Toil And Trouble: Assigning A Liquidator’s Cause of Action – Is It A Practical Power Or Just Fancy Wizardry?

Toil And Trouble: Assigning A Liquidator’s Cause of Action – Is It A Practical Power Or Just Fancy Wizardry?

Liquidators have a long list of powers and hold a pivotal role in the lifetime of a company – a charmed life, perhaps? The spellbook Corporations Act has always enchanted a liquidator with the ability to deal with company property, including causes of action. Abracadabra, section 477!

In the Land of Oz, thanks to the magic of the Insolvency Law Reform Act 2016 (Cth), liquidators can add another spell to their cauldron. Section 100-5 of Schedule 2 has been part of the Act since March 2017, allowing an external administrator to assign any right to sue conferred on him or her. For example, voidable transactions and insolvent trading claims are causes of action only available to a liquidator and these causes of action have previously been unassignable.

However, without much guidance from the Court yet, is this a practical power or just hocus-pocus? Don’t enrol at Hogwarts just yet – if you want to assign a liquidator’s right to sue, we’ve got some practical guidance for you:

CRYSTAL BALL GAZING – FACTORS YOU NEED TO CONSIDER

A) Ingredients in the Potion – What is Being Assigned? 

The first step in any assignment is to understand what the proposed causes of action are to be assigned. Defining the subject matter will determine what hurdles there might be to a successful assignment, or what ramifications could impact upon the liquidator and creditors of the company in liquidation. For example, is the cause of action a voidable transaction? What about breach of director’s duties under the Act or at common law?

Generally, parties will not be required to confine those actions narrowly in the early stage – it is common and usually desirable that assignments of this nature be wide. Fine tuning can occur later by pleadings or in a deed.

B) The Liquidator’s Power

Section 477(2)(c) of the Act allows a liquidator to sell or otherwise dispose of company property, including a ‘thing in action’. The new section 100-5 of Schedule 2 allows a liquidator to assign any right belonging to him or her under the Act.

However, these powers don’t automatically mean that an assignment will be without issues (especially if interested parties are likely to oppose the assignment). There is generally no duty for liquidators to first assess the reasonable prospects of success of the actions being assigned (particularly in unfunded liquidations). But there is still a duty to act in the interest of all creditors.

It’s not just about whether the liquidator has a certain power, but whether the proposed rights can (or should) actually be assigned.

C) Voodoo, Hexes and Jinxes

So what might stop an assignment from occurring, even where a liquidator has a prima facie power? For one thing, there are certain classes of rights which cannot be assigned, such as causes of action which clearly have no prospect of success, are vexatious, frivolous or oppressive, or as a matter of law are incapable of assignment (i.e. “personal” causes of action that are only available to the person who suffered loss, such as damages for unconscionable conduct).

D) Money, Money, Money

It is also doubtful whether liquidators have any right to the proceeds of a claim that is assigned under Section 100-5 of Schedule 2. Whilst the right to bring a voidable transaction claim belongs to a liquidator, a court is only empowered to make orders for the benefit of the company in liquidation. Make sure you consider the flow of funds and who is entitled to the fruits of the claim, otherwise you could end up with a bare right to sue and no right to the proceeds. 

You should also be careful about any assignment fee that is based only on proceeds to a claim. The right to future proceeds can be dealt with in a deed of assignment, but this could attract property law issues in relation to assignment of future property.

E) Information, Investigation and Incantation – What does an assignee inherit?

Arguably, an assignee of a voidable transaction claim under Section 100-5, for example, would not inherit a liquidator’s statutory powers of investigation. Ordinary access to books and records and powers of examine could be critical to an assignee’s ability to pursue claims assigned to him/her. If there is an ongoing cost to the liquidator for assisting with these powers, then again this should be dealt with in a deed of assignment.

F) The Curse of Creditor or Court Approval

If any deed of assignment is likely to take 3 months to complete, creditor or court approval will be required under section 477(2B) of the Act. For example, the rights being assigned could take longer than 3 months to litigate, or an assignee might ask the liquidator to remain involved to provide ongoing supervision or assistance of the claims for more than 3 months.

Even so, Court involvement might be inevitable if there is creditor, contributory or another interested party opposed to the assignment. A deed of assignment should take this (and any costs of Court/creditor involvement) into account.

G) Be Careful What You Wish For – Costs and Value of the Claim to the Liquidation

Speaking of which, Court proceedings can often lead to increased costs and duration of a liquidation. This could impact on a liquidator’s commercial judgment to enter into an assignment of rights. Again, ensure your deed of assignment clearly shows who is responsible for what costs of the assignment. Any costs to creditors, including the likelihood of taking a proposed assignment to Court for approval or direction, should be determined and factored into the value of the assignment fee.

Liquidators also need to be careful of assignment fee proposals that allow some return against the costs incurred in the liquidation but no return to creditors themselves. The value of a proposed assignment should be seen as properly preferring creditor’s interests to a liquidator’s own interests.

H) Foretelling the Future – what are the practical consequences of the assignment?

If the facts, issues and relationships of parties in a matter are complicated, then the practical consequences of an assignment can be unclear. The prospect of obtaining a recovery by assigning rights which would otherwise involve no return for creditors is appealing. But if those rights could eventually lead to a detrimental outcome by voiding transactions or unwinding contractual agreements, for example, then this should be considered at the outset.

THE DEVIL IN THE DETAIL – REQUIREMENTS OF AN ASSIGNMENT 

A) Section 100-5 Notice

Creditors must be notified of any assignment before it is made. Without much Court guidance on the notice form, minimum notice period, how the notice should be given or options for creditors who wish to oppose the assignment, liquidators should proceed with caution – provide reasonable notice of any proposed assignment and carefully consider the opinions and concerns of those affected by the assignment.

B) Deed of Assignment

A carefully drafted Deed of Assignment will be critical to resolving as many of these issues as possible and it is important to seek legal advice at this stage.

For a start, the Deed should address a definition of what is being assigned (including any right to future proceeds), the value of the assignment, how any assignment fee has been calculated, the costs of the assignment (including any creditor or court approval), who is responsible for payment of costs, what assistance the liquidator will provide to the assignee of the rights (if any), what warranties are being provided, exclusions or limitations of liability for the liquidator, an indemnity from the party taking the assignment and any conditions surrounding payment.

C) Legal Notice of Assignment

An assignment of rights will only be effective if a lawful Notice of Assignment is provided to the potential defendant(s) of the claims. This notice must comply with relevant State laws (e.g. section 12 of the Conveyancing Act 1919 in NSW). Be careful to comply with each State if the proposed assignment cuts across State boundaries.

The powers to assign can be valuable to a liquidation if the process is considered carefully. Save yourself the toil and trouble and seek proper advice to ensure the result is (spell)binding. 

 

For more information, contact Holly Jackson of Ledlin Lawyers

Email:                hjackson@ledlinlawyers.com.au

Direct line:        02-8488-3385

Disclaimer

Ledlin Lawyers’ articles are intended as general information and commentary and should not be used or relied on in place of legal advice. Please seek formal advice on particular transactions, circumstances and matters related to any articles, blog posts or case studies posted on this website.
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