South Australian Management Corporation v John Sheahan

[1995] SASC 4963

COURT IN THE SUPREME COURT OF SOUTH AUSTRALIA DEBELLE J

CWDS
Corporations - liquidation - Secured creditor - bank holds mortgage debenture as security for monies advanced to borrower corporation - borrower defaults - bank appoints receivers - receivers institute action for damages in name of borrower - bank later successfully applies to wind up borrower - order made winding up borrower and appointing liquidators - receivers resign six weeks after winding up order - bank seeks to resume conduct of the action - relevant principles. Scarel Pty Ltd v City Loan and Credit Corporation Pty Ltd
(1988) 12 ACLR 730; Zempilas and Others v JN Taylor Holdings Ltd (in lig) (No 6) (1991) 5 ACSR; Re Landmark Corporation Ltd (1968) 1 NSWR 705; Re Alexanders Securities Ltd (No 2) (1983) 2 Qd R 597; Gough's Garages Ltd v Pugsley (1930) 1 KB 615; Trendtex Trading Corporation v Credit Suisse (1982) AC 679, (1980) 1 QB 629; Re Timothy's Pty Ltd and the Companies Act (1981) 2 NSWLR 706; First City Corporation Ltd v Downsview Nominees Ltd (1989) 3 NZLR 710; Re Leslie Homes (Aust) Pty Ltd (1984) 8 ACLR 10-20; Re Asiatic Electric Co Pty Ltd and Companies Act (1970) 2 NSWR 612 and Kelaw Pty Ltd v Catco Developments Pty Ltd
(1989) 15 NSWLR 587, applied. Poulton v The Commonwealth (1953) 89 CLR 540; Re Henry Pound, Son and Hutchins (1889) 42 Ch D 402 and Defries v Milne (1913) 1 Ch 98, distinguished. Georgiadis v Australian and Overseas Telecommunication Corporation (1994) 179 CLR 297; Re Yates (1989) 88 ALR 583 and Martell v Consett Iron Co Ltd (1955) Ch 363, considered.

HRNG ADELAIDE, 8, 14 December 1994 #DATE 15:2:1995 #ADD 13:3:1995

Counsel for plaintiff:     Mr J Wells QC with Ms R Pak-Poy

Solicitors for plaintiff:    Minter Ellison Baker O'Loughlin

Counsel for defendants:     Mr M Abbott QC with Mr G Grieve

Solicitors for defendants: Piper Alderman

ORDER
Application granted.

JUDGE1 DEBELLE J The plaintiff is the former State Bank of South Australia. It was invested with its new name by the State Bank (Corporatisation) Act 1994. That Act authorised the Treasurer to transfer assets and liabilities of the former State Bank of South Australia to a new bank called the Bank of South Australia Ltd. The function of the plaintiff is to manage, realise and otherwise deal with those assets and liabilities of the former State Bank which remain after assets and liabilities have been transferred to the Bank of South Australia Limited by the Treasurer: s19 of State Bank of South Australia Act.

2. The defendants John Sheahan and Anthony Milton Sims are liquidators of the third defendant Health and Life Care Ltd ("HLC") which on 24 May 1994 was wound up by order of this Court. The same order appointed Messrs Sheahan and Sims liquidators. The petitioning creditor was the plaintiff.

3. The plaintiff is a secured creditor of HLC and is its only secured creditor. The plaintiff applies for declarations that it is entitled to assume control of an action instituted by receivers appointed by it, the receivers having resigned. It also claims other ancillary relief. I turn to the events leading to this application. The action of which the plaintiff seeks to assume control is action No 289 of 1993.

4. On 11 August 1988 HLC executed a deed called a mortgage debenture in favour of the State Bank. By that mortgage debenture HLC charged all its undertaking and all its real and personal property and assets, both present and future, as security for all monies due by it to the State Bank. It was a fixed and floating charge. HLC was party to a facility agreement dated 21 May 1987 made between the bank and Hamron Pty Ltd. By that agreement HLC and others agreed to be bound by the same liabilities and obligations as Hamron Pty Ltd had agreed with the bank. Hamron Pty Ltd defaulted under the agreement and HLC was bound to indemnify the bank. HLC in turn defaulted on its obligations and on 22 February 1993 the bank appointed Messrs A.G. Hodgson and A.M. Cornell as receivers and managers of HLC. The appointment was made pursuant to powers contained in the mortgage debenture.

5. On 23 February 1993 HLC had issued an action in this Court against Price Waterhouse, a firm of chartered accountants. That is the action No 289 of 1993. On 20 May 1993 the receivers and managers amended the summons so that the action was brought by them in the name of HLC. The mortgage debenture gave the receivers express power to take proceedings in the name of the company: see Clause 28(b)(x) of the mortgage debenture. In that action HLC claims damages for breach of contract and for negligence in relation to accounting advice given by Price Waterhouse to HLC concerning the acquisition of a group of companies. The solicitors for the receivers and managers were Messrs Finlaysons acting as agents for Messrs Clayton Utz in Melbourne. In mid-1993 the conduct of the action was taken over by another firm of solicitors in Adelaide, Messrs Johnson Winter and Slattery.

6. On 27 April 1994 the plaintiff made its application to wind up HLC and, as already mentioned, on 24 May this Court ordered the winding up HLC and appointed Messrs Sheahan and Sims liquidators. On 30 June 1994 Messrs Hodgson and Cornell resigned as receivers and managers of HLC.

7. The file in this action does not disclose any application or any order concerning who was to continue to prosecute the action upon the resignation of the receivers. Generally speaking, upon an order being made to wind up a company, the liquidator is the appropriate person in whom is vested the authority to decide whether the company should take or continue an action to recover damages or secure other relief for an injury done to the company: Scarel Pty Ltd v City Loan and Credit Corporation Pty Ltd (1988) 12 ACLR 730; Zempilas and Others v JN Taylor Holdings Ltd (in liquidation) (No 6) (1991) 5 ACSR 28. The combined effect of Clauses 28(b)(x), 30 and 32 of this debenture empowered the plaintiff to enter and take over the conduct of the action. Although there is some affidavit evidence concerning the events leading up to and following the order winding up HLC and the prosecution of this action, I have been asked to deal with the matter without regard to that evidence. I am prepared to assume for the purposes of this application that, upon the resignation of the receivers, the liquidator in accordance with the general rule, took over the conduct of the action.

8. Disputes have arisen between the plaintiff and the liquidators concerning the conduct of the action. This had led the plaintiff to seek to assume possession of the action. It is unnecessary for present purposes to examine the nature or subject matter of those disputes. It is sufficient to note that the plaintiff now claims that it is entitled to conduct and control the action. A perusal of the documents filed in this action does not indicate the extent to which, if at all, the liquidators have prosecuted the action. It appears they have done little. That is not to criticise the liquidators - it appears to reflect the fact that there has been a dispute between the plaintiff and the liquidators.

9. On 25 November 1994, the plaintiff gave the liquidators notice in writing of its intention to assume possession of the action. The notice was in the following terms:
    "WHEREAS questions have arisen over the possession, conduct and
    control of the chose in action or choses in action which are the
    basis of the abovementioned action in the Supreme Court of South
    Australia No. 289 of 1993 ('the choses in action').
    TAKE NOTICE THAT SOUTH AUSTRALIAN ASSET MANAGEMENT CORPORATION of 91
    King William Street, Adelaide in the State of South Australia 5000,
    formerly STATE BANK OF SOUTH AUSTRALIA, pursuant to its powers under
    the mortgage debenture given by HEALTH AND LIFECARE LIMITED dated the
    11th day of August 1988 and to the extent to which it is necessary to
    do so to assume possession and control, HEREBY takes possession and
    control of the choses in action."

10. The liquidators disputed the entitlement of the plaintiff to take possession of the action. On 5 December 1994, the plaintiff therefore instituted this action claiming:
    1. A declaration that the chose or choses in action the subject of
    the action No 289 of 1993 between HLC as plaintiff and Price
    Waterhouse as defendant are assets of HLC which are subject to the
    mortgage debenture given by HLC in favour of the plaintiff.
    2 .A declaration that the plaintiff is entitled to possession or to
    resume possession of the action.

11. The plaintiff claimed other incidental and ancillary relief including a declaration that it is at liberty to continue to prosecute the action in the name of HLC. The plaintiff also applied pursuant to Rules 25.01 and 63.01 of the Supreme Court Rules seeking summary disposal of the matter.

12. The application has come on at short notice. The affidavits filed by both the plaintiff and the defendants contain many allegations, counter-allegations and denials relating to the conduct of the litigation and the steps taken by each of the parties before and after the winding-up order and the appointment of the liquidators. The defendants assert, among other things, that the plaintiff is prevented by its conduct from seeking the relief it now claims. The pre-trial procedures in action No 289 of 1993 are well advanced. In addition to the plaintiff and defendant, there are three separate sets of third parties numbering eleven persons. The dispute between the plaintiff and the liquidators has the potential to delay the prompt prosecution of the action and thus cause unnecessary inconvenience and expense to the defendants and third parties. It is desirable to seek to resolve it as soon as possible.

13. There is a threshold question which is essentially a question of law, namely, whether the plaintiff is entitled as of right or by leave to resume possession and control of the action. There is, perhaps, a subsidiary question, namely, if leave is required, what are the criteria by which the court will determine whether leave should be granted? The parties have agreed that it is convenient first to determine the threshold question. If that question is determined, it might render it unnecessary to examine all the contentious questions of fact and thus enable an early resolution of the plaintiff's application. The issues in large part turn only on the documents and the principles of law relating to liquidation, the powers of secured creditors and receivers appointed by them. The questions for determination are suitable for resolution in a summary way. For the purpose of this application the only evidence before me is the affidavit of Mr A.G. Parkinson and the exhibits thereto as well as the plaintiff's notice dated 25 November 1994.

14. I set out the relevant provisions of the mortgage debenture. The charging clause is expressed in these terms:
    "AND for better securing to the Bank the payment of the moneys hereby
    secured:-
    (a) The Mortgagor as beneficial owner HEREBY CHARGES all and singular
    its undertaking and all its real and personal property and assets
    whatsoever and wheresoever both present and future including (without
    prejudice to the generality of the foregoing) the goodwill of its
    business and all book debts and its uncalled unpaid capital and
    premium for the time being; and in addition
    (b) where the Mortgagor is a trustee of the Trust (which shall, where
    the Bank has actual notice, be specified in the Second Schedule
    hereto) the Mortgagor as trustee of the Trust HEREBY CHARGES all and
    singular the real and personal property and assets whatsoever and
    wheresoever situate now or at any time and from time to time
    hereafter forming part of the trust fund or trust property of the
    Trust whether by way of original settlement or accretion thereto or
    purchase gift or other transfer or acquisition howsoever occurring
    and specifically including the book debts present and future of the
    business conducted by the Trust or by the Mortgagor on behalf of the
    Trust all of which undertaking property and assets comprised in this
    charge and referred to in paragraphs (a) and (b) above and hereby
    charged or expressed so to be being hereinafter collectively called
    'the mortgaged property' PROVIDED THAT the mortgaged property is
    limited in the manner described in the Third Schedule hereto."

15. By Clause 5 HLC agrees that it will, at the request of the plaintiff, take every step necessary for the more effectively securing the mortgage property or the proceeds thereof:
     "That the Mortgagor will at the request of the Bank and at the
    Mortgagor's expense apply for or join in applying for every consent
    and make or join in making every declaration and execute or join in
    executing every such deed instrument or assurance and do every such
    act and thing for further or more effectually securing to the Bank
    the mortgaged property the proceeds thereof or arising therefrom and
    any compensation for improvements as shall by the Bank be reasonably
    required or as may be required by law."

16. The charge created by the debenture is a fixed and floating charge. It is a fixed charge as against the property nominated in para (a) of Clause 24 and a floating charge as regards all other assets charged by the debenture. Clause 24 provides:
    "That the charge hereby created:-
    (a) shall operate as a fixed charge as regards all real and leasehold
    property uncalled capital plant engines fittings and machinery (other
    than stock-in-trade) patents trade marks designs goodwill and all
    books of account titles and other documents relating in any way to
    the business transactions of the Mortgagor together with all
    securities negotiable or otherwise held by the Mortgagor for the
    repayment f any amount owing to the Mortgagor and all bond or store
    warrants at any time deposited with the Bank by the Mortgagor and the
    goods mentioned in any such bond and/or store warrants and also all
    rights of indemnity which the Mortgagor has or will have from time to
    time against the Trust Fund or the Trust; and
    (b) shall operate as a floating charge as regards all other assets
    hereby charged;
    but so that the Mortgagor is not to be at liberty (except with the
    consent in writing of the Bank being first had and obtained) to
    create or permit to subsist any mortgage charge or other encumbrance
    (whether specific or general fixed or floating) or lien in respect of
    the mortgaged property or any part thereof ranking or which might by
    any means be made to rank in priority to or pari passu with this
    charge PROVIDED HOWEVER that the Mortgagee may from time to time by
    notice in writing to the Mortgagor convert the floating charge hereby
    created into a fixed charge as regards any assets specified in the
    notice."

17. Clauses 25 to 26 prescribe the circumstances in which the money is secured by the debenture become payable. It is unnecessary to recite them as it is common ground that HLC was in default and the moneys secured by the debenture were payable to it.

18. Clause 28 authorises the plaintiff, among other things, to appoint a receiver and sets out the powers of the receiver. The powers of the receiver are set out in Clause 28(b) and include:
    "(i) to take possession collect and get in the whole or any part of
    the mortgaged property...
    (x) to take proceedings at law or in equity or before any commission
    judicial or official person in the name of the Mortgagor or the
    Receiver or otherwise for all or any of the purposes of his
    appointment and the powers hereby conferred."

19. Clause 30 sets out the plaintiff's powers which include the power to exercise all powers conferred upon a receiver:
    "That notwithstanding that a Receiver may or may not have been
    appointed as aforesaid the Bank shall have the right at any time
    after the moneys hereby secured have become payable without any
    consent on the part of the Mortgagor and without the necessity for
    any demand or notice to exercise all or any of the powers authorities
    and discretions conferred on a Receiver by this charge either
    expressly or by implication and in the event of a Receiver being in
    possession of the mortgaged property or any part thereof to determine
    the Receiver's possession thereof by notice in writing whereupon the
    Receiver shall cease to be agent of the Mortgagor and shall at the
    discretion of the Bank deliver to the Bank or its nominee the
    mortgaged property or retain the same for and on behalf of the Bank
    in which last-mentioned event the retention by the Receiver of the
    mortgaged property shall be deemed to be possession thereof by the
    Bank."

20. Clause 32 enables the plaintiff to enter into possession, withdraw and enter again into possession as often it thinks expedient:
    "That notwithstanding that the Bank shall have entered into
    possession of the mortgaged property or any part thereof either by a
    Receiver or otherwise the Bank or such Receiver may at any time at
    its or his pleasure withdraw from such possession and notwithstanding
    such entry and withdrawal re-enter and withdraw as often as it or he
    may in their absolute discretion deem expedient."

21. Before dealing with the issues for determination, I set out some well established general principles.
    1. A secured creditor is entitled to stand outside a liquidation and
    rely upon his security: Re Landmark Corporation Ltd (1968) 1 NSWR
705; Re Henry Pound Son and Hutchins (1889) 42 Ch D 402.
    2. The fact that the winding up order was made on the application of
    a secured creditor does not oblige that secured creditor to give up
    his security: Re Alexanders Securities Ltd (No 2) (1983) 2 Qd R
    597.
    3. Upon the liquidation of a company, the secured creditor may
    enforce his security, although he may require leave pursuant to
    s471(2) of the Corporations Law to commence or continue any action
    or other civil proceedings.
    4. A chose in action is an asset or property and, subject to the law
    relating to maintenance and champerty, a chose in action may be
    secured in the same way as another other asset or property: Gough's
Garages Ltd v Pugsley (1930) 1 KB 615; Georgiadis v Australian and
Overseas Telecommunication Corporation (1994) 179 CLR 297, at 303 to
    305, 311 to 319. In Gough's Garages Ltd v Pugsley the question was
    whether a receiver appointed under a debenture was able to continue
    to prosecute an action commenced before the order had been made
    winding up the company. Greer LJ explained how the chose in action
    might be secured in these terms (at 621):
    "A debenture is given to creditors in order that they may have a
    security. It is a floating security until there is some kind of
    default and a receiver is appointed, and the rights under the
    debenture are actually put in some way into execution by the
    appointment of a receiver. But the receiver under his debenture has
    certain powers. In this case, among other powers, he has the power
    'to take possession of, collect and get in the property charged by
    this debenture and for that purpose to take any proceedings in the
    name of the company or otherwise as may seem expedient.' That right
    to take proceedings, was just as much a security for the debt as any
    other rights given by the debenture. I should not be disposed to
    put too narrow an interpretation on the word 'property.' After all,
    property in law consists of rights. The complete property in any
    chattel consists of the right to the possession and use of that
    chattel. But a right of any kind, such as a right to a chose in
    action, is property which may be pledged to debenture holders just
    as any other kind of property. It does not matter whether the

    property in question was in existence in the hands of the company
    granting the debenture at the time when the debenture was given, or
    whether it came into existence by the operation of a subsequent Act
    of Parliament. It seems to me that to deprive the debenture holders
    of a right, under the part of the debenture that I have mentioned,
    to realize a valuable right of the company, because the company has
    gone into liquidation, is to nullify one of the valuable rights
    given to the receiver by the debenture."
    Romer LJ expressed the position in these terms (at 625):
    "The debenture therefore is a first charge upon all the assets of
    the company. Among the assets of the company was the valuable
    right attaching to the company as a tenant under the lease of Nos.
    10 and 12, Marsh Street, Bristol, to obtain compensation, or a new
    lease in lieu of compensation, under s.4 and s.5 of the Landlord
    and Tenant Act, 1927. That is, therefore, a right which is charged
    in favour of the debenture holders and forms part of their
    security. The debenture provided that at any time after the
    principal moneys became due the debenture holders might appoint a
    receiver, and the receiver so appointed should have power 'to take
    possession of, collect, and get in the property charged by this
    debenture, and for that purpose to take any proceedings in the name
    of the company or otherwise as may seem expedient.' That clause
    would therefore empower the receiver duly appointed by the
    debenture holders to take the necessary proceedings for the purpose
    of obtaining a new lease in lieu of compensation in respect of
    which new lease the company had already given notice to the lessors
    on April 22, 1929."
    5. Although the appointment of a liquidator terminates the capacity
    of a receiver to act as the agent of the company: Gosling v
Gaskell and Grocott (1897) AC 575, the receiver nevertheless
    continues to have a limited authority to deal with the charge
property: Sowman v David Samuel Trust (1878) 1 WLR 22; Re Landmark
    Corporation (supra); Re Leslie Homes (Aust) Pty Ltd (1984) 8 ACLR
    1020. That limited authority includes the right to commence or to
    continue to prosecute an action in the name of the company if that
    action forms part of the charge property: Gough's Garages Ltd v
Pugsley (supra); Re Asiatic Electric Co Pty Ltd and Companies Act
(1970) 2 NSWR 612; Kelaw Pty Ltd v Catco Developments Pty Ltd
(1989) 15 NSWLR 587 approved in Atkins v Mercantile Credits Ltd
(1985) 10 ACLR 153; Re Yates (1989) 88 ALR 583, 593. However, it
    is the receiver or the secured creditor who must fund the
    continuing prosecution or litigation: Kelaw Pty Ltd v Catco
    Developments Pty Ltd (supra) at 593. The receiver continues to
    prosecute the action as an incident of the security and to nullify
    it is to negate the effect of the security. That is the effect of
    the reasons of Greer LJ quoted above. Romer LJ expressed the
    principle in these terms (at 626):
    "It is perfectly true (and it has been laid down over and over
    again) that where, as happened in this case, the debenture or trust
    deed securing the debentures contains the usual clause, that the
    receiver appointed under the deed shall be deemed to be the agent
    of the company, that the winding up of the company, or the
    compulsory liquidation of the company puts an end to the agency.
    But it does not put an end in any way to the powers of the
    receiver. In my opinion, when this liquidation order was made, the
    right of the receiver to proceed in the name of the company in the
    county court was in nowise affected."

22. By this debenture, HLC charged all its assets and property both present and future. The right of HLC to bring this action was an asset or property of the company: Gough's Garages Ltd v Pugsley. When, on 22 February 1993, the plaintiff appointed the receivers, the floating charge crystallised and the receivers were entitled to realise the assets and property secured by the mortgage debenture, which included the cause of action held by HLC. As already mentioned, HLC had purported to institute the action on 23 February 1993. On 20 May 1993 the summons was amended so that the action was brought by the receivers in the name of the company. At some date between 22 February and 20 May 1993, the receivers took over the conduct of the action. By virtue of the mortgage debenture, the receivers had express power to bring an action in the name of the company. Thereafter, the receivers continued to prosecute the action until they resigned on 30 June 1994.

23. The appointment of the liquidators on 24 May 1994 did not terminate the capacity of the receivers to continue to prosecute the action: Gough's Garages Ltd v Pugsley (supra) and the authorities in para 5 above. However, with the apparent concurrence of the plaintiff, the receivers ceased to prosecute the action upon their resignation. As already mentioned, for the purposes of this application, I assume that, in accordance with the general rule as expressed in Scarel Pty Ltd v City Loan and Credit Corporation Pty Ltd, the liquidators took control of the action and continued to prosecute it.

24. Before turning to the question whether the plaintiff is now able to assume control of the action, there is one other issue.

25. I have qualified the proposition that a chose in action may be secured in the same way as any other asset or property by stating that it was subject to the laws of maintenance and champerty. Although it was common ground that a chose in action was property, Mr Abbott, who appeared for the defendants, submitted that, in the circumstances of this case, the chose in action could not properly be charged as the charge would savour of maintenance and champerty and thus be contrary to public policy. He called in aid the proposition that it is contrary to public policy to assign either in law or in equity a right to sue for unliquidated damages in contract or in tort. In my view, Mr Abbott has stated the proposition too absolutely. An assignment of this kind is not necessarily contrary to public policy. It is necessary to examine the circumstances of each individual case.

26. For a long time it has been the general rule that it was not possible to assign a bare right of action on the ground that the assignment might, according to its nature, savour of maintenance or champerty. However, the law relating to maintenance and champerty has altered. Although, in common with other jurisdictions, the crimes of maintenance and champerty have been abolished in this State and neither is actionable as a tort: see Schedule 11 of the Criminal Law Consolidation Act 1935 which was inserted into the Act by the Act No 35 of 1992, these provisions do not affect any rule of law as to the cases in which a contract was to be treated as contrary to public policy or otherwise illegal: see s3 of Schedule 11. It, therefore, seems plain that Parliament intended to leave the law as to the effect of maintenance and champerty upon contracts unaffected by the abolition of them as crimes and torts: Trendtex Trading Corporation v Credit Suisse (1982) AC 679 at 702, a decision concerning like provisions in the Criminal Law Act 1967 (UK) s14. Nevertheless, in this century, the courts have taken an increasingly more liberal view than hitherto of the supporting of litigation by a third party, an attitude described by Lord Roskill as "infinitely more liberal": Trendtex at 702. The history of these developments has been traced by Danckwerts J and the Court of Appeal in Martell v Consett Iron Co Ltd (1955) Ch 363 and by the Court of Appeal in Trendtex Trading Corporation v Credit Suisse (1980) 1 QB
629. It must be noted that the law has for a long time recognised that certain kinds of maintenance are lawful.

27. It is well settled that it is not maintenance to uphold a party in litigation in whose result the party accused of maintenance has a real and bona fide interest: British Cash and Parcel Conveyors Ltd v Lamson Store Service Co Ltd (1908) 1 KB 1006 at 1021. Thus, members of a trade union may combine to assert the right of a trade unionist to his wages: Greig v National Amalgamated Union of Shop Assistants (1906) 22 TLR 274; a number of manufacturers may combine to protect the freedom of an individual trader to make his goods: Plating Company v Farquharson (1881) 17 Ch D 49; and persons whose livelihood or recreation will be adversely affected by pollution of waters may combine to defeat an aggression against the rights of one of them: Martell v Consett Iron Co Ltd at 386. Although a personal cause of action in tort is not, generally speaking, assignable, an exception has been made in the case of insurance contracts where the insurer is subrogated to the rights of the insured: Compania Colombiana de Seguros v Pacific Steam Navigation Co
(1965) 1 QB 101. Legislation in relation to legal aid also shows a change in public opinion on the question of supporting litigation. As the Law Reform Committee has noted, a great deal of civil litigation is maintained by third parties: 101st Report of Law Reform Committee of South Australia on Maintenance and Champerty (1987) p33.

28. Other exceptions are listed in Meagher, Gummow and Lehane, Equity - Doctrines and Remedies (3rd edition), paras 694-696. One exception is where the right to sue is attached to property. Thus, the vendor of real property may transfer to the purchaser a right of action for a breach of contract in relation to that property: Ellis v Torrington (1920) 1 KB 399. But even in that case it is possible to assign only a right of action in contract. A right of action in tort, for example, a right to sue for tortious waste could not be assigned: Defries v Milne (1913) 1 Ch 98. Another exception, in the case of contract, is where the assignment is of the benefit of a contract, whether the claim to which it gives rise is liquidated or unliquidated and the assignment is made before the breach: Torkington v Magee (1902) 2 KB 427. It was not, however, possible to assign the bare right to sue for unliquidated damages for breach of contract: May v Lane (1894) 64 LJ(QB) 236; Torkington v Magee (supra); County Hotel and Wine Company Ltd v London and North Western Railway (1918) 2 KB 251; nor the bare right to sue in tort: Defries v Milne (supra) and Poulton v The Commonwealth (1953) 89 CLR 540, 602; nor the bare right to sue in equity: Prosser v Edmonds (1835) 1 Y and C Ex 481, 160 ER
196. However, the House of Lords in Trendtex examined whether it was possible to assign a bare right of action.

29. The House of Lords adopted both the review of the law by the Court of Appeal in that case and the review made by Danckwerts J and the Court of Appeal in Martell v Consett Iron Co Ltd. Both Lord Denning MR and Oliver LJ in the Court of Appeal observed that it was necessary to review a law which, if not entirely obsolete, was obsolescent, and to re-examine it in light of current notions of public policy. Oliver LJ expressly approved the observations of Danckwerts J in Martell v Consett Iron Co Ltd at 382:
    "I ask the rhetorical question: how can such a doctrine founded upon
    considerations of public policy become at some point frozen into
    immutable respectability, so as to be no longer capable of
    alteration? No wonder Lord Dunedin in Weld-Blundell v. Stephens
(1920) AC 956, 977; 36 TLR 640 described the action of maintenance as
    'a cumbersome curiosity of English law'. It seems to me that unless
    the law of maintenance is capable of keeping up with modern thought,
it must die in a lingering and discredited old age." And as Danckwerts LJ noted in Hill v Archbold (1968) 1 QB 686, 697:
    "...the law of maintenance depends upon the question of public
    policy, and public policy... is not a fixed and immutable matter. It
    is a conception which, if it has any sense at all, must be alterable
    by the passage of time."

30. The question in Trendtex was whether an assignment of an action for unliquidated damages for breach of contract was contrary to public policy. Trendtex, a Swiss corporation, had contracted to sell a large quantity of cement to an English company for shipment to Nigeria. Trendtex had borrowed from Credit Suisse, a Swiss bank, in order to finance the purchase of the cement. The English company was to pay for the cement by means of a letter of credit issued by a Nigerian bank ("CBN") but that bank subsequently failed to honour the letter of credit. Trendtex claimed damages amounting to (US) $14M in proceedings in England against CBN. CBN pleaded sovereign immunity and the plea succeeded at first instance. In January 1977 the Court of Appeal allowed an appeal by Trendtex but CBN was given leave to appeal to the House of Lords and a petition of appeal was lodged in April 1977. As Lord Wilberforce expressed it, the position at that stage was that Trendtex had a cause of action of uncertain value: Trendtex at 692. In the meantime, on 6 September 1976, Trendtex had assigned to Credit Suisse all its claims arising out of the cement contracts "until the claims of the assignee are covered". Credit Suisse was given power to bring actions in its own name or that of Trendtex. On 26 November 1976 Trendtex surrendered to Credit Suisse all its claims which included claims against CBN arising from the cement contracts and from a specified letter of credit issued by CBN "to the full extent of the indebtedness to the transferee". These were normal assignments by way of security from a debtor to its creditor bank. However, on 4 January 1978, Trendtex entered into an agreement with Credit Suisse for whom a Swiss lawyer, Maitre Patry, was acting. The agreement commenced with some recitals, the third of which stated that Trendtex was indebted to Credit Suisse for US$1.5M. The fourth recital noted an agreement that Credit Suisse would attempt to recover its claim against Trendtex by negotiating with CBN. The fifth recital was that Credit Suisse had received an offer from a third party to buy the claim of Trendtex against CBN for US$800,000. The agreement then provided that Trendtex did not oppose the sale by Credit Suisse to a purchaser of its choice of all the claims of Trendtex against CBN and recognised that it had no further interest in the CBN case. It was alleged that, soon after, in February 1978, Maitre Patry went to Nigeria and settled the CBN case for a payment of US$8M. No part of that sum was paid to Trendtex. The question was whether the agreement of 4 January 1978 was void as offending the law relating to maintenance and champerty. The House of Lords held that, while Credit Suisse had a genuine and substantial interest in the success of the CBN litigation, the agreement of 4 January 1978 manifestly involved the likelihood of a profit being made either by the third party or possibly also by Credit Suisse out of the cause of action; that the agreement, therefore, savoured of champerty as it involved trafficking in litigation; and that, therefore, the assignment was contrary to public policy: see Lord Wilberforce at 694.

31. The leading speeches in the House of Lords were given by the Lords Wilberforce and Roskill. The other members of the House agreed with them. Both Lord Wilberforce and Lord Roskill distinguished between the initial assignments to Credit Suisse and the assignment of 4 January 1978. Lord Wilberforce said (at 694) that the vice of the agreement lay in the introduction of the third party. If no party had been involved in the agreement before January 1978 but Trendtex and Credit Suisse, it would be have been difficult to contend that the agreement offended against the law of maintenance and champerty. This was because Credit Suisse had a genuine and substantial interest in the success of the CBN litigation by reason of its interest as a secured creditor. Lord Wilberforce said (at 694):
    "If no party had been involved in the agreement of January 4, 1978,
    but Trendtex and Credit Suisse, I think that it would have been
    difficult to contend that the agreement, even if it involved (as I
    think it did) an assignment of Trendtex's residual interest in the
    C.B.N. case, offended against the law of maintenance or champerty.
    As I have already shown, Credit Suisse had a genuine and substantial
    interest in the success of the C.B.N. litigation. It had, and I do
    not think that the legitimacy of its action was challenged,
    guaranteed the previous costs. It had by the documents of September
    6 and November 26, 1976, taken a security interest in the litigation
    or its proceeds. To carry this a stage further by a surrender of
    Trendtex's residual interest (if this was the effect of the agreement
    of January 4, 1978) would, in my view, have been lawful, though a
    question might have arisen (and indeed may arise) whether, after
    Credit Suisse had been satisfied as creditors, Trendtex could claim
    the return to it of any surplus."

32. Lord Roskill relied on the analysis in the judgments of Danckwerts J and the Court of Appeal in Martell v Consett Iron Co Ltd and in the Court of Appeal in Trendtex. His Lordship agreed (at 702-703) that the law had become more liberal in its approach to what was lawful maintenance and more liberal in its approach to the circumstances in which it would recognise the validity of an assignment of a cause of action. Like Lord Wilberforce he distinguished between the initial assignments to Credit Suisse and the agreement of 4 January 1978, involving a third party. He acknowledged that an assignment of a chose in action is enforceable where the assignee can show a genuine commercial interest in the enforcement of the action. He said (at 703):
    "My Lords, I am afraid that, with respect, I cannot agree with the
learned Master of the Rolls (1980) QB 629, 657 when he said in the
    instant case that 'The old saying that you cannot assign a "bare
    right to litigate" is gone.' I venture to think that that still
    remains a fundamental principle of our law. But it is today true to
    say that in English law an assignee who can show that he has a
    genuine commercial interest in the enforcement of the claim of
    another and to that extent takes an assignment of that claim to
    himself is entitled to enforce that assignment unless by the terms of
    that assignment he falls foul of our law of champerty, which, as has
    often been said, is a branch of our law of maintenance. For my part
    I can see no reason in English law why Credit Suisse should not have
    taken an assignment to themselves of Trendtex's claim against C.B.N.
    for the purpose of recouping themselves for their own substantial
    losses arising out of C.B.N.'s repudiation of the letter of credit
    upon which Credit Suisse were relying to refinance their financing of
    the purchases by Trendtex of this cement from their German
    suppliers...
    The court should look at the totality of the transaction. If the
    assignment is of a property right or interest and the cause of action
    is ancillary to that right or interest, or if the assignee had a
    genuine commercial interest in taking the assignment and in enforcing
    it for his own benefit, I see no reason why the assignment should be
    struck down as an assignment of a bare cause of action or as
    savouring of maintenance."

33. Thus, provided the assignee has a "genuine and substantial interest" (Lord Wilberforce at 694) or a "genuine commercial interest" (Lord Roskill at 703), the assignment of a cause of action in damages for breach of contract is valid. A bank to whom the assignor is indebted may, therefore, lawfully take an assignment of a cause of action as security for repayment. As is pointed out in Meagher et al, Equity Doctrines and Remedies, (supra) at 204 the interest of the assignee must exist independently of the arrangement to maintain the action. As Staughton J observed in "The Kelo" (1985) 2 Lloyd's Rep 85 at 89, the contrast is between trafficking in litigation or selling lawsuits as articles of commerce on the one hand and taking an assignment in a case where the assignee has a genuine commercial interest on the other. The decision in Trendtex was followed in this country in Re Timothy's Pty Ltd

(1981) 2 NSWLR 706 where the assignment was of an action for damages for breach of contract and was made in consideration of the forgiveness of the debt; and in Re Daley (1992) 37 FCR 390 where the assignment was of causes of action for debts.

34. The decision in Trendtex has the effect of qualifying substantially the principle that it is not possible to assign a bare right to sue for unliquidated damages for breach of contract. There seems to be no reason in logic or as a matter of public policy, why it should not also be possible to assign the bare right to sue for unliquidated damages in tort where the cause of action is not for a personal tort such as damages for personal injury, defamation, or false imprisonment: cf Lord Denning MR in Trendtex (1980) 1 QB at 656. There does not seem to be any ground of public policy which justifies drawing a distinction between a cause of action for unliquidated damages for breach of contract on the one hand and, on the other hand for damages in tort, where the tort is not of a personal nature. Such a distinction has little weight in an action where, as here, the causes of action in both contract and in tort both stem from the same facts, where the test of causation will be the same, and where, in large part, the measure of damages for the pecuniary loss which directly flows from the breach will be the same, namely, damages. For the purpose of determining whether an assignment is valid, it is possible to draw a valid distinction between torts of a personal nature and torts which affect the plaintiff's commercial interests or his interests in property.

35. It was not clear whether the House of Lords intended to distinguish between an action for damages in contract and an action for damages in tort. The decision of course concerned only an action for damages in contract. The reference in the speech of Lord Roskill to an assignment of the "bare right to litigate" or the "bare right of action" suggests no such distinction. Instead, the general purport of His Lordship's speech suggests that, if a genuine commercial interest exists, the assignment of an action for damages in both contract and tort is valid. The expression the "bare right to litigate" was used to distinguish that right from a right to damages as an incident of a transfer of property such as in Ellis v Torrington (1920) 1 KB 399. That distinction had been drawn by Parker J in Glegg v Bromley (1912) 3 KB 474; see also Lloyd LJ in Brownton Ltd v Edward Moore Inbucon Ltd (1985) 3 All ER 499 at 507. Similarly, Lord Wilberforce was content to resolve the issues in that case by reference to the necessity for a genuine and substantial interest. The rule against assigning a bare right of action does not, I think, turn on whether the action is in tort or in contract but on whether there exists a genuine commercial interest and there is no hint of trafficking in litigation: see Lloyd LJ in Brownton Ltd v Edward Moore Inbucon Ltd (supra) at 507.

36. All of these issues have been canvassed by Gault J in First City Corporation Ltd v Downsview Nominees Ltd (1989) 3 NZLR 710 at 753-758 and I respectfully agree with the substance of his reasons. In that case an assignment by a borrower to a lender of a cause in action in tort was held to be valid. I respectfully agree with Gault J that Defries v Milne is distinguishable and, to the extent that it is not, I do not think it should now be followed in the light of the observations made in Trendtex. In Poulton v The Commonwealth (1953) 89 CLR 540 at 602 it was held that the assignment of a cause of action in tort was not assignable in either law or equity. But the decision is, I think, distinguishable since in that case the required genuine commercial interest was lacking.

37. For these reasons, I conclude that provided the action is not of a personal nature and that the assignee has a genuine commercial interest, both an action for unliquidated damages in tort and an action for unliquidated damages for breach of contract are capable of assignment and the assignment will not be contrary to public policy.

38. In this case, the plaintiff had a genuine commercial interest in that the assignment formed but one part of the security given by HLC for advances made to it. Further, the security was given in 1988 long before HLC had instituted its action against Price Waterhouse. There is no hint of trafficking in litigation. As the lender, the plaintiff had a genuine commercial interest in taking an assignment as part of its security. Had the action been limited to an action for damages for breach of contract, the action would have been capable of assignment on the principles established in Trendtex. Given that the same facts give rise to the cause of action in negligence and the tort is not of a personal nature, there is not, I think, any respect in which the assignment offends either the law of maintenance or of champerty nor is it contrary to public policy.

39. For all of these reasons, the assignment is valid.

40. I have assumed for the purpose of this decision that upon crystallisation of the mortgage debenture, the chose in action was assigned to the plaintiff or its receivers. There is a division of opinion whether that is a correct analysis of this charge. It is well settled that a floating charge is an equitable charge. Professor Sykes contends that the floating charge is an hypothecation and, therefore, does not involve even on crystallisation, an assignment of the property of the company: Sykes and Walker, The Law of Securities (5th edition) at 959 to 960. However, in National Mutual Life Nominees Pty Ltd v National Capital Development Commission (1975) 6 ACTR 1, Blackburn J held that upon crystallisation, a charge operates as an equitable assignment of the property to which it relates (at 407) (see further discussion in B and G). I do not think it is necessary in this action to enter into this issue. The true question is whether a dealing in a chose of action, be it by way of hypothecation as in a charge or by assignment, is contrary to public policy.

41. I turn to the question whether the plaintiff is entitled to take over this action. As the plaintiff intends to prosecute the action, s471(2) of the Corporations Law requires that it obtain leave to do so. Leave is required in order to ensure so far as is possible the orderly administration of the liquidation, to ensure that the assets of the company in liquidation should be administered in accordance with the provisions of the Corporations Law, to ensure that no person should get an advantage to which, under those provisions, he was not properly entitled, and to enable the Court effectively to supervise all claims brought against the company: Re Sydney Formworks Pty Ltd (in liq) (1965) NSWR 646, 649 to 650; Re A.J. Benjamin Ltd (in liq) (1969) 90 WN (Pt.1) (NSW) 107, at 109.

42. Where a receiver has been appointed by a secured creditor and the company is in liquidation, the receiver is entitled to take custody of secured assets which he does not already hold. The practice in England appears to be that the receiver must apply to the Court for leave to do so but in Australia the receiver will have leave as of right: Re Henry Pound, Son and Hutchins (supra); Re Landmark Corporation Ltd (in liq) (1968) 1 NSWR 705, and the discussion in Blanchard and Gedye, The Law of Company Receivership (2nd ed), para 12.11. As the plaintiff is empowered by the mortgage debenture to exercise the powers of a receiver, it would in the ordinary course be entitled as the secured creditor to take possession of the cause of action as an asset secured by the mortgage debenture and assume the conduct and control of the action. To conclude otherwise, would be to deny the force and effect of the plaintiff's security. The question in this case is whether the fact that the liquidator is prosecuting the action qualifies that right. For the reasons which follow I do not think it does.

43. Since the secured creditor is entitled to stand outside the liquidation and enforce his security, the plaintiff is entitled to exercise the powers granted to it by the mortgage debenture. Those powers include the right to exercise the powers of the receiver (Clause 30) which includes the power to conduct legal proceedings in the name of HLC (Clause 28(b)(x)). In permitting the liquidators to take over the prosecution of the action the plaintiff might be deemed to have withdrawn from possession of the action. Nevertheless, it is entitled by Clause 32 to resume the conduct and control of the action which forms part of the mortgaged property. In that respect it is entering again into possession of the mortgaged property. The plaintiff's powers in Clauses 28, 30 and 32 are incidents of the security it has taken and it would be entirely inconsistent with the plaintiffs's position as secured creditor if it were denied the entitlement to exercise those powers. The plaintiff would be unable to exercise its powers only if it surrendered the security.

44. The court cannot circumscribe the powers of a secured creditor. Thus, where the secured creditor seeks to assume possession of the mortgaged property, in this case the right to prosecute an action, a court cannot, I think, consistently with the rights of the secured creditor refuse to grant leave. In a case such as this, the questions for the court is whether the orderly administration of the liquidation will be adversely affected if the plaintiff takes over the prosecution of the action; what, if any, steps need to be taken to protect the proper interests of the liquidators; and whether any other order should be made to ensure that orderly administration of the liquidation. Mr Abbott QC did not point to any detriment to this liquidation, if leave was granted, and I am unable to identify any.

45. I should add that, although Clause 32 permits the plaintiff to enter into possession, withdraw and re-enter into possession of the mortgaged property as often as it thinks expedient to do so, that power might not be so absolute where the company is in liquidation. The orderly administration of a liquidation might require that that power be limited. It is not necessary in this case to determine the extent of any limitation upon that power except, perhaps, to suggest that terms might be required to ensure the orderly prosecution of the action.

46. The receivers had possession of the action as part of the secured property. They relinquished possession on their resignation. The liquidator has had possession of the action for a relatively short period and has done little to prosecute the action. There will be no detriment to the liquidation if leave is granted to the plaintiff to take over the conduct of the action and it will be entirely consistent with the position of the plaintiff as a secured creditor to grant leave. When granting leave, the Court should ensure that the liquidators are not prejudiced in any costs or other liability they have incurred in relation to the action. Another question might concern the disposition of the surplus of the proceeds of the action, if any, after the plaintiff has been satisfied as a secured creditor. Thus, any grant of leave should be on terms.

47. For all of these reasons, the assignment is valid. The plaintiff requires leave to take over the conduct of this action but leave should be granted. In the circumstances of this case, the grant of leave should be on terms. I will hear the parties as to those terms.