Show me the money!
What happens when a bankruptcy trustee or liquidator identifies misconduct or possible recovery action but there is no money to investigate or pursue?
Frequently, a bankrupt estate or a liquidation has limited—or no—funds available. In such cases, it makes it difficult for an appointee to investigate in detail any misconduct, and/or to pursue any actions deemed to be meritorious. A bankruptcy trustee or liquidator has some alternatives to ensure (wherever possible) these matters are considered, and action is taken.
Where it relates to potential recovery action
If a commercial cause of action exists in a bankrupt estate or a liquidation, but no funds are available to investigate and pursue the action, one or some of the following steps are normally taken:
- Seeking creditor indemnity funding
Creditors are requested to consider funding the unresolved investigations and action. While a request for funding can be unpalatable for some creditors (who have already suffered loss as a result of the insolvency) the Bankruptcy Act 1966 and Corporations Act 2001 can allow an ‘indemnifying creditor’ to be paid in priority to other creditors—if there are recoveries from the funded action.
While creditor indemnity funding can be uncommon, the Australian Taxation Office and Department of Education have specific budgets for this funding.
- Engaging a solicitor and/or barrister to act on a speculative basis
If the action is considered commercial to pursue, the liquidator or bankruptcy trustee may engage a legal advisor on a speculative basis i.e. the party is only paid if/when there are recoveries from the action.
Such agreements are relatively common in the insolvency industry and allow many claims to be pursued, which would otherwise be abandoned.
- Seeking litigation funding
A number of third parties specifically fund liquidator or bankruptcy trustee actions. These parties, known as litigation funders, may agree to fund all costs associated with an action but will often charge a percentage of any amounts awarded as a condition of agreeing to fund the proceedings. Typically, creditors must approve such agreements.
- Negotiating a settlement (i.e. without litigation)
Bankruptcy trustees or liquidators may simply discuss settlement with the parties subject to potential actions without any litigation. A settlement can give a lower return than in a litigation, but it also means that there are recoveries that may otherwise not have existed due to the inherent risks and uncertainties associated with litigation. Depending on the claim’s nature such settlements may require creditor approval.
Where it relates to potential misconduct
If misconduct is identified in a bankrupt estate or a liquidation, but no funds exist to investigate the matter, the following steps are normally taken:
- Assetless Administration Funding is sought (for corporate insolvency matters)
The Australian Securities and Investments Commission (ASIC) has an annual budget to fund liquidator investigations into potential misconduct of directors or other company officers. Funding can range from the low thousands for an investigation report to enable ASIC to take action to ban or disqualify directors, to many tens of thousands of dollars for more complex matters, and those which may have a criminal element.
- “Section 305” funding is sought (for personal insolvency matters)
Much like ASIC in the corporate space, funding is available from the Australian Financial Security Authority (AFSA) to ‘facilitate the proper carrying out of the trustee’s statutory and fiduciary duties’ in the personal insolvency space.
The reality is frequently, insolvency matters are not fully investigated due to lack of funding. The options outlined above however, ensure that where the misconduct is blatant or commercial actions exist, there are avenues available to ensure the matters are not left unchecked.