Assignment Of Liquidator’s Right To Sue: Considerations For Liquidators And Assignees

By Benedict Peter, Special Counsel, Alicia Hill, Principal and Georgie Cape, Law Clerk, MST Lawyers

On 1 March 2017, a significant change was made to the Corporations Act 2001 (Act) involving a liquidator’s powers to sue various parties.  This change was the introduction of a new provision into section 100-5 in Schedule 2 of the Act.  It inconspicuously sits under “Other Matters” in the Schedule and permits a liquidator to assign actions to others, which historically only a liquidator could bring.

One of the key powers held by a liquidator involves bringing legal proceedings against parties for their misdeeds in managing the company, selling the company’s assets within defined periods at an undervalue, purchasing property at an overvalue, entering into insolvent transactions, making preference payments to creditors and general rights against debtors of the company.

Some of these powers existed at common law, in particular, the power to sue debtors of the company.  In the past, where possible assignment has occurred and litigation resulted.

Statutory Powers

Little explanation or guidance is provided in parliamentary documents as to the manner of application of this new provision by liquidators and parties willing to take the assignments.  This article attempts to fill some gaps in our understanding as to how to operate this new regime.

The new section 100-5 amendment relates specifically to the statutory powers given by the Act to a liquidator to bring legal proceedings.  These include:

  1. a general power pursuant to section 567 of the Act to bring proceedings in relation to actions taken before 23 June 1993.  This power may not have much practical use because of the long passage of time since 1993;
  2. section 588FE which makes certain transactions voidable.  Section 588FF refers to the liquidator’s powers to apply for various orders in relation to voidable transactions pursuant to section 588FE;
  3. section 588FH which gives the company’s liquidator power to recover, from a related entity, benefits from insolvent or voidable transactions; and
  4. section 588M which gives the liquidator power to recover, from the company’s directors, any loss caused to the company through insolvent trading.

These are wide and important powers which liquidators frequently use.  A substantial amount of time and expense in liquidations is taken up in making or resolving these claims.  Successful claims by liquidators have returned funds to a company and can result in the payment of dividends to creditors.

Under the 2017 amendments, the liquidator may now assign these actions to any willing taker.

Why Assign?

The power to assign will only likely be used where an assignee sees it will benefit in taking on a claim that the liquidator either cannot themselves run or determines is not in the best interests of creditors to run.

Notice to Creditors

The liquidator’s power to assign is subject to section 100-5 which requires the liquidator to give notice of the “…proposed assignment…”.  These words in the section make it clear that the creditors have to be informed before the assignment is made.

The section does not specify how the notice must be given, nor does it provide options for creditors that disagree with the assignment. Liquidators should proceed with caution when faced with opposed creditors. As this area is quite unclear, case law is required to provide further guidance. Liquidators should provide reasonable notice to creditors regarding the assignments and consider creditor opinions and concerns. This may involve a meeting with creditors or taking a vote from creditors as to what claims can be chased and what can be assigned.

Assignment of Proceeds of Claim

It is critical to note that the section only gives the power to assign the right to sue.  The section does not explicitly provide the liquidator power to assign the benefits of the suit to the assignee.  Any assignee taking on a possibly onerous claim will want to have a right to take the fruits of the litigation. Such issues will need to be managed via a formal Deed of Assignment between an assignee and the liquidator.

What about Contributors?

No reference is made in the section to the rights of contributories to be notified of a proposed assignment.

To avoid potential litigation by contributories about the assignment or potential assignment, it may be prudent for a liquidator to inform contributories of a proposed assignment in the same way that the creditors are notified.

Restrictions

Section 477 (2A) of the Act restricts the liquidator’s right to compromise any claim of at least $20,000.

Section 477 (2B) of the Act also restricts the liquidator’s rights to enter into contracts that may exceed a duration of 3 months.

If a right is assigned and any fruits of litigation are to be paid to the liquidator, then this is very likely to take more than three months to finally complete. More documents and information may be required from the liquidator to assist the assignee to succeed in the claim.  The assignee may want to compromise claims over $20,000.

Accordingly, liquidators need to be conscious of what terms they strike in any assignment and seek creditor approval where necessary.

Meeting to Approve Assignment

It is recommended that a liquidator consult contributories and creditors regarding their potential assignment decisions to avoid or reduce potential future liability over a decision.

Although meetings of creditors are not binding on liquidators, it will be helpful if the liquidator takes into account the views of the contributories and creditors before making any assignments so as to lend support to a liquidator’s decision.

Notices of Assignment

Notice of the assignment has to be given to the potential Defendants.  These Notices have to comply with the various State laws relating to such Notices as legal proceedings may cut across State boundaries and will only be able to be effectively pursued if lawful Notice of Assignment has been given for the relevant jurisdiction.

Content of Deed of Assignment

It is critical to draft an appropriate Deed of Assignment to resolve as many of these questions as possible. 

Any deed should address at least:

  • what is being assigned;
  • what warranties are being given by the liquidator when assigning (if any);
  • what assistance (if any) the liquidator will provide the assignee;
  • who bears the costs of any assigned action;
  • what the liquidator will recover from the assignee in return for granting the assignment and when;
  • what conditions will be attached (if any) to any payments to be made to the liquidator (for example payment after litigation costs);
  • what exclusions from liability or limitations on liability of the liquidator will be made;
  • what happens if a liquidator is found to be wrongly appointed or has not properly assigned any action.

As the first of these actions start to be assigned, any assignee or liquidator will need to take care to consider these and any action or specific issues so that there is a clear and documented understanding between an assignee and a liquidator about how this assignment will work.

If you would like to discuss these assignments by the liquidator, please do not hesitate to email Alicia Hill or call +61 3 8540 0200.