the Official Assignee’s decision to pursue, discontinue or assign a right of
action.
Property passing to the Official Assignee
Rights of action passing to the Official Assignee relate directly to the bankrupt’s property. All property
passes to the Official Assignee in the same condition as it was in the hands of the bankrupt, and is still
subject to liabilities. Examples of rights of action that the Official Assignee may have to deal with
include:
  breach of contract
  damage to property
  a right to recover a debt, or
  a right to claim a distribution from a deceased estate.
Although s101 states “all property passes”, the courts have always held that rights of action purely
personal to the bankrupt don’t pass.
It should be noted, however, that the line between personal and “property” may not be obvious.
Employment disputes, for example, will frequently involve economic/financial damage as well as injury
to feelings. It will be necessary to obtain legal advice as to whether an action is personal to the
bankrupt.
Employment Relations Act 2000 - s123 Remedies in relation to personal grievances
(1) Where the Authority or the court determines that an employee has a personal grievance, it may,
in settling the grievance, provide for any 1 or more of the following remedies:
(c) the payment to the employee of compensation by the employee’s employer, including
compensation for—
(i) humiliation, loss of dignity, and injury to the feelings of the employee…
In Cooley v Prestige (Unreported CIV-2011-443-436), the Court set out the elements of the test for a
personal claim not vesting in the Official Assignee. Namely, the damages being sought need to be
estimated:
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  by immediate reference to pain felt by the bankrupt
  in respect of the bankrupt’s body, mind or character, and
  without reference to the bankrupt’s rights of property.
In that case, the point was made that many claims for economic loss have the potential to cause
consequential distress to the bankrupt. However, this will not be sufficient to enable the claim to be
classified as personal, and thus to enable the bankrupt to bring proceedings in their own name.
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Remember that many rights of action against the bankrupt/company in liquidation are stayed upon the
Official Assignee’s appointment (pursuant to s76(1) of the Insolvency Act/s248 of the Companies Act), if
they relate to a liability that will only be able to be proved in the bankruptcy. However, this module is
concerned with rights of action belonging to the bankrupt or company, which the Official Assignee is
able to pursue against third parties.
Assignment
From time to time the Official Assignee may be asked to assign a vested right of action. This is an
immediate transfer of an existing proprietary right from the assignor to the assignee.
At the outset, it’s important to distinguish between different kinds of rights of action. How the right of
action arose will determine the ways the Assignee can deal with it.
If the right of action is vested in the Assignee as an incident of the bankrupt’s property vesting under
section 101 (e.g. if the bankrupt had a right to sue as at the date of adjudication), then:
  While the bankrupt is undischarged, the Assignee may assign the right of action to any person
(other than the bankrupt) without permission from the court. The reason that it can’t be
assigned to the bankrupt is because it would automatically revert back to the Assignee under
section 102 of the Act (see Official Assignee v Henshaw [2015] NZHC 1856)
  After the bankrupt’s discharge, the Assignee may assign the right of action to any person
(including the now discharged bankrupt) without permission from the court.
If the right of action is one that is conferred on the Assignee by the Insolvency Act 2006 (e.g. the right to
cancel an insolvent gift), then the Assignee will require the court’s permission to assign it (see section
221). These are rights to sue that the bankrupt did not have themselves, but which the Assignee may
exercise because the Act specifically allows the Assignee to. An application can be made by either the
Assignee or the person to whom the right of action is to be assigned.
If a request is made to have a right of action assigned, the Official Assignee should first consider
whether assignment is possible (see above). If the right of action is assignable, then the Assignee should
be aware of the reasons why the party wants to pursue the right of action. The reasons should be put in
writing and supported by documentation. If the requesting party is unable to provide this information,
the Official Assignee may have little choice but to decline the request. Possible outcomes are:
If the Official Assignee …
then…
isn’t prepared to take an action
it’s unreasonable to assign that claim, just because a request is
made for it to be assigned.
refuses the request
the reasons for the decision should be clearly given to the
person making the request.
after reviewing all the evidence, is
it may be prudent to seek the directions of the court, and let
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in doubt as to whether to assign a
the court make the decision as to whether the action should be
right of action to a requesting party  assigned. Alternatively, the Official Assignee might prefer to
refuse the request and leave the requesting party to appeal
that decision.
If any party is detrimentally affected by a decision to disclaim or refuse to assign a right of action, they
have the right to appeal the Official Assignee’s decision under section 226.
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Best practice is:
  to make a legal referral to ITS solicitors to determine the best way forward (i.e. disclaimer vs
assignment)
  to enter into a Deed of Assignment that meets the requirements of section 9 of the Property Law
Act 2007, and
  for the person receiving the assignment to fully indemnify the Official Assignee; and
  for there to be some consideration for the assignment.
Consideration is not a precondition for a valid legal assignment, however a Deed of Assignment that
records consideration passing between the Official Assignee provides a level of protection in the event
that the Official Assignee needs to enforce the terms of the assignment.
Note: A bare right of appeal is generally not assignable. In bankruptcy, it’s
possible that the bankrupt may approach the Official Assignee seeking an
assignment of the right to appeal the judgment debt upon which the
bankruptcy order is based, or they may wish to challenge tax assessments
made by Inland Revenue before their bankruptcy, and request an assignment
for that purpose.
In Cummings v Claremont Petroleum (1996) 137 ALR 1, the point was made
that a right to appeal which only aims to set aside a liability is unlikely to meet
the definition of “property” for the purposes of insolvency law. On that basis,
it appears an assignment of such a right of appeal wouldn’t be possible.
Disclaimer
Where there’s a right of action on file that the Official Assignee is not going to deal with because there’s
no merit to the claim, or where it would be uneconomic to proceed, it’s best practice to disclaim the
action.
If the Official Assignee has formed the view that a potential claim is unmeritorious, a disclaimer can be
an efficient way of bringing to an end discussions about whether or not the Official Assignee should
assign the proceedings to the bankrupt.
Once the disclaimer has been issued, the bankrupt would be able to file proceedings asking for the
disclaimed property to be vested in them.
Module cross-reference:
Disclaimer of property 48
Legislation
Insolvency Act 2006
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  76 Effect of adjudication on court proceedings
  101 Status of bankrupt’s property on adjudication
  102 Status of property acquired during bankruptcy
  217 Assignee’s general powers
  190 Bankrupt's co-contractor may sue and be sued
  221 Assignee may assign the right to sue under this Act
  225  Assignee may apply for directions by court
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  Schedule 1 Assignee’s general powers
Schedule 1(b) the Assignee has the power to “begin, continue, discontinue, and defend legal
proceedings relating to the property of the bankrupt”.
Companies Act 1993
  248 Effect of commencement of liquidation
  254 Liquidator not required to act in certain cases
  260 Powers of liquidator
  260A Liquidator may assign right to sue under this Act
  Schedule 6 Powers of liquidators
Schedule 6(a) the liquidator of a company has power to “commence, continue, discontinue, and
defend legal proceedings”.
Property Law Act 2007
Part 2, Subpart 5 - Assignment of things in action
High Court Rules
  HCR 24.52 Applications to court by Official Assignee
  HCR 24.53 Official Assignee’s liability for costs

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Issues of concern/potential problem areas
Any decision regarding rights of action is potentially fraught with risk to the Official Assignee, whether in
bankruptcy or as the Liquidator of a company. All decisions must be based on sound reasoning backed
up with full legal advice. Like any decision of the Official Assignee, the process must be transparent.
Assignment or transfer
The Official Assignee must look at the merits of any situation before assigning or transferring a right of
action to another party. If need be, the Official Assignee should communicate with all affected parties
and ask for their views.
It’s best practice for creditors’ views to be sought first before a right of action is transferred to a creditor
or third party. This is particularly true where the request has come from a bankrupt. In most instances
it’s best practice to ask creditors whether they are willing to fund legal proceedings first before even
considering whether or not to assign the proceedings. If creditors are unwilling to fund legal
proceedings, that would be relevant to the decision whether to assign.
Creditor in a bankrupt estate
Where the potential defendant is a creditor in a bankrupt estate, care should be taken to ensure that
their rights are not infringed. They may have a right to counterclaim or set off their debt. In Edmonds
Judd v Official Assignee [2000] 2 NZLR 135, the Court’s view was that this was a factor that ought to be
considered before making a decision in relation to rights of action.
There have been cases where the bankrupt has wished to file proceedings in their own name for breach
of fiduciary duty (breach of trust). However, it is well settled that claims of this nature relate to the
bankrupt’s property, and can only be brought in the Official Assignee’s name. Claims under the Family
Protection Act 1955, which are based on the moral duty of the deceased at the date of his or her death
to make provision for a person’s family, are entirely economic claims, and would need to be pursued by
the Official Assignee following a person’s bankruptcy. Claims under the Law Reform (Testamentary
Promises) Act 1949 are also economic claims.
Memoranda for external referral
All memoranda intended to brief in-house counsel or an Insolvency Manager for external referral should
be in full, and should - in effect - review the file as to the issues and correspondence held relating to the
matter.
In Re Callis (a bankrupt); Callis v Pardington (1996) 7 NZCLC 261,211 the Official Assignee was criticised
for not disclosing to the solicitor that there was a letter on file previously advising the potential
defendant that no action would be taken against them. It’s therefore important that as much
information as possible is provided to the solicitors.
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Right of action
It appears to be fairly well settled that a bankrupt or other party is not able to pursue a right of action
purely due to the fact that the Official Assignee has manifested an intention not to pursue the action, or
for any other reason it’s regarded as having been abandoned. Accordingly, for the bankrupt or a third
party to pursue a right of action, there will need to be a valid assignment of the right of action or
disclaimer, followed by an application to Court to have the right vested in that party.
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Award of costs against the Official Assignee
In the past the courts have been reluctant to award costs against the Official Assignee, because of the
public duty imposed on the office. Recently, however, this view has changed, and the Official Assignee
has had costs awarded against them in certain instances. It’s therefore very important that the merits of
a case are carefully assessed before a decision is made.
Arguable claim
Whilst the Official Assignee can enter into a deed of assignment, he/she should only do so if there’s an
arguable claim to assign. In making a decision as to whether an arguable claim exists, the Official
Assignee must give consideration to the likely outcome of the claim. The main reason for assigning a
claim would be that the claim has merit, however the cost of pursuing is likely to be greater than the
recovery.
Note: Unless a comprehensive indemnity is obtained, the
Official Assignee may still be liable for costs should the
proceedings be unsuccessful. Any assignment of claims should
only be undertaken after careful consideration and legal advice.

Insolvency procedure
Initiating or continuing proceedings
In the majority of cases, the existence of a right of action predates adjudication or liquidation, with legal
action having been either contemplated or commenced by the bankrupt or company. It’s of critical
importance that, if the Insolvency Officer discovers matters of this nature, they be followed up promptly
– this includes making an entry into the Asset Register for the estate.
Note: Where a potential right of action is identified, it’s best
practice to obtain input from counsel sooner rather than later,
as there may be a deadline for filing proceedings.
In the case of proceedings already on foot, there may be Court
timetabling in place.
If it’s discovered that a right of action exists:
1.  Find out who the solicitors are for both parties.
2.  Contact them and advise of the Official Assignee’s involvement.
3.  Find out what the essential elements of the action are.
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4.  Obtain:
o  legal files
o  financial records, and
o  copies of all associated correspondence.
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5.  Speak with the parties potentially involved and complete appropriate file notes. This may include:
o  the bankrupt/director
o  creditors
o  receivers
o  liquidators
o  potential defendants
o  accountants, and
o  previously instructed solicitors.
6.  Prepare a referral to Insolvency Manager or legal counsel setting out the following:
o  the facts of the case
o  the evidence available
o  potential legal problems
o  strength of the claim (if known)
o  available funding and/or indemnity from creditors
o  likely recovery for creditors, and the class of creditors who will benefit from any recovery
action
o  the potential for an adverse award of costs against the Official Assignee/Liquidator
o  likelihood of successfully negotiating or mediating a settlement with the other party.
7.  Legal counsel will then advise whether the right of action should be initiated or continued.
Notes:
i.  If you’re approached by solicitors acting for the defendant, proceed
with care. Frequently defendants will point to the bankruptcy as a
reason why the proceedings should be stayed or discontinued. It’s
only natural for the defendant’s lawyers to overstate the strength
of their client’s case when they first make contact to enquire
whether or not the Official Assignee will be continuing proceedings
against their client. In most cases, all that can be said is that the
Official Assignee is yet to form a view, and will be unable to do so
until all documentation relevant to the proceedings has been
obtained and reviewed.
ii.  Take care also when approaching potential defendants. Make sure,
for example, that you deal with their solicitors where they have
been instructed. Approaches of this kind should be discussed with
the Official Assignee’s solicitors before being initiated.
8.  In some circumstances it may be appropriate to file a discontinuance with the Court, in which case
you will need to get a solicitor involved. Whether it is appropriate will depend on the circumstances,
but the approach is probably preferable if there is a looming Court date, or if the Court has set a
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timetable for the filing of certain documents.
Creditor funding
If there are not sufficient funds in the estate to pursue legal action likely to result in a recovery,
creditors should be approached and asked whether they are willing and able to fund the action. It’s
important that all known creditors are written to.
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