A preference claim of liquidators against the Commissioner of Taxation (ATO) under s 588FA of the Corporations Act was assigned to litigation funders under section 100-5 of the Insolvency Practice Schedule (Corporations).
That section provides that where an external administrator has already commenced proceedings, court approval of the assignment must be obtained (b), and the creditors must be notified (c).
The company had gone into liquidation in June 2013 and the preference claim was then commenced. It involved 86 challenged tax payments totaling $7,005,329.27.
The assignment was made years later, in February 2022.
The WA Supreme Court approved that assignment ex parte under s 100-5(b) and no reasons for judgement were given.
Only shortly before the trial of the preference proceedings against the ATO did it become apparent that there was no prospect of the creditors of the company receiving any dividend from any successful outcome of the action. The terms of the assignment required the funder to receive any funds remaining after the payment of legal costs.
“The liquidator said that he had reviewed a calculation that, assuming LCM’s Recovery costs to be $1,860,163 and CIA to be wholly successful in the proceedings, CIA (as opposed to the liquidators) might receive $1,435,056 in total, while LCM would receive $8,397,356”.
The Court pointed out that, on the liquidators’ calculations, $889,234 in liquidators’ fees and $1,990,944 in legal or recovery costs would have been incurred in order to secure $206,916 for CIA’s creditors, although it possible that an award of costs in favour of LCM might have improved that return. There was some other residual uncertainty about these figures.
“The operation of the terms of the assignment … seriously called into question whether the interests of justice required that the court approve the assignment”.
The requirement that the external administrator obtain the court’s approval under s 100-5(b) indicates that the court is to exercise a supervisory role in relation to any proposed assignment.
While
“the fundamental objective of the preference avoidance provisions is equality among creditors of the same class, it is difficult to see how that objective is advanced by an award in favour of an assignee of the right of action which results in no benefit to the class of creditors”.
Two important decisions were cited. Hall v Poolman distinguishes two situations, one, where the liquidators’ funding arrangements provide no more than a token benefit to the creditors and are in truth a means for the litigation funder and the liquidator to generate profit for themselves without any substantial benefit to creditors; and two, where, though creditors are unlikely to obtain any substantial benefit from the litigation, a successful outcome will recoup properly and reasonably incurred costs and expenses of the liquidator.
Re Cardinal Group Ltd (in liq) is an example of the latter, Justice Black saying
“[if]f the proceedings were pursued to seek to recover the liquidators’ costs or funding which had been devoted to the conduct of the proceedings, it seems to me that that is a proper purpose, where liquidators would less readily accept appointment, and litigation funders would less readily fund proper proceedings in liquidation, if liquidators could not recover their remuneration or litigation funders could not recover the funding which they provided. It seems to me that that approach is consistent with that of the Court of Appeal in Hall v Poolman”.
The WA Supreme Court considered it was unable to consider any conduct issue because it had not been pleaded, and the Court had earlier approved the assignment.
In the end result, the funder’s $7 million preference claim against the ATO under s 588FA failed; the funder could not prove insolvency and the ATO had a good faith defence under s 588FH.
Comment
I have said that the recovery provisions of liquidators and trustees are not as they seem or at least we don’t know how effective they are.
What I have asked for by way of data is to know the net proceeds for creditors when such claims are “successful”. It would appear that in most or many cases any successful recoveries would go to the liquidators and the funders and the lawyers. As much was accepted by the 2023 PJC report in relation to preferences. This may indicate a lack of funds generally in insolvency.
That outcome is not necessarily critical of the practitioners, as the cases indicate, but may alternatively show that litigation rights of recovery are too costly for the amount being pursued. There is also the government’s acceptance of trusts and other such protective arrangements that would serve to negate otherwise successful actions, although that would not have been the case here.
An option is for the courts themselves in their inherent authority over the liquidator and trustee as so-called officers of the court to provide an accounting of any voidable transaction claims pursued. Certainly that option is more available under section 100-5(b). It may be also that the courts should review litigation funding arrangements at the beginning of any such litigation claims.
Productivity Commission
It asks for comment on the integrity of the regime and its effectiveness and about any other serious concerns about Australia’s insolvency frameworks. Before it can make that assessment, it needs to know how the system works, here, the reality of of the outcomes of preference and other voidable claims. As I said earlier, legal outcomes are not always as they might seem.
Apart from other things this case shows difficulties in bringing a claim 13 years after the alleged preferences.
LCM Recoveries Pty Ltd (ACN 636 546 999) -v- Commissioner of Taxation [No 2] [2026] WASC 327.
One Response
It is particularly unfortunate that the WASC did not give reasons for the orders made permitting assignment. I would have thought that the defendant ought to have been given notice of the assignment assignment as a person affected by the orders – at least then there would have been a contradictor