We have now passed 1 March 2017 and there are some new rules in town.
Section 100-5 of Schedule 2 to the Insolvency Law Reform Act 2016 (ILRA) enables an external administrator to assign their rights to sue under the Corporations Act 2001 (Cth) (Act) once written notice of the proposed assignment has been given to the creditors. If the external administrator has already commenced court proceedings, the external administrators cannot assign the right to sue unless the approval of the Court has been obtained.
There is currently no guidance available as to what considerations the Court must take into account before approving an assignment when Court proceedings have already commenced. However, it would seem likely that the external administrator would need to satisfy the Court, among other things, that the assignment would be more beneficial to creditors and would facilitate the efficient winding up of the company than if the claim remained with the external administrator.
Before the introduction of section 100-5, only Liquidators were able to pursue claims that were considered personal to them (as opposed to causes of action belonging to the Company). These personal causes of action included voidable transactions (such as unfair preferences and uncommercial transactions) and claims against directors for insolvent trading. The ability of Liquidators to now assign those claims to any creditor or interested party in return for payment pursuant to Section 100-5 means that those claims can now be brought by third parties even if there are insufficient funds available to the Liquidators to do so.
Given that Liquidators have no general duty to incur expenses where there are insufficient assets available, previously the Liquidator might have chosen not pursue those claims even though it might ultimately have resulted in benefits for the creditors of the insolvent company. If the Liquidators were compelled to commence those claims – for example at the request of creditors or ASIC – the Liquidators would have required an indemnity to be provided and/or litigation funding to be obtained. The ability to assign voidable transaction and insolvent trading claims therefore expands the options available to Liquidators and potentially finalises the winding up of a company more quickly in that the Liquidators can simply assign the cause of action for payment and distribute the funds to creditors.
The ability to assign the claims also represents a significant expansion in terms of litigation funding. When assignment was not possible, external administrators entered into litigation funding agreements on occasion to obtain the necessary funds to pursue relevant claims to realise assets for distribution. This was often an expensive and time consuming process that involved, among other things:
- Obtaining legal advice on the prospects of success of the claim;
- Locating an appropriate litigation funder willing to provide the necessary funds;
- Negotiating the terms and conditions of any funding agreement; and
- In certain circumstances obtaining (out of necessity or desirability) Court approval before entering into the funding agreement – i.e. if the agreement was to continue for a period exceeding 3 months.
It was also necessary to consider, among other things:
- Whether entry into the litigation funding agreement would advance the interests of the company as a whole;
- The extent to which the liquidator has canvassed other funding options;
- The nature and complexity of the cause of action;
- The amount of costs likely to be incurred in the conduct of the action and the extent to which the litigation financier was to contribute to those costs; and
- The proportionality between the likely costs and risks in the litigation and any likely recovery.
Despite the above considerations, the Courts have held that litigation funding agreements can be entered into even if there are little or no prospects of recovering any funds beyond the liquidators’ costs and the litigation funder’s expenses. The Court merely requires that the litigation funding agreement not be in manifestly unreasonable terms; the preliminary investigation and litigation costs were reasonably incurred; and but for the litigation funding, no assets would be available to pay for costs already incurred. Accordingly, even if a liquidator was successful, there was no certainty that any funds recovered would actually benefit creditors.
Section 100-5 therefore makes it possible for the Liquidator to assign those claims to any creditor or interested party in return for payment. This means that the speed of the process of realising assets of the insolvent company can be increased. In addition, there may also be greater certainty in the determination of dividends available for distribution to creditors.
This article was written by Grant Whatley, Partner and Holly Lam, Senior Associate.