A sign for unfunded liquidators: what you need to know about assigning a cause of action - Insolvency/Bankruptcy

This week's TGIF examines the NSW Supreme Court decision In the Matter of Kevin Jacobsen Pty Limited (in liq) [2016] NSWSC 538 which considered a challenge to an application under s 477(2B) to assign a cause of action.

What happened?

On 10 August 2015, the liquidators of Kevin Jacobsen Pty Limited (in liquidation) (KJPL) applied to the NSW Supreme Court for:

an order under s 477 (2B) of the Corporations Act 2001 (the Act) approving entry into a deed of assignment of choses in action (Deed); and
a declaration that entry into the Deed was not invalid by reason of failure to obtain prior approval as required by that section of the Act.

The liquidators, who were unfunded, had been approached by solicitors acting for Kevin Jacobsen (the Assignee) in relation to the sale or assignment of certain causes of action which may have been available to KJPL.

Creditors had previously been advised that KJPL had no readily realisable assets, liabilities amounting to over $7 million and the only source of recovery was potential legal action.

However, given the liquidators had been unable to obtain third party funding to investigate the claims, they considered the assignment to be in the best interests of the creditors of KJPL. A term of the Deed was that the Assignee agreed to pay KJPL 5% of the gross recoveries made arising out of any litigation commenced.

The Deed was executed and the Assignee filed a Statement of Claim in the Equity Division of the NSW Supreme Court.

Shortly thereafter, an application for retrospective approval of the Deed was made to the Court. The liquidators' evidence was that approval had not been sought prior to commencing proceedings due to time pressures at the time of entry into the Deed.

Application before the Court

The application for approval was stood over on several occasions and the Court granted two entities leave to be heard on the application.

The two entities challenged entry into the Deed on, inter alia, grounds that:

the proposal to assign was ill-advised and any prospective return for creditors was speculative;
there was no rational basis for the adoption of a 5% figure as a return to KJPL under the Deed; and
no assessment had been conducted of the Assignee's capacity to fund the litigation through to a final hearing.

The Decision

The Court held that a detailed assessment of the prospects of the claim was not necessary or material to the liquidators' assessment of the desirability of the assignment from the perspective of creditors. The Deed offered at least a prospect of a return and liquidators in an unfunded liquidation could not sensibly be required to undertake a detailed investigation of the legal merits of a claim prior to assigning it to a third party for the best value that could be achieved.

Furthermore, external advice was not required in order to make a commercial judgment given the limited options that were available.

The Court rejected the submission that there was no rational basis for the 5% figure. His Honour held that the liquidators were not in a position to undertake an abstract analysis of the proportion of gross proceeds they ought to accept and the Court would not substitute its judgment for the liquidators' commercial judgment. This was particularly so in circumstances where only one offer had been made, no third party would make a more favourable offer and the alternative was a winding up without a return to creditors.

However, the Court was not satisfied, on the evidence, that the Assignee had the ability to fund the proceedings to completion. The liquidators' argued that this was not relevant, however, his Honour observed that if there was no real prospect of the procural of funding for the proceedings to a successful conclusion, the Deed would have no real benefit to creditors.

As such, the Assignee's ability to procure funding was held to be material to the liquidators' decision and the Court stood the application over so that the liquidators could make further inquiries and lead further evidence.

Comment

This decision provides guidance for unfunded liquidators who have identified potential claims during the course of their investigations. In such circumstances, a full investigation of the legal merits will not be a pre-requisite to an assignment to a third party. However, a higher level of inquiry is required where such claims are pursued by a liquidator himself or herself with the aid of funding.

It also serves a useful reminder of what claims are capable of being assigned. Whilst the Court did not rule on the matter, it is well-established that claims under s 82 of the Trade Practices Act 1974 (Cth) and under s 1041l of the Act are not capable of assignment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.