Rights to sue up for grabs, who wants them?

The world of insolvency is currently undergoing serious review, with potential reforms flying around thick and fast. But talk of safe harbours and unenforceable ipso facto clauses (see our update here) have overshadowed a significant development that commenced on 1 March 2017: the ability for external administrators¹ to now assign their rights to sue under the Corporations Act 2001 (Cth) (Corporations Act).

The Insolvency Law Reform Act 2016 (Cth) (Insolvency Act) recently amended the Corporations Act by adding a new schedule: Schedule 2 – Insolvency Practice Schedule (Corporations) (Schedule). The right to sue for claims such as insolvent trading or voidable transactions, previously personal to external administrators, can now be assigned pursuant to section 100-5 of the Schedule.

The assignment of such rights can only be done prior to the external administrator commencing such an action unless the Court otherwise approves. The external administrator must also give written notice of the proposed assignment to creditors before assigning such a right. After the assignment is effected, a notice of assignment must be issued that complies with the relevant state legislation². The notice can come from either the assignor or assignee, must be in writing and given to the debtor or potential defendant.

Once the assignment has been made, any reference in the Corporations Act to an external administrator in relation to an action is taken to be a reference to the assignee.

There is the possibility, however, that the assignment will require Court or creditor approval in any event if its falls within sections 477(2A) or (2B) of the Corporations Act. Such approval would be required where the circumstances of the assignment result in a debt effectively being compromised or where the right is assigned pursuant to an arrangement that will extend for more than three months after the agreement is entered into.

The assignment of such rights would primarily appeal to litigation funders and related parties of the company or those wishing to control the assigned claim.

¹A person is an external administrator of a company if the person is:

• the administrator of the company or
• the administrator under a deed of company arrangement that has been entered into in relation to the company or
• the liquidator of the company or
• the provisional liquidator of the company.

²For example, section 134 of the Property Law Act 1958 (Vic) or section 12 of the Conveyancing Act 1919 (NSW)