Liquidators’ Power to Assign Rights of Action of a Company

In a recent case Owners of Strata Plan 5290 v CGS & Co Pty Ltd [2011] NSWCA 168 , the NSW Court of Appeal considered whether s 477(2)(c) of the Corporations Act 2001 (Cth) (the “Act”) empowers liquidators to assign a right of a company to a third party in circumstances where that right would otherwise be unassignable.

This article explores this recent case and a general overview of the rights and benefits of Liquidators in assigning causes of action.

Facts

The Owners Corporation and a building company, BMP, entered into a contract (the contract) which provided that neither party was able to assign the contract or any payment under the contract, without the written approval of the other party, referred to as a “non-assignability” clause.

BMP was subsequently placed in voluntary liquidation and the liquidators entered into an agreement with another entity, CGS, purporting to assign all of BMP’s entitlements under the contract to CGS. BMP nor the liquidators obtained the written approval of the Owners Corporation, which was required by the contract. Subsequent to the assignment taking place, CGS commenced proceedings against the Owners Corporation seeking to recover the amount due to the builder.

Section 477 of the Corporation Act

A company’s rights of action are “property” of the company and can be sold to third parties. Assignments are normally made in return for a payment and/or a percentage or proceeds from successful litigation. This power for Liquidators is derived from section 477 of the Act.

Section 477(2)(c) of the Act provides that:

“Subject to this section, a liquidator of a company may:

 (c) sell or otherwise dispose of, in any manner, all or any part of the property of the company.”

The Decision by the Court of Appeal

In the first instance decision, Bryson JA determined that CGS had title to rights provided for under the contract as a result of BMP’s liquidator having made a valid sale or disposition pursuant to s 477(2)(c) of the Act.

The Owners Corporation appealed this decision on the basis that s 477(2)(c) should not be construed as authorising BMP’s liquidator to assign the rights under the contract without the consent of the Owners Corporation.

The Court of Appeal of NSW held that s 477(2)(c) of the Act was not broad enough to authorise the liquidator to transfer rights arising under contracts with “non-assignability” clauses, such as the entitlements arising under the contract between the Owners Corporation and BMP.

As such, where a company is party to a contract which includes a “non-assignability” clause, it is important to note that s 477(2)(c) of the Act will not operate to allow a liquidator to assign the rights of the company under the contract without consent of the relevant parties under the contract.

Key Principles Governing Assignment of Causes of Action

This case highlights that some actions may be non assignable by a Liquidator due to contractual prohibition. The following are other basic principles that should be considered by a Liquidator before assigning a cause of action;

• the sale or assignment must be a bona fide exercise of the liquidator’s power;
• an assignment should not open the defendant up to vexatious litigation;
• frivolous claims (ones unlikely to succeed) should not be assigned;
• liquidators are not required to assign a right of action where the only offer received is “pitiful”
• any agreement that involves the liquidator’s continued involvement in the litigation for more than three months requires approval under s 477(2B) of the Act;
• an assignment of a cause of action can include an assignment of the right to control the litigation;
• a liquidator’s assignment of a cause of action in accordance with s 477(2)(c) of the Act is not prohibited by the bar on champerty and maintenance — but any subsequent assignment by the assignee is
• a Liquidator should see that the claim has merit before assigning it and if it does have merit he/she should seek fair payment for the claim;

Benefits for Liquidators in Assigning Causes of Action

In some instances, assigning causes of action by a Liquidator may be the best option available. Some of the reasons for this are as follows;

1. It takes away the risk of litigation. In some cases, an upfront sum for the Liquidator may be better than conducting the litigation as it takes away the risk of an unsuccessful outcome
2. It may be cost effective. Litigation can become expensive. If a Liquidator conducts the litigation, the Liquidator’s costs in running the litigation to its full extent may diminish the return for creditors.
3. Some causes of action are complicated and may relate to events that arose years before the Liquidator became involved. As such the Liquidator would not have sufficient factual knowledge of the case to properly conduct the litigation efficiently.
4. Liquidators may be unfunded to conduct the litigation, which may also encourage a defendant to defend any proceedings vigorously with the intention to exhaust the Liquidator. However it is important to note that a Liquidator in this scenario could look at litigation funding options.
5. In some cases, assignees of causes of action are highly incentivised to conduct and obtain a successful outcome. For example, a Director may have the incentive of obtaining a successful outcome for the benefit of creditors as it may minimize their personal exposure under personal guarantees and insolvent trading claims.
6. Litigation can take time. In some cases, creditors may prefer to receive an immediate (and definite) sum of money, even if it is of a lesser amount that what could be expected from successful litigation, rather than wait for years for the litigation to run its full course.