Michael.1
Insolvency and related law and policy, and more

Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related issues, in Australia and internationally. He has a strong law and policy background, is independent of any connections, and his views are his own. He gives no legal advice. 

What do creditors get from ‘successful’ recovery actions by insolvency practitioners?

A Judge has ordered that Trustees in bankruptcy file “evidence that identifies the benefits the creditors of the bankrupt estate are likely to receive if the Trustees succeed” in the voidable transaction claims being brought.  That was ordered in the particular circumstances of the case, but it would be a useful order for judges to make generally, in personal and corporate insolvency.

Hall v Poolman principles

In an insolvent trading case some years ago, the Judge interrupted proceedings to ask counsel for the liquidator who would be the financial recipient of any successful outcome for the liquidator.  The response was, essentially, the liquidator and his lawyers and the litigation funder, but not the creditors.

The Judge expressed concern at that and initiated an inquiry into the liquidator’s conduct, which however, the Court of Appeal reversed, giving guidance on the circumstances where such an outcome might properly arise.[1]

The Judge’s query of the parties was nevertheless relevant in the context of any insolvency where insolvency practitioners have particular responsibilities to maximise returns to creditors, to properly administer the estate and to properly conduct the proceedings as litigant, for example, to avoid unnecessary expense, to act in a “commercially sound” way,[2] and to genuinely pursue settlement.[3]

How financially useful is litigation?

From the viewpoint of the operation of the insolvency system, the question is also relevant.  We don’t know much about the usefulness of many voidable transaction provisions, given the extent of evidence required, the necessary preparatory work needed, the cost of the action, and then the likelihood of recovery.  All that involves the time and costs of the IP, the lawyers and possibly a litigation funder.  That then brings in the proportionality aspect of IPs’ remuneration in bringing that action.

A suggestion

To address that, I have in the past suggested that IPs be obliged to report on the actual financial outcome for creditors from their litigation.  That would provide some assessment of the value of the particular recovery provision; it might lead to more effective law changes.  The outcome that creditors don’t benefit financially may not be a subject of criticism, only that the system is too demanding.  What was said to be the high cost of bankruptcy voidable transaction litigation was a reason for the administrative recovery processes with s 139ZQ notices, back in 1993.  Presumably some cost benefit analysis was done to justify that.  AFSA’s present statistics show that only 5% of receipts in a bankruptcy come from voidable transaction recoveries.

In the absence of any government action, it seems to me that this could be either an academic research study or a project undertaken by a professional body among its members.  My helpful suggestions have not been taken up, although the latest suggestion was only last week.[4]

The Courts

But there are the courts.  Presumably their authority to ask ‘the question’ would be limited to the particular case.

That has now happened in a long running bankruptcy matter, described here: Assigning bankruptcy claims to a former trustee | Murrays Legal Commentary There was much toing and froing, so to speak, in the last few weeks as to who did or should have done what.  An application to strike out the recovery proceedings was made which led to various correspondence between the parties’ lawyers where terms such as ‘flagrant disregard’ and “odious accusations” appear, and where letters were not answered or in full. The Judge found inconsistences in the evidence of the parties and their lawyers. But while he was inclined to dismiss the action, he decided not to because, as he said,

“there is one issue that has not been the subject of any evidence; and that is the interests of the creditors of the bankrupt estate.

He continued:

“If, for example, there are creditors and a successful prosecution of the proceedings is likely to result in a tangible benefit to the creditors, that might well be a decisive factor in favour of my not dismissing the proceedings, and in my dealing with any prejudice the respondents may have suffered by making appropriate costs orders”.

He directed the trustees to file “evidence that identifies the benefits the creditors of the bankrupt estate are likely to receive if the Trustees succeed” in the claims being brought.  The matter is next in court on 15 September 2021.

See Macks as Trustee of the Bankrupt Estate of Lee v Lee (No 2) [2021] FCCA 1800 (6 August 2021) (austlii.edu.au)

Comment

Although this case has a complicated background, it may prompt other judges to likewise focus on the financial outcome of the matter; necessarily accepting that insolvency law allows outcomes where the proceeds of action may be applied other than to creditors, and where, as one court explained it, much work is done in an insolvency that is of no direct benefit to creditors.

And while I have assumed the Court would not make such an order a matter of general report, the Federal Court is guided by the “overarching purpose” to facilitate the just resolution of disputes as quickly, inexpensively and efficiently as possible (s 37M) and it has the power to ensure that through s 37N, and, in bankruptcy, through its general power under s 30, in ensuring compliance by trustees with their obligations under s 19, and under IPSB Div 42, and under the general law.

=========================================

[1] Hall v Poolman [2009] NSWCA 64

[2] Bankruptcy Act s 19(1)(j)(k)(l); IPRB Div 42.

[3] Civil Dispute Resolution Act 2011.

[4] Short Discussion Paper_ AAL Insolvency Roundtable _4 August 2021_ Murray-Harris.pdf (academyoflaw.org.au) p 6. See also Does insolvency practice constitute a profession? | Murrays Legal Commentary saying that English academics have written that insolvency practitioners “are highly secretive and rarely publish any meaningful information about their affairs”, (necessarily only in England).

Share on facebook
Share on google
Share on twitter
Share on linkedin

2 Responses

  1. Michael
    Very interesting for lawyers (a judge) to be questioning the benefits to creditors of antecedent transaction recovery actions (as provided for in statute) when the greatest cost impost in these matters is largely legal costs brought about by the adversarial legal system encouraging a scorched earth approach to litigation unjustifiable delays etc.
    Sorry sometimes it’s seems like a protection racket for lawyers and their dodgy clients and the trustee is questioned on their bona fides.

    1. David, yes, the rule of law costs time and money and there would be something in what you say, despite, as I would know in your case, and assume in others, compliance with the serious obligations trustees have as litigants.
      But as I point out, we don’t even know from the profession what net outcome they recover and yet it is the profession which holds that information. Hence my [on-going] suggestion.
      If the profession does not choose to, then perhaps it is best to have the state require it by a change in the law.
      Thanks for your comments
      Michael

Leave a Reply

Your email address will not be published. Required fields are marked *

Latest

Popular

Featured

Stay Up To Date With Murrays Legal Commentary

Subscribe now