Any productivity review of the insolvency system in Australia would find many opportunities to reduce time and costs, in particular in corporate insolvency. This is one of them.
In the context of the current government focus on productivity, this comment of 2024 about the uselessness of s 477(2A) and (2B) is re-posted. Litigation Funding in Insolvency and in Class Actions – Murrays Legal
The sub-sections have nevertheless continued to take on lives of their own, in the courts, conference topics and academic articles, based upon the substantial body of case law having developed around the rather particular wording of s 477(2B).
These imposed restrictions on the powers of liquidators were each said to be necessary by the 1988 Harmer Report – “Harmer”. They were never imposed on bankruptcy trustees. In 2025, they should be repealed.
History
Going back, Harmer said it was considering removing most of what were a number of then existing fetters on the powers of liquidators and trustees, on the basis of those practitioners’ general competence and qualifications.
One exception was to restrict the power to enter into long term commitments “such as the mortgaging or leasing of property of the insolvent”.
Then, “on further reflection”, it was considered that creditor or court approval should be sought for compromising debts over a prescribed amount “since that is an action which may directly prejudice creditors and where proof of damage to them would be exceedingly difficult after the event”: [608-609].
Despite submissions that these provisions would merely add to the cost of an administration and reduce its efficiency, the government accepted the Harmer recommendation in corporate insolvency and hence we have 2A and 2B: Ex Memo to the Corporate Law Reform Bill 1992 [765-766].
While Harmer recommended the same restrictions for trustees, bankruptcy policy was having none of that. Trustees had a wide variety of discretionary powers to deal with the property of a bankrupt. Those powers included selling all or any part of the bankrupt’s property, carrying on a bankrupt’s business, mortgaging property, compromising claims or referring disputes to arbitration, and bringing, instituting or defending any legal proceedings. The Harmer recommendation was seen as imposing a hurdle before the effective and expeditious administration of an estate. And in any event, any person affected by a decision of a trustee could apply to the Court for an order reviewing that decision: Ex Memo to the Bankruptcy Legislation Amendment Bill 1996 at [92]. That right also of course existed in corporate insolvency.
Bankruptcy policy thereby saved trustees and their estates trustees’ remuneration costs, the cost of lawyers and barristers, and the courts, in dealing with such matters. In contrast, the typically more conservative corporate lawyers thereby imposed on external administrations liquidators’ remuneration costs, the cost of lawyers and barristers, and the courts.
Whether that corporate approach related to concerns about the then standards and competencies of liquidators, it should now not be relevant given the common regulatory regime applied under the ILRA 2016.
Current law
Corporate insolvency caselaw is replete with the mantra of determining whether a long-term agreement is conducive to an “expeditious and beneficial administration”, qualified by the courts always saying that their task is not to second guess the liquidator’s commercial judgment.
Going well beyond the mortgaging or leasing of property, solicitor retainer agreements are now included. We also have uncertainty whether approval under s 477(2B) of the Act is required for agreements entered into by the liquidator as agent for or representative of the company, as well as agreements in the name of the company.
“However, approval is not required for entry into agreements by the liquidator in their own name. In determining whether the agreement has been entered into by the liquidator as agent for or representative of the company or in their own name, it is necessary to consider the substance of the agreement, whether the company is a party to the agreement or appears to have the status of a party under the agreement, and who receives the benefit of the services provided under the agreement.”: Kitay v Frigger (No 2) [2024] WASC 113; and Nipps (liquidator), in the matter of i-Prosperity Pty Ltd (in liq) [2024] FCA 1527 at [91]; Nipps (liquidator), in the matter of I-Prosperity Pty Ltd (in liq) [2025] FCA 696.
Over the years, many millions of dollars in legal and practitioner fees, and court resources, would have consumed moneys otherwise payable to creditors.
In that respect, no-one could suggest that the retention of these provisions has had support of those beneficiaries other than for proper reasons.
Since Harmer, the powers given to the courts, and practitioners and other parties by the Insolvency Law Reform Act 2016, for example s 90-15 IPS, are more than adequate.
Instead, the court could require the trustee or liquidator give an accounting of the financial outcome of their litigation
If there were any purpose in the courts approving funding agreements, this should be to have the trustee or liquidator give an accounting of the financial outcome of the litigation, that is whether a reasonable return to creditors was secured or whether the funding went only to pay the liquidator and their lawyers.
