Assignment of "Rights to Sue"

1 March 2017 saw changes brought by the Insolvency Law Reform Act 2016 (Cth) come into effect, ultimately extending the powers given to insolvency practitioners to be able to assign statutory causes of action that they have not been able to previously assign. 

These new provisions (each respectively, s 100-5 of Schedule 2 of the Corporations Act 2001 (Cth) ('Corporations Act') and the Bankruptcy Act 1966 (Cth) ('Bankruptcy Act') (collectively referred to as 'the Acts') extend the ability of external administrators to assign any "right to sue", including for instance: 

1. Rights to sue under the Bankruptcy Act: 

a.  s 115 and 116 (transfers during relation back period); 

 b. s 120(1) (transfers for less than market value); 

 c. s 121(1) (transfers to defeat creditors); 

d. s 121A(1) (transactions where consideration given to a third party); 

e. s 122 (preference payments); 

2. Rights to sue Corporations Act: 

a. s 588FA(1) (unfair preferences); 

b. s 588FB(1) (uncommercial transactions); 

c. s 588FD(1) (unfair loans); 

d. s 588FDA(1) (unreasonable director-related transactions); 

e. s 588G(1) (insolvent trading); 

Why? 

Insolvency practitioners have no general duty to incur costs where there are insufficient assets or funds available in the administration. 

Aside from ASIC or AFSA intervention or funding; funding from creditors or litigation funders (noting Court approval where required); indemnities; and/or engaging solicitors/barristers to take matters on a speculative basis; (or a combination of any of the above), void or voidable transactions engaged by company officers and bankrupts have the potential to escape untouched. 

Pointers 

Court approval is required if the action has already commenced; 

Creditors must be given written notice of the proposed assignment and in certain circumstances, will have to give approval; 

  • Insolvency practitioners need to consider the time constraints of particular assignments. Assignments that are for longer than three (3) months will need get approval of the courts or creditors pursuant to s 477(2A) or (2B) of the Corporations Act

Once assignment is effected, a notice of assignment must be issued which complies with relevant state and territory conveyancing legislation; 

  • In New South Wales for instance, this is pursuant to s 12 of the Conveyancing Act 1919 (NSW). 

External administrators should be cautious not to purport to assign rights to sue which would comprise claims that are frivolous or vexatious; Citicorp Australia Ltd & Ors v Official Trustee in Bankruptcy & Anor [1996] FCA 1116.

When May it be Useful? 

Depending on the circumstances, an assignment pursuant to the new provisions may be useful as follows: 

For Insolvency Practitioners 

When insolvency practitioners do not have funding, rather than forgoing the proceedings altogether, the "value" of the claim may be realised by an assignment; 

For Creditors 

Potentially provides for a quicker dividend: 

  • However, note: in commercial reality, deeds of assignment may be drafted on the basis that payments to the insolvency practitioner involve a minimal upfront payment and remaining payments are otherwise stagnated, tiered or success based (given the level of risk taken on by the assignee); and 
  • There may be ongoing involvement by the insolvency practitioner in the matter which would restrict them from declaring dividends including of course any final dividend paid too early. For instance, they may be required to report to creditors on an ongoing basis until the litigation is finally determined; 

An aggrieved creditor may decide that it is in their best interests to purchase and therefore control the litigation and the cost thereof (if the external administrator does not appear to have the appetite or funds to do so); 

 For insolvency law generally 

Provides a general deterrence against those whom are considering engaging in phoenixing or asset stripping activity. 

 How far does the Right to Sue extend? 

Bankruptcy Act 

There are provisions under the Bankruptcy Act which provide for the Trustee to: 

  • Commence litigation in a Court of competent jurisdiction for the recovery of unpaid income contribution liabilities, post the date of discharge; 
  • Apply to the Official Receiver for the issuance of a s 139ZL(1) notice should the bankrupt have failed to pay their income contribution liabilities; 
  • Apply to the Official Receiver for the issuance of a s 139ZQ(1) notice should the Trustee allege that a transaction is void pursuant to ss 120, 121, 121A, 122 and arguably 115/116 of the Bankruptcy Act. 

Do the "rights to sue" extend this far? It is noted that a person who refuses or fails to comply with a s 139ZL(1) or 139ZQ(1) notice commits an offence; s 139ZO(1); s 139ZT(1). Similarly s 139ZL(1), if a notice under s 139ZQ(1) is given to a person in respect of any property, the property is charged with the liability of the person to make payments to the trustee as required by the notice. 

Is it the intention of the legislature to provide persons whom are not officers of the Court with the power to apply for these notices (with no consequential disciplinary procedures or standards to abide to) and the consequence for recipients of the same potentially being the charging and sale of their property (if not worse)? The only gatekeeper will be the Official Receiver in that circumstance. 

Corporations Act 

Where a court is satisfied that a transaction of a company is voidable pursuant to s 588FE of the Corporations Act, orders can be made including: 

  • An order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction; 
  • An order directing a person to transfer to the company property that the company has transferred under the transaction; 
  • An order requiring a person to pay to the company an amount that, in the court’s opinion, fairly represents some or all of the benefits that the person has received because of the transaction; 
  • An order requiring a person to pay to the company an amount that, in the court’s opinion, fairly represents some or all of the benefits that the person has received because of the transaction. 

Accordingly, external administrators may need to assign not only the "right to sue" in respect of any relevant action, but also the right to any debt, proceeds or property recovered as a result. 

This should be permissible as an extension to the ability to sell or dispose of, in any manner, all or any part of the property of the company under s 477(2)(c) of the Corporations Act. However, there is of course no case law on the point. It may be that a court finds that there is no such ability. 

In such a case, the assignee may simply be left with a percentage plus cost (as structured by the original deed of assignment) from the liquidator in priority to creditors and prior to any dividends under s 566(1) of the Corporations Act (rather than the recovered property itself). This would obviously need to be reflected in the "price" of the assignment. 

Assignments in practice 

What beyond the publicly available information on public registers (PPSR searches; ASIC searches; title searches) can be disclosed to potential assignees? As without a Court order, external administrators are limited in what can be disclosed due to privacy concerns. 

Whilst there are improved rights to access information and documents under the Schedules (and potential examination, note for creditors only, under the Bankruptcy Act and eligible applicants under the Corporations Act), assignees will not have the same ability as an insolvency practitioner to collect information and obtain documents. For instance: 

Bankruptcy Act 

  • Requesting the Official Receiver to issue a s 77C(1) notice; 
  • Issuing a 77A(1) notice; 

Corporations Act 

  • Issuing a s 530A(1) notice; 
  • Issuing a s 530B(4) notice; 

This will mean that a potential assignee will be faced with the restrictions to obtaining such information/documents as a normal litigant would and therefore be at a disadvantage vis a vis if the external administrator had kept control of the rights to sue. There are generally no pre-disclosure obligations prior to the commencement of litigation. 

ASIC/ AFSA Involvement 

Usually an insolvency practitioner will report to ASIC various alleged breaches by company officers. ASIC's involvement will then be to attempt to encourage compliance prior to commencing any prosecutions. 

This can result in company officers complying with their obligations to provide documents and information. 

However, once actions are assigned, those assignees will not be able to rely/ lean on such powers.  

Scope of Assignments 

Issues relating to the scope of assignment should also be considered. External administrators should carefully draft a deed of assignment and identify exactly what they are and are not assigning. A copy of such an instrument will often be requested by prudent respondents upon the commencement of any litigation by assignees. 

There are risks to external administrators and assignees if these documents are not properly drafted or executed. 

In giving notice to the creditors, what can the creditors do if they don’t like the proposed assignment? What if a different potential assignee is disgruntled because they didn’t secure the assignment? 

The new s 90-15 in the Bankruptcy Act (and now an equivalent provision in the Corporations Act) gives such persons the potential ability to file proceedings against an external administrator seeking review of such decisions. 

The prospect of such litigation is likely to be high where rights to sue are assigned to a related or associated entity of the relevant entity or bankrupt; assigned for a value that others’ may believe does not represent the market value. The list could go on. 

Assignees being required to pay Security for Costs 

In Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148, Hodgson JA discussed the principles relating to proceedings being brought by a liquidator, and applications for security for costs. Generally, no order for security for costs will be ordered against external administrators when they are pursuing these types of action (the policy being that the external administrator is exercising a statutory power vested in them). Will this be a different case for assignees of these rights to sue? 

Stamp Duty 

Section 65(1) of the Duties Act 1997 (NSW) sets out that a dutiable transaction is exempt from duty if it is, or occurs as a consequence of any of the following: 

  • The appointment of a receiver or trustee in bankruptcy; 
  • The appointment of a liquidator; 

Will it be the case that assignee's can claim that any property that is transferred to them directly is exempt from stamp duty as the transfer has occurred as a consequence of the appointment of an external administrator? 

Conclusion 

There are many more questions than answers at this stage. Overall, we are of the view that the Courts will have some initial work to do filling the void.

Authored by Dan Rappoport and Gavin Parsons of Gavin Parsons and Associates

gavinparsonsadm

Date posted: 2017-09-01