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Michael Murray’s on-going commentary on issues in corporate and personal insolvency law and related policy and law reform, in Australia and internationally. Given the scope of insolvency, this extends to business, consumer and professional conduct, and ethics, governance and regulation, criminal, tax, environmental and administrative law, and the courts and government.

 

‘A good idea’ – assignment of a liquidator’s recovery rights

A liquidator has transferred, with court approval, potential recovery claims to the ATO, as the major and only creditor in a liquidation. The law concerning assignment of claims is however said to remain uncertain despite changes made to facilitate such transfers.

In the case in hand, the ATO is owed $5.4m. The company – Anatax – went into liquidation in May 2015 with $333 in its bank account.

The company was registered as a tax agent and the activities of those involved and the company itself, including transfers of property, prompted an audit by the ATO.

The liquidator, Mr Nicols,

“unsurprisingly it may be thought”,

as Justice Perram said,

“believes there may be a number of causes of action available to Anatax (and also himself as liquidator) including claims …for contraventions of ss 181 and 182 of the Corporations Act … and against the entities which are currently holding those properties”.

As the Judge explained:

“Because Anatax has no money, Mr Nicols thinks it would be useful to conduct examinations under s 596A and 596B of the Act and also to issue notices to produce in order to obtain relevant books and records. However, he does not have the funding to do this.

The Commissioner suggested to Mr Nicols that it might be useful for Anatax to assign all of its causes of action to the Commonwealth and for the Commissioner to take over Mr Nicols’ role in conducting the relevant inquiries. Mr Nicols agreed that this would be a good idea and appropriate since the only creditor of Anatax is the Commissioner”.

A deed was therefore executed between the ATO and the liquidator in 2019 to give effect to this transaction.

The only issue for the court was that the deed created obligations on Anatax which extended beyond three months after its date, and the Court’s approval under s 477(2B) was necessary for the deed to take effect. In fact, the deed was expressed to be conditional on Court approval being obtained. There was no real explanation for the 4 years having passed since the date of liquidation.

 The Court was ready to find that what was proposed was proper and appropriate, in good faith and with no error of law or principle: Nicols, in the matter of Anatax Pty Ltd (in liq) [2019] FCA 1528

Comment

The apparent ready approval of this assignment was no doubt supported by the evidence, although the terms of the assignment are not shown or discussed.

In other circumstances, an assignment by a liquidator of rights of action of the company can be a difficult area of law and policy, recently described as being “afflicted by inconsistent and circular reasoning”. This is now said to be further complicated by the changes made by the Insolvency Law Reform Act 2016 to introduce a right to assign a cause of action of the liquidator or trustee, under s 100-5 of the Schedules.

In corporate insolvency, the effect of these changes has been described as allowing the assignment of “the power to bring proceedings in respect of voidable transactions under Part 5.7B”, these being claims of the liquidator, but the section

“does not seem to extend, for example, to permit assignment of a company’s (as distinct from an external administrator’s) cause of action for breach of directors’ duties arising under the Corporations Act or a right to sue for misleading and deceptive conduct arising under the Australian Consumer Law (since that is not a right conferred under the Corporations Act)”.[1]

That comment referred to what was then a pending journal article, since published.[2]

In its thorough review of the law, including the impact of s 100-5, the article states, relevantly, that

”statutory causes of action against a director for breach of statutory duties in the Corporations Act are probably incapable of assignment by a liquidator, and even if they can be assigned, they cannot be enforced by the assignee”.

Under the new law, the article continues that it is

“very unclear how the provisions of [s 100-5] will operate in the context of the existing law on the assignment of causes of action by liquidators, or in relation to the existing provisions of the Corporations Act”.

It concludes in saying:

“The upshot is that despite the laudable intention to simplify and streamline, the provisions of the Insolvency Reform Act 2016 may simply have added another layer of complexity. Some judicial clarification will be necessary”.

There would in fact be a question whether the law is beyond judicial clarification though some court challenge would assist in relation to what is said to be a growing market for these assignments.

The ATO’s legal guidance on indemnities to insolvency practitioners might also give thought to these issues.

The UK

Uncertainty also exists in relation to a similar but simpler provision in the UK – s 248ZD of the Insolvency Act 1986 – introduced in 2015 for the same purpose, to allow the liquidator to sell a right of action which the liquidator may have no funding or inclination to sue.

The section simply provides that where a company enters administration or liquidation, the insolvency practitioner “may assign a right of action (including the proceeds of an action) arising under any of the following” provisions, including fraudulent or wrongful trading, transactions at an undervalue and preferences.

Similar questions have been asked there as to whether the section aligns with the restrictions imposed by the general law or whether it give broader powers to a liquidator.[3] Other issues raised in the UK include the need to assign the claim totally in order to avoid the potential for costs being ordered against the liquidator as a party supporting the claim, which could arise if the liquidator waits on a proportion of any successful action.

Other comment

See also The practical issues of assigning a right to sue – Ryan McIlveen, Worrells, 3 December 2018; Assigning rights to sue, (2018) 30(3) ARITA J 11.

Bankruptcy?

One other point is that if this were a trustee in bankruptcy entering a deed of assignment, no creditor or court approval would have been required at all. Does s 477(2B) of the Corporations Act remain necessary?

——————————

[1] ARITA National Conference 9 August 2017, Recent developments in insolvency law, Justice Ashley Black, Supreme Court of New South Wales.

[2] An Asset Shared Can Be a Problem Doubled: Assignment of Causes of Action by a Liquidator (2019) 93 ALJ 36, Justice Robert Harper, FCCA

[3] Goode on Principles of Corporate Insolvency Law, Kristin Van Zwieten, 5th ed, Sweet & Maxwell, at [5-06].

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