As liquidators, we are often faced with a decision on whether to commence or to continue litigation for insolvent companies.
The potential financial return to the company is of course attractive, but the risks of losing the case and having to pay the other side’s legal costs is a suitable deterrent, particularly when such costs have to be met out of the liquidators personal funds
Financial hurdles (i.e. a lack of funds or our unwillingness to risk them) can sometimes be overcome, or partly overcome, by creditors funding the litigation, or by solicitors agreeing to carry their fees during the actions. But getting such support is not always easy, nor always appropriate.
Also, often our reliance on the ongoing cooperation of directors (many of whom simply want to move on with their lives) is risky, particularly in contentious litigations.
Our decision not to start or to continue litigation may very well open us up to strident criticism from one of more of the directors; they often a take the view that if the liquidator moved to right the perceived wrong done—through litigation—then creditors would get a substantial return Of course it is not unusual for directors to seek to blame someone else and we must consider this when facing criticism.
However, there is an alternative to be considered by associated parties when the liquidator says no to an action.
S236 of the Corporations Act allows directors and shareholders (with the leave of the court under S237) to carry on, and to fund, the litigation in the name of the company. S236 is probably meant to apply mainly to ongoing solvent companies, but it contains no specific prohibition in relation to insolvent companies. According to S236, if a person is: a member, former member, or person entitled to be registered as a member (of the company or of a related body corporate); or an officer or former officer of the company:
A person may bring proceedings on behalf of a company, or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for those proceedings, or for a particular step in those proceedings (for example, compromising or settling them).
It should be noted that the benefits arising from a successful action will flow to the company. The associated person does not get the benefit but would be entitled to have costs paid from the winnings. This is a different proposition to the case where the rights to an action are assigned.
As mentioned, this solution is subject to leave of the court being obtained. Under S237 leave will only be granted if a number of conditions are fulfilled, including that “it is in the best interests of the company that the applicant be granted leave”.
Where a liquidator decides not to start or continue an action because he believes that it is not in the best interests of the company, it would seem that an applicant might have a difficult job convincing the court to grant leave.
Section 236 provides related parties with an opportunity to advance litigation in circumstances where a liquidator is unwilling to do so and at the same time provides the related party with a high measure of control over the action.