Brisbane partner Michael Peldan has been selected as part of one of the discussion panels for ITSA’s National Congress later this month. The area that Michael will be discussing is the process that trustees at Worrells go through when considering whether to take legal actions when the estate has no money.
The process is essentially the same regardless of whether there is money in the estate or not, with one major difference.
The Bankruptcy Act sets out a trustee’s obligation: 19(1)(f) take appropriate action to recover property for the benefit of the estate. Trustees will have to decide what action is appropriate when an estate has no money, but when there is an action that may benefit the estate.
The obligations under the Corporations Act are similar, though a liquidator of a company with no money can rely on section 545(1) that says: “Subject to this section, a liquidator is not liable to incur any expense in relation to the winding up of a company unless there is sufficient available property”.
There are four basic questions that are asked when judging whether any action is worth pursuing. These are:
1. Are we going to win? How good is the claim?
We have to determine whether there are good or moderate prospects of success, or whether the matter is entirely speculative. We also must consider whether the claim is good enough to be able to arrange a settlement of the claim without incurring the costs of going to court. Part of that consideration is whether there is sufficient reliable evidence to ‘prove’ the claim?
If the action has little prospects of success or probably cannot be settled, it is highly unlikely that taking the claim is for the benefit of the estate. If the claim has good prospects and the evidence to prove the claim is available, the claim will be considered favorably.
2. Is the possible or likely return comparable to the risk and the costs to take the action? Is it commercially worthwhile running the claim?
This is a simple costs/benefits analysis. We must determine the size of the potential return compared to the costs of running the claim. Even a claim that has high prospects of success is not worth running if the commercial return to the estate is less than the costs of running the action. That is – trustees would not spend $10,000 trying to recover $5,000 – regardless of how good the claim may be. It is also doubtful that trustees would spend $10,000 taking an action that has a possible $20,000 recovery but only a 50% chance of success.
3. Can the other side pay any judgment against them?
If the defendant cannot meet the claim, it does not matter how good the claim appears to be, there will be no return. Whether to take any action is a purely commercial decision, so there must be a collectable commercial return. Registered Trustees are not public interest advocates and should not be required to take actions that do not bring a commercial benefit to the estate.
4. What are the creditor’s views?
Creditor may want the file to come to an end and may not want any further actions to be taken. They may believe that the length of time to run the claim is not worth the extra return if the claim is successful. Given that trustees and liquidators really act for the creditors, they must be sensitive to the opinions of creditors – albeit that the may not follow those opinions.
In judging whether to take action when there are no monies in the estate, we have one more consideration:
5. How will the costs be paid if we lose?
We have to decide whether we are prepared to speculate our fees, whether the lawyers are prepared to speculate their fees and whether any adverse costs orders can or will be covered by some party. Funding may be provided by creditors, ITSA, or litigation funders, and this funding may cover some of all of these costs. At times the claim will be so good that the trustee will risk it all and proceed without outside funding.
Every trustee will consider these issues differently. Some will be more risk adverse and some more willing to risk their own money taking an action. That means that there is no right or wrong answer and no two actions or circumstances will be identical or decided identically.