When can a liquidator sell a cause of action?

11 March 2019

Key points:

  • Liquidators have the power to sell causes of action belonging to the company, or conferred on the liquidator by the Corporations Act 2001 (Cth) (Act).
  • Selling instead of litigating causes of action can be a safer, surer and quicker path for a liquidator to realise value for creditors.
  • However, there are certain important limitations on a liquidator’s power to sell causes of action.

A liquidator’s power to sell property of the company under section 477(2)(c) of the Act enables a liquidator to sell a company’s causes of action, ie its rights to sue.

This is because of the broad definition of property in section 9 of the Act (which includes a ‘thing in action’) and caselaw holding that section 477 provides a statutory exception to the rules against maintenance and champerty (which ordinarily prevent ‘trafficking’ in litigation). Additionally, section 100-5 of Schedule 2 of the Act (section 100-5) gives a liquidator specific power to assign any right to sue conferred on the liquidator by the Act. This includes claims a liquidator can bring for insolvent trading, unfair preferences and uncommercial transactions.

Selling or assigning a cause of action is an alternative method for a liquidator to realise value for creditors, especially where the liquidator is not in a position to fund litigation.

However, a liquidator’s power to sell or assign causes of action has certain important limitations.

First, many statutory causes of action are incapable of assignment, because they are personal to the company rather than proprietary in nature. For example, only the person who suffered the loss can bring claim a claim for damages for misleading and deceptive conduct under the Australian Consumer Law.1

Second, a claim for breach of contract is not capable of assignment where the contract contains a provision preventing the parties from assigning their rights.2 Such provisions are common in contracts where the identity of one or both contracting parties is important to the other, eg service contracts, construction contracts, or joint venture agreements.

Third, with respect to a liquidator’s power under section 100-5 to assign rights to sue conferred on the liquidator by the Act, this power is subject to the following conditions:

  • If an action has already been commenced by the liquidator, approval of the court is required.
  • If an action has not yet been commenced, the liquidator must give prior written notice to creditors of the proposed assignment.

Though the Act is silent as to the timing and content of such a notice to creditors, a liquidator should give reasonable notice that affords creditors an opportunity to speak against or challenge the proposed assignment and/or to make their own offer to acquire the right proposed to be assigned.

In all cases, a liquidator must be careful to obtain proper value for creditors, and seek legal advice to ensure that a valid assignment is possible and effected. It may be appropriate, in some cases, for a liquidator to seek directions from the court.

1. This was recently confirmed in Pentridge Village Pty Ltd (in liq) v Capital Finance Australia Ltd [2018] VSC 633 where a liquidator’s purported assignment of a cause of action under the Trade Practices Act 1974 was held to be invalid.

2. See eg Owners-Strata Plan No 5290 v CGS & Co Pty Ltd [2011] NSWCA 168.

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