Following a suite of recent reforms to Australian insolvency laws, liquidators are now able to assign rights to sue, conferred on them personally by the Corporations Act. The new power to assign is broad. It appears that the implications of the power will need to be clarified by the judiciary before they are fully understood.
In this article, we look at the issues that arise from these legislative amendments along with the opportunities created.
On 1 March, 2017, division 100-5 of the new Schedule 2 to the Corporations Act took effect, allowing liquidators to assign any right to sue conferred on them by the Corporations Act, provided:
- The liquidator first gives written notice to the creditors of the proposed arrangement
- If the action has already begun, the assignment is approved by the court
Previously, while certain causes of action vesting in the company itself were assignable, a liquidator's right to sue on statutory causes of action under the Corporations Act, such as voidable transactions and insolvent trading claims, was not assignable because such claims were considered to vest in the liquidator personally and thus were not capable of assignment according to general principles.
Opportunities for liquidators on behalf of creditors
Where there is a willing buyer, the reforms turn a previously contingent asset into a realizable asset that can be quickly converted to cash for the benefit of creditors, where the liquidator may otherwise have concerns over the value, prospects or costs of a claim, or may simply suffer from a lack of funding.
Further, with the new possibility of assignment of claims to a well-funded or less risk-averse third party, the option to assign could place the liquidator in a stronger negotiating position vis-à-vis settlement.
Opportunities for litigation funders
The reforms add liquidity and flexibility to the litigation funding market for liquidator claims. Rather than entering a complex and ongoing litigation funding arrangement that is generally subject to greater scrutiny by the courts, such entities will have the option of purchasing a claim outright pursuant to a (potentially) simple deed of assignment.
Opportunities for other third parties
From earlier government reports, it appears the impetus for reform was to deter corporate breaches, reduce creditor loss, increase the speed and efficiency of liquidation and allow for the pursuit of claims which may otherwise have been forfeited as a result of lack of funding.
However, the new provision, stowed away in a late division of Schedule 2 titled "other matters" and receiving barely a mention in the explanatory memorandum, could have far broader implications.
For example, a claim could be purchased by a third party as part of an asset acquisition or protection strategy. Consider a third party that held a commercial or legal interest in a valuable asset when it was in the hands of the company in liquidation, purchasing a voidable transaction claim to unwind the transaction, return the asset and enforce its interest.
Alternatively, a claim could be purchased to exert or prevent the exertion of a commercial advantage. Consider a third party that purchases an uncommercial transaction claim with the intention of unwinding the earlier sale of a valuable asset to a competitor.
The changes may also be capitalized on by potential defendants or guarantors who may be able to purchase the claim as a defensive measure to stave off liability.
There is then the issue of affected parties who are not content to see the claim settled or, even worse, not pursued at all. Consider an instance involving allegations of insolvent trading where the liquidator has concerns over prospects or costs. Might a group of shareholders with deep pockets consider purchasing the action?
Given the potentially extensive implications of the new provision on a wide range of market participants, there is a lack of legislative guidance on how it is to operate. A number of preliminary issues present themselves.
Proceeds of claims: Does the assignee have a right to the proceeds of the claim? Division 105-5(4) provides that if a liquidator claim is assigned, references in the legislation to the liquidator in relation to the claim are taken to be references to the assignee. In relation to insolvent trading claims this is sufficient, as the right to recover is personal to the liquidator. In relation to voidable transactions, however, the court is only empowered to make orders for the benefit of the company. This arguably leaves the assignee with no right of recovery from the court.
This issue may necessitate the assignment of not only the claim, but also the future proceeds of the claim, bringing with it a number of difficult property law issues regarding the assignment of future property. Alternatively or additionally, the assignee may consider securing an irrevocable direction from the company in liquidation to pay the assignee the proceeds of the claim. Such direction may be difficult to enforce should the liquidation of the company cease prior to the determination of the claim.
Though it is arguable that an assignment of future proceeds would survive the deregistration of the company, a conservative course may be to include, as a condition of the assignment, that the company in liquidation refrain from deregistering prior to the proceeds of the claim being realized and received by the assignee.
The above measures may also bring the assignment within the purview of section 477(2B) of the Corporations Act which requires court or creditor approval of agreements that are for a term or have obligations that extend beyond three months.
Of more fundamental concern: what happens to assigned claims if a liquidator appoints an administrator? Given the availability of the original claims was contingent on a liquidator being appointed, do they continue to exist?
The pursuit of assigned claims would be in conflict with the purpose and process of administration and any subsequent deed of company arrangement. However, any agreement by the liquidator not to appoint an administrator would surely be considered in conflict with the best interests of creditors.
Notice of assignment: There is no guidance as to the notice required to be given to creditors of the proposed assignment or whether retrospective notice is sufficient. Nor is there any guidance as to what steps, if any, aggrieved creditors can take if they oppose the assignment. Liquidators should consider erring on the side of caution until guidance is provided by regulations or case law.
Approval: There is no guidance as to what the court will consider in determining whether to approve the assignment of an action that has already been commenced or who bears the onus. Presumably the liquidator will need to demonstrate that the assignment is in the best interests of creditors, which may necessitate further analysis and cost, thereby defeating, at least in part, the underlying purpose of the legislative changes and the utility of the assignment.
Investigation: It would appear that an assignee will not inherit the liquidator's statutory powers of investigation. The assignee will not be automatically entitled to the books and records of the company and will only be entitled to conduct public examinations if approved as an "eligible applicant" by ASIC. Assignees should thus look to secure liquidator assistance and consider funding liquidator examinations prior to purchasing the claim. These obligations may again necessitate court or creditor approval of the assignment under section 477(2B).
Conduct: It is unclear how the power to assign liquidator claims will fit with the new broad powers of the court to review a liquidator's conduct under division 90-15 of Schedule 2. In determining whether a liquidator has faithfully performed duties, might the court review the liquidator's assessment process and the final sale price, or a liquidator's failure to assign a claim?
Challenge to assignment: It would appear open to an assignee to subsequently challenge an assignment on grounds, for example, of misrepresentation as to the merits of a claim. Absent further legislative or judicial guidance, where possible, liquidators should seek an indemnity from any future challenge to the assignment by the assignee.
The introduction of the power to assign liquidator claims under the Corporations Act presents exciting opportunities to a wide range of market participants. However, due to a lack of further guidance from the legislature or judiciary, liquidators and assignees alike should tread carefully and always seek professional advice.