assignment of claims by liquidator

Assignment of a claim or cause of action | Practical Law

Assignment of a claim or cause of action

Practical law uk practice note 1-522-7861  (approx. 32 pages).

Online Access

Trusting the signs to assign: assigning causes of action of trustee companies.

By Sam Kingston , Mathew Gashi

When a corporate trustee goes into liquidation, there is often uncertainty about how it is to be wound up which requires Court intervention. On 15 October 2021, the Federal Government initiated a consultation process relating to trusts and insolvency, which looks to consider, amongst other things, what powers an external administrator has to administer trust property.

Relevantly, liquidators generally have the power to assign causes of action belonging to a company, or claims conferred on the liquidator by the Corporations Act 2001 (Cth) ( Act ). However, a liquidator’s power to sell or assign causes of action has certain limitations which were recently considered in Anderson v Canaccord Genuity Financial Limited [2022] NSWSC 58 ( Anderson Judgment ). In particular, limitations may arise in circumstances where the company acted in a capacity as trustee of a trust, which highlights the complexities that arise when a corporate trustee is placed in liquidation.

In the Anderson Judgment, the Court found that where the causes of action arose from breaches of duty owed to a company in its capacity as a trustee of a trust, and the company in liquidation ceased to act as trustee (as is often the case), the proper plaintiff was the new trustee of the trust.

Contrary to some previous cases, the Court also seems to suggest that liquidators can assign rights which are proprietary in nature (such as, for example, judgment debts) and personal rights (such as, for example, claims for misleading and deceptive conduct).

The Court's judgment creates some uncertainty about whether personal rights to sue which are held by a company are also capable of assignment, and if so what rights can be assigned. In circumstances where there are conflicting judgments, practitioners should seek legal advice prior to negotiating the assignment of claims which might be considered 'personal' to the company.

In general, when considering whether to assign any claims or rights to sue, practitioners should carefully consider the nature and merits of the claims sought to be assigned. Practitioners should also be wary if any complicating factors might arise in the purported assignment, such as if the claims are those of the company itself or if they are claims only available to the trustee of a trust.

How does an assignment of a cause of action work?

A liquidator has the power to sell or dispose of a company’s property, which relevantly includes a ‘chose in action’ (such as potential claims). This is a useful power as assigning a cause of action may realise funds in circumstance where a liquidator might not be able to fund potentially valuable pieces of litigation. Additionally, a liquidator may assign any right to sue which is conferred on them under the Act provided the following conditions are met:

• If legal proceedings have already commenced, the right to sue cannot be assigned without the approval of the Court.
• Before assigning any right to sue, the liquidator must give written notice to the creditors of the proposed assignment.

The assignment of a cause of action is usually documented in a Deed of Assignment. Depending on the terms of the deed, the assignment might also be subject to additional conditions such as approval of creditors or the Court. This is particularly the case if the assignment is intended to last more than three months.

Once a cause of action has been assigned, the liquidator should generally issue a notice of assignment that complies with the relevant State property law acts [1] ( Assignment Notice ). It is worth noting that in the Anderson Judgment, an Assignment Notice was not issued. This was not fatal as the assignors of the causes of action were joined as parties to the proceeding, binding them to any judgment.

Assignment of claims of a trustee company

The key issue in the Anderson Judgment was whether there was a valid assignment of claims broadly described as ‘Conspiracy Claims’ made up of claims for breach of fiduciary duties and breach of the obligations of good faith and honesty arising from employment contracts.

The key considerations addressed in the Anderson Judgment on the assignment of causes of action are briefly summarised below.

Were the ‘Conspiracy Claims’ claims of the company or of the trust?

The Court held the assignee had standing to sue for any breach of obligation owed to the companies in liquidation, but only to the extent that the claims related to each company in its own right. Where the company entered into any agreement in its own capacity, and not as trustee of any trust, the assignment of any rights and obligations arising under those agreements was effective.

Conversely, the assignee could not sue for any breaches of obligations which were owed to a company in its capacity as trustee. The liquidator could not assign these rights because the company was not the proper plaintiff (it was the trustee of the trusts at the time claims were sought to be made).

Could a bare right to litigate or personal chose in action by assigned?

Many statutory causes of action are incapable of assignment, because they are personal to the company rather than proprietary in nature. Personal claims are claims which are only available to the person who suffered the relevant loss or damage. Common examples are claims for misleading and deceptive conduct under the Australian Consumer Law and breaches of director duties under the Act.

Relying on past judgments of the Supreme Courts of New South Wales and Western Australia, the Court:

• found breaches of fiduciary duty are claims capable of assignment under the Act [2]
• seemed to suggest that there is no reason to limit the assignment of claims to only those which are proprietary in nature in view of the wording of the Act. [3]

This approach conflicts with judgments of the Supreme Court of Victoria and the Supreme Court of New South Wales. Relevantly in:

• Pentridge, the Court found that statutory causes of action for misleading and deceptive conduct under the Trade Practices Act 1974 (Cth) were unassignable [4]
• Re Colorado Products, the Court found that statutory causes of action for breaches of directors duties under the Act were not assignable. [5]

Implications

The Court’s judgment leads to some uncertainty about the extent to which personal rights to sue, which are held by a company, are capable of assignment. In general, when considering whether to assign any legal claims or rights to sue proceedings, practitioners should carefully consider the nature of the claims sought to be assigned. Practitioners should be wary if any complicating factors might arise in the purported assignment, such as if the claims are those of the company itself or if they are claims only available to the trustee of a trust.

[1] See for example section 134 of the Property Law Act 1958 (Vic), section 12 of the Conveyancing Act 1919 (NSW), Civil Law (Property) Act 2006 (ACT) s 205, Law of Property Act 2000 (NT) s 182, Property Law Act 1974 (Qld) ss 199, 200, Law of Property Act 1936 (SA) s 15, Conveyancing and Law of Property Act 1884 (Tas) s 86 and Property Law Act 1969 (WA) s 20. [2] Re Colorado Products Pty Ltd (In Prov Liq) (2014) 101 ACSR 233; [2014] NSWSC 789 ( Re Colorado Products ). [3] EC Dawson Investments Pty Ltd v Crystal Finance Pty Ltd (No 3) [2013] WASC 183. [4] Pentridge Village Pty Ltd (in liq) v Capital finance Australia Ltd [2018] VSC 633 ( Pentridge ). [5] Re Colorado Products.

Key contacts

Sam kingston, mathew gashi.

Senior Associate

Keep up to date with our legal insights and events

Related capabilities

Related services, recent articles.

Important changes to the Workplace Injury Rehabilitation and Compensation Act 2013 concerning workers’ compensation in Victoria

By Catherine Dunlop , Jessica Mourney

From 31 March 2024, amendments to the Victorian workers’ compensation scheme took effect

A step closer to mandatory climate-related disclosure

By Ron Smooker , Rosamond Sayer , Samantha Murphy , and Joseph Fox

The Treasurer introduced the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024.

Gomeroi v Santos: New guidance on good faith negotiation, and the relevance of climate change

By Susanne Rakoczy , and Larissa Svetlov

We explore Gomeroi People v Santos NSW Pty Ltd and Santos NSW (Narrabri Gas) Pty Ltd [2024] FCAFC 26 (Gomeroi Appeal).

Annual reporting requirements for your Critical Infrastructure Risk Management Program under the Security of Critical Infrastructure Act 2018 (Cth)

By Ooma Khurana , Hemant Vijaykumar

Maddocks Digital

A gateway for clients to interact and share documents.

Transparent live access to your complete conveyancing portfolio.

Maddocks Recoveries

Check progress, manage cases and respond.

Delegations & Authorisations

Delegations & Authorisations Service for Victorian Local Government.

Employment Contracts

Suitable, legally compliant, effective employment contracts.

Assigning claims – A practical update

Assigning claims - A practical update

Siba diqer and justin ward write for the australian restructuring, insolvency & turnaround association journal (volume 32 #01 2020) on pricing, structure and the practicalities involved in the purchase of causes of actions belonging to a company and those conferred on the liquidator by the corporations act 2001 (cth)..

The first of March marked the second anniversary of the changes to the Corporations Act 2001 (Cth) (Act) permitting an external administrator to assign rights to sue.

The Australian Government proposed the reform in the hope that the ‘sale of rights of action may enable the value in such rights to be realised’ [1] .

This article is based on our experience over the past two years of purchasing claims through our LCM Recoveries program as an alternative to traditional litigation funding.

It explores the causes of action which can be assigned, the pricing of an assignment, structuring the assignment, and the answers to some practical queries that are frequently raised in relation to claim purchases.

Why assign?

At the outset, it is important to note that the ability to assign claims has provided liquidators with an additional tool to maximise creditor outcomes.

This has been achieved through the:

• ability of liquidators to fund claims that would not have met traditional funding criteria
• ability of liquidators to distribute funds to creditors before the resolution of a claim and, in some circumstances, finalise the liquidation before the resolution of the dispute
• increase of options available to liquidators when realising company assets, and
• mitigation (and in some circumstances elimination) of the risks and costs associated with protracted litigation. In our experience, the ability to assign claims has resulted in improved outcomes for creditors and other stakeholders.

What claims can be assigned?

Liquidators have the power to sell causes of action belonging to the company [2] and causes of action conferred on the liquidator by the Act. [3] Actions belonging to the company which are assignable include:

• the right to recover unpaid debts, and
• contractual rights to claim damages (where the contract does not prohibit assignment). [4]

Causes of action conferred on the liquidator by the Act, which may be assigned, include claims relating to:

• unfair preferences [5]
• uncommercial transactions [6]
• insolvent transactions [7]
• unfair loans to a company [8]
• unreasonable director-related transactions [9] , and
• a director’s duty to prevent insolvent trading by the company [10] .

A company’s statutory causes of action which are not otherwise assignable cannot be assigned merely because of the liquidation of the company. For example, a claim in respect of misleading and deceptive conduct cannot be assigned [11] , and there is conflicting authority on whether a breach of director duties claim under s 180 to 184 of the Act is assignable [12] .

Once assigned, the plaintiff named in the action will be the assignee instead of the liquidator or the company.

Pricing the assignment

In pricing claims purchased by LCM, liquidators have relied on a discounted cashflow methodology to ascertain the present value of the claim. This process relies upon the preparation of a cashflow model which recognises cash outflows (legal fees, liquidator’s fees, disbursements, after-the-event insurance, funding and other costs) and cash inflows (claim value less settlement discount), which are then discounted at an appropriate discount rate to provide a current value of the claim.

In our experience, the use of this methodology allows for a clear and transparent pricing assessment, which can be objectively supported and justified to creditors and, if necessary, to the court. (Although any approval pursuant to s 477(2B) of the Act is unlikely to include a review of the commerciality of the transaction [13] and, in any event, we consider that the above approach would satisfy a liquidator’s obligations when exercising their powers pursuant to s 477 of the Act [14] ).

Structure of assignments

The purchase may be structured in a number of ways, including:

• One-off upfront paymen t – This allows the administration of the company to be finalised and funds to be distributed to creditors and other stakeholders.
• One-off payment upon the completion of investigations – This allows for the quantification of the claim by the purchaser, thereby de-risking the matter for the assignee and maximising purchase price and returns to creditors. LCM as assignee has successfully obtained eligible applicant status in order to conduct public examinations and facilitate this investigation phase post assignment.
• Split payment with an up-front component and a contingent back-end payment calculated as a percentage of the proceeds of recovery – While this requires the external administration to continue and creditors to await the outcome of the litigation, this structure maximises returns for creditors in circumstances where there is uncertainty regarding the claim size.

Regardless of the structure agreed, in our experience, the assignment of the cause of action has resulted in an earlier distribution to creditors and a much lower level of risk for liquidators.

Practical queries

A number of queries are often raised in relation to the practical aspects of a claim purchase, including:

Can the liquidator provide documents in relation to the claim to the assignee?

Yes. As discussed above, a liquidator may assign its right to sue under the Act [15] and ‘sell or otherwise dispose of, in any manner, all or any part of the property of the company’ [16] including a chose in action [17] . Pursuant to s 477(2)(m) of the Act, a liquidator may ‘do all such other things as are necessary for winding up the affairs of the company and distributing its property’.

By way of analogy, in order to sell the business of the company, certain financial records of the company must be provided to the purchaser. Similarly, in order to sell a claim and distribute the proceeds, certain financial records can be provided to the assignee. This is because the assignee must have access to certain documents in order to be in a position to run the purchased claim, much like the purchaser of a business requires company records to run the business.

Will confidentiality and privilege be preserved?

Yes. It is standard practice to enter into a confidentiality agreement prior to accepting documents in support of a funding application or potential assignment. The purpose of this agreement is to preserve confidentiality, the assignor’s privilege and the parties’ common interest privilege.

Both assignor and assignee ‘share an interest in the successful prosecution of the litigation and the advice given in relation to the litigation’ [18] . Nevertheless, when purchasing a claim by way of assignment, the assignee will often obtain its own independent legal advice.

Will the liquidator need to stay involved and how is that relationship governed?

Although uncommon, in some circumstances there may be a need for the liquidator to provide assistance to the assignee following an assignment.

In matters involving LCM, this issue has been resolved through provisions in the deed of assignment which allow LCM to obtain the liquidator’s services at their standard hourly rate, effectively on the basis of a consultancy. The structuring of the relationship in this way does not prevent the liquidator from finalising the relevant administration.

Change in funding dynamics

The changes to the Act allowing the sale of liquidators’ claims (along with the existing rights to assign company claims) have provided a significant change in the funding dynamics of insolvency claims.

In our experience, the ability to assign claims has resulted in improved outcomes for creditors and stakeholders generally. It has provided liquidators with additional flexibility and, notwithstanding some areas of uncertainty, is generally achieving the stated goal of enabling ‘the value in such rights to be realised’ [19] .

1 Secretary to the Treasurer and Attorney-General, Parliament of Australia, Proposals Paper: A modernisation and harmonisation of the regulatory framework applying to insolvency practitioners in Australia, (2011) 39.

2 Corporations Act 2001 (Cth) s 477(2)(c).

3 Insolvency Practice Schedule (Corporations) s 100-5.

4 Pentridge Village Pty Ltd (in liq) v Capital Finance Australia Ltd [2018] VSC 633; CGS Owners of Strata Plan No 5290 v CGS & Co Pty Ltd (2011) 81 NSWLR 285.

9 s 588FDA.

11 Pentridge Village Pty Ltd (in liq) v Capital Finance Australia Ltd [2018] VSC 633; Aquatic Air Pty Ltd v Siewert [2015] NSWSC 928.

12 Re Colorado Products Pty Ltd (in prov liq) (2014) 101 ACSR 233 compared with Re Novaline Pty Ltd (in liq) (2011) 282 ALR 49.

13 McLean v Elvapine Aberglasslyn Road Pty Ltd [2008] NSWSC 484.

14 Wentworth Metals Group Pty Ltd v Leigh and Owen (as liquidators of Bonython Metals Group Pty Ltd): In the matter of Bonython Metals Group Pty Ltd (in liq) [2013] FCA 349.

15 Insolvency Practice Schedule (Corporations) s 100-5.

16 s 477(2)(c).

17 s 9 (definition of ‘property’).

18 Slea Pty Ltd v Connective Services Pty Ltd [2017] VSC 361 [32].

19 Secretary to the Treasurer and Attorney-General, Parliament of Australia, Proposals Paper: A modernisation and harmonisation of the regulatory framework applying to insolvency practitioners in Australia, (2011) 39

Investment Manager - APAC

[email protected]

+61 418 815 863

Justin Ward

Portfolio Manager - APAC

[email protected]

+61 2 8098 1396

+61 420 305 345

Related Articles

Singapore considers conditional fee arrangements

Severance – it’s only Human

Chambers Global Practice Guide – Litigation Funding 2024 Australia

Keep in touch.

Sign up to receive the latest insights from LCM

• Insights & events

Assigning debts and other contractual claims - not as easy as first thought

Harking back to law school, we had a thirst for new black letter law. Section 136 of the Law of the Property Act 1925 kindly obliged. This lays down the conditions which need to be satisfied for an effective legal assignment of a chose in action (such as a debt). We won’t bore you with the detail, but suffice to say that what’s important is that a legal assignment must be in writing and signed by the assignor, must be absolute (i.e. no conditions attached) and crucially that written notice of the assignment must be given to the debtor.

When assigning debts, it’s worth remembering that you can’t legally assign part of a debt – any attempt to do so will take effect as an equitable assignment. The main practical difference between a legal and an equitable assignment is that the assignor will need to be joined in any legal proceedings in relation to the assigned debt (e.g. an attempt to recover that part of the debt).

Recent cases which tell another story

Why bother telling you the above?  Aside from our delight in remembering the joys of debating the merits of legal and equitable assignments (ehem), it’s worth revisiting our textbooks in the context of three recent cases. Although at first blush the statutory conditions for a legal assignment seem quite straightforward, attempts to assign contractual claims such as debts continue to throw up legal disputes:

• In  Sumitomo Mitsui Banking Corp Europe Ltd v Euler Hermes Europe SA (NV) [2019] EWHC 2250 (Comm),  the High Court held that a performance bond issued under a construction contract was not effectively assigned despite the surety acknowledging a notice of assignment of the bond. Sadly, the notice of assignment failed to meet the requirements under the bond instrument that the assignee confirm its acceptance of a provision in the bond that required the employer to repay the surety in the event of an overpayment. This case highlights the importance of ensuring any purported assignment meets any conditions stipulated in the underlying documents.
• In  Promontoria (Henrico) Ltd v Melton [2019] EWHC 2243 (Ch) (26 June 2019) , the High Court held that an assignment of a facility agreement and legal charges was valid, even though the debt assigned had to be identified by considering external evidence. The deed of assignment in question listed the assets subject to assignment, but was illegible to the extent that the debtor’s name could not be deciphered. The court got comfortable that there had been an effective assignment, given the following factors: (i) the lender had notified the borrower of its intention to assign the loan to the assignee; (ii) following the assignment, the lender had made no demand for repayment; (iii) a manager of the assignee had given a statement that the loan had been assigned and the borrower had accepted in evidence that he was aware of the assignment. Fortunately for the assignee, a second notice of assignment - which was invalid because it contained an incorrect date of assignment - did not invalidate the earlier assignment, which was found to be effective. The court took a practical and commercial view of the circumstances, although we recommend ensuring that your assignment documents clearly reflect what the parties intend!
• Finally, in Nicoll v Promontoria (Ram 2) Ltd [2019] EWHC 2410 (Ch),  the High Court held that a notice of assignment of a debt given to a debtor was valid, even though the effective date of assignment stated in the notice could not be verified by the debtor. The case concerned a debt assigned by the Co-op Bank to Promontoria and a joint notice given by assignor and assignee to the debtor that the debt had been assigned “on and with effect from 29 July 2016”. A subsequent statutory demand served by Promontoria on the debtor for the outstanding sums was disputed on the basis that the notice of assignment was invalid because it contained an incorrect date of assignment. Whilst accepting that the documentation was incapable of verifying with certainty the date of assignment, the Court held that the joint notice clearly showed that both parties had agreed that an assignment had taken place and was valid. This decision suggests that mistakes as to the date of assignment in a notice of assignment may not necessarily be fatal, if it is otherwise clear that the debt has been assigned.

The conclusion from the above? Maybe it’s not quite as easy as first thought to get an assignment right. Make sure you follow all of the conditions for a legal assignment according to the underlying contract and ensure your assignment documentation is clear.

Contact our experts for further advice

Search our site

Assignment Of Claim By A Liquidator

Home / Insolvency Guides And Information / Assignment Of Claim By A Liquidator

Overview Of Assignment Of Claim By Liquidator

During the course of a Liquidation , assignment of a claim by a Liquidator may be an issue that crops up as part of the winding down of the company.

What Is Assignment Of Claim?

Assignment of claim is the process that is typically processed through a document called a Deed Of Assignment whereby a claim or a cause of action that belonged to a Liquidator or a company that has gone into Liquidation is assigned to another party.

Factors For A Liquidator To Consider On Any Assignment

In order for the issue of the assignment of a claim to be considered by the Liquidator, he or she will usually need to consider:

• Details of the precise causes of action that they are asked to assign.
• Documents that evidence the facts that give rise to those causes of action.
• Terms upon which the Liquidator is asked to agree to the assignment ie. payment of monies in exchange and the timescales for receipt of those funds.
• Legal advice (or use of their own professional judgment) as to the merits of the suggested claims.
• The benefit to creditors from the assignment.
• Whether the Liquidator considers that it is in the best interests of creditors to run the claim(s) instead of granting an assignment.
• How to deal with claims that appear lacking in merit.

Claims Lacking Merit Or Spurious

If the claims proposed to be assigned do not seem meritorious, hopeless or very weak then a Liquidator may well be likely to refuse to grant any assignment.

The risk to a Liquidator who grants an assignment of a spurious claim is that it could give rise to a complaint and the Court may venture its displeasure in any judgment. It is possible, particularly if there is deferred consideration that the Court could actually award adverse costs against the Liquidator personally if he or she assigned a spurious claim that failed.

Are you a creditor or a Director of a company?

If you are a creditor or Director of an insolvent company or a bankruptcy, Oliver Elliot can help you. We Know Insolvency Inside Out.

Share This Page!

Expert advice is just a click away.

If you have any questions in relation to Assignment Of Claim By A Liquidator then contact us as soon as possible for advice. Oliver Elliot offers a fresh approach to insolvency and the liquidation of a company by offering specialist advice and services across a wide range of insolvency procedures.

Our expertise is at your fingertips.

By submitting this form you agree with the storage and handling of your data by Oliver Elliot. For more details, please read our Privacy Policy .

• Yes, I agree

Disclaimer: Assignment Of Claim By A Liquidator

This page Assignment Of Claim By A Liquidator   is not legal advice and should not be relied upon as such. This article is provided for information purposes only. You can contact us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.

Recent Posts / View All Posts

• Success stories
• Reported cases
• Testimonials
• Oliver Elliot Blog

Director Resources

• Debtor Portal
• Company Information Form
• Questionnaire For Directors
• CVL Starter Pack
• Consultancy Engagement Letter
• Insolvency and liquidation solutions
• Bounce Back Loan Help
• Company rescue
• Personal insolvency solutions
• Debt recovery
• Insolvency Helpline

Creditor resources

• Creditor portal
• Creditor updates
• Fee estimates
• Disbursement Policy
• Creditor rights
• Service regulations
• Accessibility
• Privacy Policy
• Cookie Policy
• Terms of use
• Making a complaint

London Office

Moda Business Centre Stirling Way Herts WD6 2BW

[email protected] +44 (0)20 3925 3613

© 2024 Oliver Elliot. All Rights Reserved. Registered in England and Wales. Company Number: 11746967

• Creditors Voluntary Liquidation (CVL)
• Members Voluntary Liquidation (MVL)
• Compulsory Liquidation
• Administration
• Company Voluntary Arrangement (CVA)
• Covid-19 Business Recovery Help
• Liquidate Company
• Can’t Pay Bounce Back Loan
• Personal Liability
• Your Options
• Strike Off Company
• Lose My Home
• Write Off Bounce Back Loan
• Resolve HMRC Tax Debts
• HMRC Tax Investigation
• Personal Liability Notice
• Accelerated Payment Notices
• Employee Benefit Trusts
• Tax Avoidance
• Insolvency recoveries
• Insolvency Litigation
• Forensic investigations
• Liquidation
• Bounce Back Loan
• Company closure
• Personal insolvency
• No recovery no fee
• Collect debt
• Change insolvency practitioner
• Creditor guides and rights
• Creditor Portal
• Tax avoidance
• Time to pay
• Director investigations
• Insolvency practitioner powers
• Legislation
• Director duties / disqualification
• Liquidator duties
• Administrator duties
• Trustee In Bankruptcy Duties
• Nominee Duties
• Insolvency Practitioner Duties
• Remove a liquidator
• Preferences
• Discovery and disclosure
• Duty to creditors
• Director duty
• Rescission of Wind Up Order
• Balance sheet assets

• Practical Law

Assignment of a claim or cause of action

Practical law uk practice note 1-522-7861  (approx. 32 pages).

• Court proceedings: restructuring & insolvency
• Property: restructuring & insolvency
• Restructuring and Insolvency Transactions
• Regulation, Powers and Duties of Insolvency Practitioners

FAC Number: 2024-03 Effective Date: 02/23/2024

Subpart 32.8 - Assignment of Claims

32.800 scope of subpart..

This subpart prescribes policies and procedures for the assignment of claims under the Assignment of Claims Act of1940, as amended, ( 31 U.S.C.3727 , 41 U.S.C.6305 ) (hereafter referred to as "the Act").

32.801 Definitions.

Designated agency , as used in this subpart, means any department or agency of the executive branch of the United States Government (see 32.803 (d)).

No-setoff commitment , as used in this subpart, means a contractual undertaking that, to the extent permitted by the Act, payments by the designated agency to the assignee under an assignment of claims will not be reduced to liquidate the indebtedness of the contractor to the Government.

32.802 Conditions.

Under the Assignment of Claims Act, a contractor may assign moneys due or to become due under a contract if all the following conditions are met:

(a) The contract specifies payments aggregating $1,000 or more.

(b) The assignment is made to a bank, trust company, or other financing institution, including any Federal lending agency.

(c) The contract does not prohibit the assignment.

(d) Unless otherwise expressly permitted in the contract, the assignment-

(1) Covers all unpaid amounts payable under the contract;

(2) Is made only to one party, except that any assignment may be made to one party as agent or trustee for two or more parties participating in the financing of the contract; and

(3) Is not subject to further assignment.

(e) The assignee sends a written notice of assignment together with a true copy of the assignment instrument to the-

(1) Contracting officer or the agency head;

(2) Surety on any bond applicable to the contract; and

(3) Disbursing officer designated in the contract to make payment.

32.803 Policies.

(a) Any assignment of claims that has been made under the Act to any type of financing institution listed in 32.802 (b) may thereafter be further assigned and reassigned to any such institution if the conditions in 32.802 (d) and (e) continue to be met.

(b) A contract may prohibit the assignment of claims if the agency determines the prohibition to be in the Government’s interest.

(c) Under a requirements or indefinite quantity type contract that authorizes ordering and payment by multiple Government activities, amounts due for individual orders for $1,000 or more may be assigned.

(d) Any contract of a designated agency (see FAR 32.801 ), except a contract under which full payment has been made, may include a no-setoff commitment only when a determination of need is made by the head of the agency, in accordance with the Presidential delegation of authority dated October 3,1995, and after such determination has been published in the Federal Register. The Presidential delegation makes such determinations of need subject to further guidance issued by the Office of Federal Procurement Policy. The following guidance has been provided:

Use of the no-setoff provision may be appropriate to facilitate the national defense; in the event of a national emergency or natural disaster; or when the use of the no-setoff provision may facilitate private financing of contract performance. However, in the event an offeror is significantly indebted to the United States, the contracting officer should consider whether the inclusion of the no-setoff commitment in a particular contract is in the best interests of the United States. In such an event, the contracting officer should consult with the Government officer(s) responsible for collecting the debt(s).

(e) When an assigned contract does not include a no-setoff commitment, the Government may apply against payments to the assignee any liability of the contractor to the Government arising independently of the assigned contract if the liability existed at the time notice of the assignment was received even though that liability had not yet matured so as to be due and payable.

32.804 Extent of assignee’s protection.

(a) No payments made by the Government to the assignee under any contract assigned in accordance with the Act may be recovered on account of any liability of the contractor to the Government. This immunity of the assignee is effective whether the contractor’s liability arises from or independently of the assigned contract.

(b) Except as provided in paragraph (c) of this section, the inclusion of a no-setoff commitment in an assigned contract entitles the assignee to receive contract payments free of reduction or setoff for-

(1) Any liability of the contractor to the Government arising independently of the contract; and

(2) Any of the following liabilities of the contractor to the Government arising from the assigned contract:

(i) Renegotiation under any statute or contract clause.

(ii) Fines.

(iii) Penalties, exclusive of amounts that may be collected or withheld from the contractor under, or for failure to comply with, the terms of the contract.

(iv) Taxes or social security contributions.

(v) Withholding or nonwithholding of taxes or social security contributions.

(c) In some circumstances, a setoff may be appropriate even though the assigned contract includes a no-setoff commitment; e.g.-

(1) When the assignee has neither made a loan under the assignment nor made a commitment to do so; or

(2) To the extent that the amount due on the contract exceeds the amount of any loans made or expected to be made under a firm commitment for financing.

32.805 Procedure.

(a) Assignments.

(1) Assignments by corporations shall be-

(i) Executed by an authorized representative;

(ii) Attested by the secretary or the assistant secretary of the corporation; and

(iii) Impressed with the corporate seal or accompanied by a true copy of the resolution of the corporation’s board of directors authorizing the signing representative to execute the assignment.

(2) Assignments by a partnership may be signed by one partner, if the assignment is accompanied by adequate evidence that the signer is a general partner of the partnership and is authorized to execute assignments on behalf of the partner-ship.

(3) Assignments by an individual shall be signed by that individual and the signature acknowledged before a notary public or other person authorized to administer oaths.

(b) Filing. The assignee shall forward to each party specified in 32.802 (e) an original and three copies of the notice of assignment, together with one true copy of the instrument of assignment. The true copy shall be a certified duplicate or photostat copy of the original assignment.

(c) Format for notice of assignment. The following is a suggested format for use by an assignee in providing the notice of assignment required by 32.802 (e).

Notice of Assignment

To: ___________ [ Address to one of the parties specified in 32.802 (e) ].

This has reference to Contract No. __________ dated ______, entered into between ______ [ Contractor’s name and address ] and ______ [ Government agency, name of office, and address ], for ________ [ Describe nature of the contract ].

Moneys due or to become due under the contract described above have been assigned to the undersigned under the provisions of the Assignment of Claims Act of1940, as amended, ( 31 U.S.C.3727 , 41 U.S.C.6305 ).

A true copy of the instrument of assignment executed by the Contractor on ___________ [ Date ], is attached to the original notice.

Payments due or to become due under this contract should be made to the undersigned assignee.

Please return to the undersigned the three enclosed copies of this notice with appropriate notations showing the date and hour of receipt, and signed by the person acknowledging receipt on behalf of the addressee.

Very truly yours,

__________________________________________________ [ Name of Assignee ]

By _______________________________________________ [ Signature of Signing Officer ]

__________________________________________________ [ Titleof Signing Officer ]

__________________________________________________ [ Address of Assignee ]

Acknowledgement

Receipt is acknowledged of the above notice and of a copy of the instrument of assignment. They were received ____(a.m.) (p.m.) on ______, 20___.

__________________________________________________ [ Signature ]

__________________________________________________ [ Title ]

__________________________________________________ On behalf of

__________________________________________________ [ Name of Addressee of this Notice ]

(d) Examination by the Government. In examining and processing notices of assignment and before acknowledging their receipt, contracting officers should assure that the following conditions and any additional conditions specified in agency regulations, have been met:

(1) The contract has been properly approved and executed.

(2) The contract is one under which claims may be assigned.

(3) The assignment covers only money due or to become due under the contract.

(4) The assignee is registered separately in the System for Award Management unless one of the exceptions in 4.1102 applies.

(e) Release of assignment.

(1) A release of an assignment is required whenever-

(i) There has been a further assignment or reassignment under the Act; or

(ii) The contractor wishes to reestablish its right to receive further payments after the contractor’s obligations to the assignee have been satisfied and a balance remains due under the contract.

(2) The assignee, under a further assignment or reassignment, in order to establish a right to receive payment from the Government, must file with the addressees listed in 32.802 (e) a-

(i) Written notice of release of the contractor by the assigning financing institution;

(ii) Copy of the release instrument;

(iii) Written notice of the further assignment or reassignment; and

(iv) Copy of the further assignment or reassignment instrument.

(3) If the assignee releases the contractor from an assignment of claims under a contract, the contractor, in order to establish a right to receive payment of the balance due under the contract, must file a written notice of release together with a true copy of the release of assignment instrument with the addressees noted in 32.802 (e).

(4) The addressee of a notice of release of assignment or the official acting on behalf of that addressee shall acknowledge receipt of the notice.

32.806 Contract clauses.

(1) The contracting officer shall insert the clause at 52.232-23 , Assignment of Claims, in solicitations and contracts expected to exceed the micro-purchase threshold, unless the contract will prohibit the assignment of claims (see 32.803 (b)). The use of the clause is not required for purchase orders. However, the clause may be used in purchase orders expected to exceed the micro-purchase threshold, that are accepted in writing by the contractor, if such use is consistent with agency policies and regulations.

(2) If a no-setoff commitment has been authorized (see 32.803 (d)), the contracting officer shall use the clause with its AlternateI.

(b) The contracting officer shall insert the clause at 52.232-24 , Prohibition of Assignment of Claims, in solicitations and contracts for which a determination has been made under agency regulations that the prohibition of assignment of claims is in the Government’s interest.

Definitions

FAC Changes

Style Formatter

• Data Initiatives
• Regulations
• Smart Matrix
• Regulations Search
• Acquisition Regulation Comparator (ARC)
• Large Agencies
• Small Agencies
• CAOC History
• CAOC Charter
• Civilian Agency Acquisition Council (CAAC)
• Federal Acquisition Regulatory Council
• Interagency Suspension and Debarment Committee (ISDC)

ACQUISITION.GOV

An official website of the General Services Administration

• Download PDF

• Assigning Bankruptcy Claims to Claims Traders
• Assigning Bankruptcy Claims to Claims Traders Overview
• Bankruptcy and Restructuring
• Security Agreements and UCC Filings in Bankruptcy
• Acquiring Assets from Bankruptcy Estates and Distressed Borrowers
• Workout, Refinancing, and Restructuring Opportunities Outside of Bankruptcy
• Representing Creditors in Bankruptcy Court and Pre-Petition Negotiations
• Pursuing Assignments for the Benefit of Creditors
• Debtor-in-Possession Financing and Cash Collateral
• Preventing Debtor Bankruptcy Through Liquidation, Restructuring, and Reorganization
• Proofs of Claim
• Estate Disputes Over the Treatment of Differing Creditor Claims, Transfer Avoidance, Breach of Fiduciary Duty, and Alter Ego Liability
• Reconciling Creditors Committee Interests to Avoid Litigation and Expedite Recovery
• Litigating Parasitic State Court Claims on Behalf of the Estate
• Adversary Proceedings to Set Aside Preference Payments and Fraudulent Transfers
• Creditors’ Committees and Trustees
• Defending Against Involuntary Bankruptcy Petitions
• Advising Insolvent Companies on Fiduciary Duties and Winding Down
• Establishing a Restructuring Agenda
• Recovering from Non-Debtor Entities
• Filing Involuntary Bankruptcy Petitions
• Foreclosure or Repossession During Bankruptcy
• The Impact of Commercial Reorganization on Creditors
• Trade Supplier Relations with Financially Distressed Customers
• Creditor’s Committees and Trustees
• Adversary Proceedings in Bankruptcy
• Relief from the Automatic Stay
• Bankruptcy Defense: Fraudulent Transfers and Preferential Payments

What does assigning bankruptcy claims to claims traders encompass?

Assigning bankruptcy claims to claims traders involves the transfer of a creditor’s rights to collect on a debt from the original creditor to a third-party investor or claims trader. In the context of bankruptcy legal services for creditors in Florida, claims traders can purchase claims from the original creditor at a discounted rate, expecting to recover more than the purchase price during the bankruptcy process.

For example, under Florida and federal law, a creditor with a claim against a debtor in a Chapter 11 bankruptcy case may decide to assign their claim to a claims trader. The claims trader would negotiate a purchase price with the original creditor and, once the claim is assigned, step into the shoes of the original creditor in the bankruptcy proceedings. This process allows the original creditor to receive a portion of their claim amount upfront and avoid the uncertainty of the bankruptcy process.

Need a bankruptcy law advocate? Schedule your consultation today with a top bankruptcy and restructuring attorney.

Which Florida laws and regulations apply to assigning bankruptcy claims to claims traders?

In Florida, the process of assigning bankruptcy claims to claims traders is primarily governed by federal law, as bankruptcy proceedings fall under federal jurisdiction. The Bankruptcy Code, specifically  11 U.S.C. § 101 et seq. , provides the framework for bankruptcy cases, including the treatment of claims.

A critical aspect of the Bankruptcy Code relevant to claims traders is the concept of “allowance” and “disallowance” of claims, governed by  11 U.S.C. § 502 . This section sets forth the process by which claims are either allowed or disallowed in a bankruptcy case and, thus, directly impacts claims traders who have acquired assigned claims.

Furthermore, the Federal Rules of Bankruptcy Procedure, specifically  Rule 3001 , detail the requirements for filing and transferring proofs of claim in a bankruptcy case. Claims traders must follow these procedural rules to ensure their assigned claims are correctly recognized and treated during the bankruptcy process.

How does assigning bankruptcy claims to claims traders connect to the bankruptcy process?

The assignment of bankruptcy claims to claims traders directly affects the bankruptcy process as it introduces a new party into the proceedings. By purchasing claims from original creditors, claims traders essentially step into the shoes of the original creditors, participating in the bankruptcy case and seeking to recover a higher amount than the purchase price. However, purchasing claims can introduce potential litigation risks, such as disputes over the assignment’s validity, the assigned claim’s priority, or the claim’s value.

For instance, under  11 U.S.C. § 502 , a claim can be subject to objection, leading to litigation if the debtor, the trustee, or another party in interest disputes the assigned claim’s validity or amount. Additionally, a claims trader’s motivations may differ from the original creditor, potentially leading to more aggressive tactics in pursuit of recovery and increasing the likelihood of litigation.

When a set of facts is appropriate for bankruptcy services, there are many paths a claimant may take. We are value-based attorneys at Jimerson Birr, which means we look at each action with our clients from the point of view of costs and benefits while reducing liability. Then, based on our client’s objectives, we chart a path to seek appropriate remedies.

To determine whether your unique situation may necessitate litigation or another form of specialized bankruptcy advocacy, please contact our office to set up your initial consultation.

What steps should creditors take to mitigate the risks of assigning bankruptcy claims to claims traders?

Consider the following strategies:

• Perform due diligence: Before assigning a claim, creditors should conduct thorough due diligence on potential claims traders, including their track record, litigation history, and financial stability. Comprehensive due diligence can help ensure a smoother assignment process and reduce potential disputes.
• Review assignment agreement: Creditors should work with experienced bankruptcy counsel to draft and review the assignment agreement to ensure it clearly outlines the rights and responsibilities of both parties. A well-drafted agreement can minimize ambiguities and potential disputes over the assignment.
• Comply with procedural requirements: Creditors must adhere to the Federal Rules of Bankruptcy Procedure when assigning claims. In addition, properly filing and transferring proofs of claim can help avoid challenges to the assigned claim’s validity.
• Monitor bankruptcy proceedings: Even after assigning a claim, creditors should monitor the bankruptcy case and stay informed about any developments that may impact their claim or the claims trader’s actions. Keeping an open line of communication with the claims trader can help address any concerns and mitigate potential litigation risks.
• Consult with legal counsel: Engaging experienced bankruptcy counsel throughout the assignment process can help creditors navigate complex legal issues, ensure compliance with relevant laws and regulations, and proactively address potential litigation risks.

Please contact our office to set up your initial consultation to see what forms of legal protection and advocacy may be available for your unique situation.

How should bankruptcy counsel facilitate assigning bankruptcy claims to claims traders?

Counsel should consider the following to protect their clients:

• Legal compliance: Counsel ensures compliance with federal and Florida bankruptcy laws and Federal Rules of Bankruptcy Procedure, particularly in transferring proofs of claim and adhering to notice requirements.
• Drafting and reviewing assignment agreements: Experienced bankruptcy counsel helps prepare and review assignment agreements, safeguarding the parties’ interests and minimizing ambiguities that may lead to disputes.
• Due diligence: Counsel assists in conducting due diligence on claims traders, evaluating their litigation history, financial stability, and track record to ensure a smooth assignment process.
• Negotiation support: Bankruptcy counsel supports creditors in negotiating favorable terms in the assignment agreement, maximizing the creditor’s return and protecting their rights.
• Monitoring bankruptcy proceedings: Counsel keeps creditors informed about developments in the bankruptcy case even after the assignment, ensuring that the claims trader’s actions align with the creditor’s interests.

Frequently Asked Questions

• How does the bankruptcy court treat the assignment of claims to claims traders?

Bankruptcy courts typically treat claims traders as the successors to the original creditors’ rights, allowing them to participate in the bankruptcy case and seek recovery on the assigned claim. However, the claims trader must comply with the Federal Rules of Bankruptcy Procedure and applicable state laws, and their claims may still be subject to objections or challenges.

• Are there any restrictions on assigning bankruptcy claims to claims traders?

Certain restrictions may apply depending on the bankruptcy case’s specific claim, jurisdiction, or circumstances. Therefore, consulting with experienced bankruptcy counsel is essential to identify potential restrictions or limitations on assigning claims in a particular case.

• How do claims traders profit from purchasing bankruptcy claims?

Claims traders profit by purchasing claims at a discount from the original creditor and then seeking to recover a higher amount through bankruptcy. This recovery may come from cash distributions or other assets from the debtor’s bankruptcy estate. The difference between the purchase price and the recovery amount represents the claims trader’s profit.

Have more questions about how bankruptcy services could positively impact your business operations and relationships?

Crucially, this overview of assigning bankruptcy claims to claims traders does not begin to cover all the laws implicated by this issue or the factors that may compel the application of such laws. Every case is unique, and the laws can produce different outcomes depending on the individual circumstances.

Jimerson Birr attorneys guide our clients to help make informed decisions while ensuring their rights are respected and protected. Our lawyers are highly trained and experienced in the nuances of the law, so they can accurately interpret statutes and case law and holistically prepare individuals or companies for their legal endeavors. Through this intense personal investment and advocacy, our lawyers will help resolve the issue’s complicated legal problems efficiently and effectively.

Having a Jimerson Birr attorney on your side means securing a team of seasoned, multi-dimensional, cross-functional legal professionals. Whether it is a transaction, an operational issue, a regulatory challenge, or a contested legal predicament that may require court intervention, we remain tireless advocates at every step. Being a value-added law firm means putting the client at the forefront of everything we do. We use our experience to help our clients navigate even the most complex problems and come out the other side triumphant.

If you want to understand your case, the merits of your claim or defense, potential monetary awards, or the amount of exposure you face, you should speak with a qualified Jimerson Birr lawyer. Our experienced team of attorneys is here to help. Call Jimerson Birr at (904) 389-0050 or use the contact form to schedule a consultation .

We live by our 7 Superior Service Commitments

• Conferring Client-Defined Value
• Efficient and Cost-Effective
• Accessibility
• Delivering an Experience While Delivering Results
• Meaningful and Enduring Partnership
• Exceptional Communication Based Upon Listening
• Accountability to Goals

Assignment for the Benefit of Creditors: Stay of Litigation

Assignment for the Benefit of Creditors: General Overview

latest Blog Posts

Professional services industry legal blog.

Reasonable and Effective Non-Compete Clauses from the Employer’s Perspective Read More

Join our mailing list.

Call our experienced team., we’re here to help, connect with us., call our experienced team..

The Bar Council of India does not permit advertisement or solicitation by advocates in any form or manner. By accessing this website, www.khaitanco.com, you acknowledge and confirm that you are seeking information relating to Khaitan & Co of your own accord and that there has been no form of solicitation, advertisement or inducement by Khaitan & Co or its members. The content of this website is for informational purposes only and should not be interpreted as soliciting or advertisement. No material/information provided on this website should be construed as legal advice. Khaitan & Co shall not be liable for consequences of any action taken by relying on the material/information provided on this website. The contents of this website are the intellectual property of Khaitan & Co.

Transfer of Illiquid Assets and Assignment of Creditor Claims: IBBI Amends Liquidation Regulations to Hasten the Process

The Insolvency and Bankruptcy Board of India (IBBI) on 13 November 2020 issued the Insolvency and Bankruptcy Board of India (Liquidation Process) (Fourth Amendment) Regulations, 2020 (Amendment) which introduced seminal changes to the liquidation regime under the Insolvency and Bankruptcy Code, 2016 (IBC). The Amendment has been introduced on the back of the discussion paper issued by IBBI on 26 August 2020 on Corporate Liquidation Process (Discussion Paper). This Amendment proposes solutions to resolve 2 major issues which plagued the efficacious and expeditious completion of a corporate liquidation process under the IBC, (a) assignment by a creditor of its claims / interest during liquidation; and (ii) disposal / assignment of non-readily realisable / illiquid assets. In this paper we are analysing these two issues, the manner in which the Amendments modify the corporate liquidation framework vis-à-vis these issues and their impact on the corporate liquidation process.

THE TWO KEY ISSUES

ISSUE 1: ASSIGNMENT OF CLAIMS/INTERESTS DURING LIQUIDATION

During the liquidation process, a creditor is required to file its claim with the liquidator. Subsequently, such claim gets settled pursuant to the realisation of the assets in the liquidation estate of the corporate debtor and its subsequent distribution in the manner set out in Section 53 of the IBC. This is a time-consuming process.

It is relevant to note that the scheme of the IBC allows a creditor to assign its claims in favour of a third party. Sections 5(7) and 5(20) of the IBC stipulate that the assignee of a financial debt or an operational debt shall also be considered as a financial creditor or an operational creditor, respectively. Further, in the context of a corporate insolvency resolution process, a creditor is allowed to assign the debt owed to it by a corporate debtor in favour of a third party in terms of Regulation 28 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations). However, the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations (Liquidation Regulations) did not, until the Amendment, set out an explicit mechanism by which a creditor could assign the debt owed to it by the corporate debtor, in favour of a third party.

Recognising this lacuna, the Discussion Paper proposed that a provision similar to that in the CIRP Regulations may be provided under Liquidation Regulations to enable exit of stakeholders who prefer not to wait until the realisation of assets and distribution of its proceeds. Pursuant to this suggestion offered in the Liquidation Regulations, the Amendment introduced Regulation 30A to the Liquidation Regulations , which inter alia , now stipulates that:

Thus, the Liquidation Regulations now provide a mechanism for assignment of claims which is similar to that already provided under the relevant regulations for the corporate insolvency resolution process (CIRP). Accordingly, an assignee of a creditor’s claim can be treated as a creditor during liquidation.

ISSUE 2: THE TREATMENT OF NON-READILY REALISABLE ASSETS DURING LIQUIDATION

It is a well settled principle that 2 of the most important objectives of the IBC are: (a) timebound resolution of stress of the corporate debtor; and (b) maximisation of value of the assets of the corporate debtor to ensure maximum recovery of dues by the creditors of such corporate debtor (Twin Objectives). The entire scheme of the IBC, including the CIRP and the liquidation process have been formulated in a manner which, inter-alia, ensures that the said Twin Objectives are met in a fixed time frame.

Under the IBC, the legal framework pertaining to liquidation process of the corporate debtor have been set out in Chapter III of Part II of the IBC read with the Liquidation Regulations. The said framework attempts to ensure that the said Twin Objectives are realised to the greatest extent possible. For example: (a) Regulation 44(1) of the Liquidation Regulations stipulates that a liquidator is required to complete the liquidation process within a period of 1 year from the date of commencement of the liquidation process of the corporate debtor; and (b) Regulation 32 read with Regulation 32A of the Liquidation Regulations stipulate 6 different methods by which a liquidator may sell the assets of a corporate debtor.

However, notwithstanding the above, the realisation of the Twin Objectives in the context of liquidation process of a corporate debtor has been severely impeded on account of the presence of ‘non-readily realisable assets’ (NRRA) of the corporate debtor. Acknowledging the same, the Discussion Paper elucidated the challenges posed by the presence of NRRAs in the liquidation estate of a corporate debtor and set out the possible solutions to address these challenges. To put the issue in perspective, we have set out below (i) the meaning of NRRAs; (ii) the problems posed by them to the realisation of Twin Objectives; and (iii) means of resolving the problem of NRRAs in a liquidation estate.

Meaning of NRRAs: A liquidator pursuant to its appointment is required to take into his/her custody and control the assets of the corporate debtor, and form the liquidation estate in terms of Section 35 of the IBC. Some of these assets of the corporate debtor may not be readily convertible into cash and distributed among the stakeholders of the corporate debtor and/or may require an indefinite time for their realisation on account of peculiar nature of such assets or special circumstances. These assets include sundry debts (such as refunds from Government and its agencies), contingent receivables, disputed receivables, disputed assets, assets underlying avoidance transactions etc. The Discussion Paper defines such assets as NRRA.

The Problem Posed by NRRAs: The presence of NRRAs is detrimental to the achievement of the Twin Objectives, that too within the strict timelines prescribed under the IBC. Considering that the time taken to realise NRRAs is uncertain, the completion of the liquidation process and the subsequent dissolution of the corporate debtor may take an inordinate amount of time. This is in stark contravention to one of the most central tenets of the IBC ie., the expeditious and time bound resolution of stress of the corporate debtor. Further, as rightly observed in the Discussion Paper, if the dissolution is kept pending for want for realisation of such assets, then not only the liquidation cost keeps accruing continuously but also the value of the assets keeps on depreciating with time. This prejudicially affects the maximisation of value of the assets of the corporate debtor and as a result prejudicially affects credit recovery for the claimants.

A second conundrum pertaining to NRRAs is that the realisation of NRRAs would require time, effort and most importantly, costs on the part of the liquidator. A liquidator is required to take action to recover the amount receivable from the contingent assets (receivables) which may accrue to a corporate debtor based on an occurrence of uncertain future events over which the liquidator has no control whatsoever. Further, contingent receivables are usually a subject matter of litigation which not only leads to inordinate delays in crystallisation of such contingent claims but also entails the liquidator incurring substantial legal costs. The lack of funding during liquidation severely complicates the matters further for the liquidator. These delays and costs severely depreciate the value of the liquidation estate of the corporate debtor and prejudicially affect the monie s recovered by the creditors of such corporate debtor pursuant to the completion of the liquidation process. However, if the NRRAs are left unrealised and the corporate debtor is dissolved, then the assets end up getting locked and no stakeholder finds merit in pursing assets with relevant authorities/ forums, which in turn leads to loss in value of unclaimed assets, which could otherwise have been used to maximise recoveries.

Proposed Solution: The Discussion Paper sets out that a viable solution to resolve the issue of NRRA is to allow the liquidator to assign the NRRAs for any such amount which the market is willing to pay, and distribute the same among stakeholders. Further, the Discussion Paper proposes that when the liquidation estate of the corporate debtor is insufficient to pay the debts, then the liquidators can be provided with the right to assign certain statutory rights of action (such as avoidance transactions actions, contingent claims etc.), to the third parties. This ensures an expeditious conversion of NRRAs into cash. Further, if the liquidator takes proactive measures to assign NRRAs then such assignment can be made for a lucrative consideration prior to the assets of the corporate debtor depreciating in value. Accordingly, allowing the liquidator to assign the NRRAs and thereby ensuring the better realisation of the Twin Objectives in a liquidation process.

Amendment to the Liquidation Regulations: Acknowledging the issue identified in the Discussion Paper and the solution offered to redress this issue, the Amendment introduced Regulation 37A to the Liquidation Regulations which introduces the concept of NRRAs to IBC. Regulation 37A defines NRRA as an asset which is included in the liquidation estate of the corporate debtor which could not be sold through available options. It further clarifies that NRRAs inter-alia include contingent or disputed assets and assets underlying proceedings for preferential, undervalued, extortionate credit and fraudulent transactions referred to in Sections 43 to 51 and Section 66 of the IBC.

Further, Regulation 37A stipulates that a liquidator may assign or transfer a NRRA through a transparent process, in consultation with the stakeholders’ consultation committee set up under Regulation 31A of the Liquidation Regulations. It further sets out that such assignment cannot be made by the liquidator in favour of a person who is disqualified to submit a resolution plan for a corporate debtor undergoing corporate insolvency resolution process under the provisions of Chapter II of Part II of the IBC (Ineligible Person). This condition is consistent with the general principle set out in proviso to Section 35(1)(f) of the IBC, which sets out that a liquidator cannot sell movable or immovable properties of the corporate debtor or actionable claims of the corporate debtor in a liquidation process to an Ineligible Person.

In addition to the above, the Amendment also modified Regulation 38 of the Liquidation Regulations. Prior to the Amendment, Regulation 38 provided that “a liquidator may, with the permission of the Adjudicating Authority, distribute amongst the stakeholders, an asset that cannot be readily or advantageously sold due to its peculiar nature or other special circumstances.” The Amendment modifies Regulation 38 of the Liquidation Regulations, and the same now reads as “a liquidator may, with the permission of the Adjudicating Authority, distribute amongst the stakeholders, an asset that could not be sold, assigned or transferred due to its peculiar nature or other special circumstances.” Vide this amendment to Regulation 38, the Amendment harmonises the language of Regulation 38 with the newly inserted Regulation 37A of the Liquidation Regulations.

The issues set out in the Discussion Paper are indeed substantial issues which have been causing serious detriment to the efficacious and swift completion of a liquidation process. The presence of illiquid assets not only hamper the value maximisation of the liquidation estate of the corporate debtor but also substantially slow down the pace of the liquidation process. It is relevant to note that as per the figures set out in the Quarterly Newsletter published by the IBBI for the months of April to June 2020, out of the 955 cases wherein liquidation was initiated, only 88 cases have been finally completed. It is relevant to note that out of the remaining 867, around 428 cases have been under liquidation for more than the period of 1 year, as stipulated in terms of Regulation 44 of the Liquidation Regulations.

The changes introduced by way of the Amendment are expected to effectively address both the aforementioned issues. The right conferred on the liquidator to assign NRRAs will help create a niche market for such illiquid assets allowing the buyers with deep pockets and specialisation to acquire these assets and pursue recoveries. This not only helps in the monetisation of otherwise illiquid assets but also helps speed up the liquidation process by relieving the liquidator of the obligation to invest time and expenses in realising these assets. This is more often in cases where the liquidator does not have sufficient funds to meet the mounting legal expenses. Additionally, as rightly set out in the Discussion Paper, the right conferred on the creditors to assign their exposure in the liquidator, in favour of the liquidator, is to enable exit of stakeholders who prefer swifter recoveries at a fair discount.

-      Rajeev Vidhani (Partner), Himanshu Vidhani (Senior Associate) and Ashwij Ramaiah (Associate)

For any queries please contact: [email protected]

Rajeev Vidhani (partners)

We have updated our Privacy Policy , which provides details of how we process your personal data and apply security measures. We will continue to communicate with you based on the information available with us. You may choose to unsubscribe from our communications at any time by clicking here.

For private circulation only

The contents of this email are for informational purposes only and for the reader’s personal non-commercial use. The views expressed are not the professional views of Khaitan & Co and do not constitute legal advice. The contents are intended, but not guaranteed, to be correct, complete, or up to date. Khaitan & Co disclaims all liability to any person for any loss or damage caused by errors or omissions, whether arising from negligence, accident or any other cause.

© 2021 Khaitan & Co. All rights reserved.

One Forbes 3rd & 4th Floors, No. 1 Dr. V. B. Gandhi Marg Fort, Mumbai 400 001

T: +91 22 6636 5000

E: [email protected]

119/65, First Floor Dr Radhakrishnan Salai Mylapore Chennai 600 004, India

T: +91 11 4151 5454

E: [email protected]

Max Towers 7th & 8th Floors Sector 16B, Noida Gautam Buddh Nagar 201 301 India

T: +91 80 4339 7000

E: [email protected]

Ocean Financial Centre #37-02 10 Collyer 37th Floor Quay Raffles Place 049315, Singapore

E: [email protected]

Afristrat Investment Holdings Faces Continued Legal Challenges Over Liquidation Claims

12 Apr 2024 (Johannesburg Stock Exchange) Afristrat Investment Holdings Limited has been entangled in ongoing legal proceedings regarding liquidation claims, as updates emerge on separate applications from a creditor and an ordinary shareholder, according to recent filings on the Johannesburg Stock Exchange's Securities Exchange News Service (SENS).

In a notice dated March 8, 2024, the company informed holders of its securities that a creditor, who previously initiated a liquidation application against Afristrat, is planning to reschedule the hearing after it was removed from the court schedule. The original hearing was set for July 20, 2023, but has been pending a final decision on the initial liquidation application.

Further complicating the company's legal landscape, a court decision on February 21, 2024, dismissed another liquidation application made by an ordinary shareholder. The court's decision to reject the shareholder's claim for liquidation included an order for costs against the applicant. Following this, the shareholder has sought permission to appeal the decision, which will be reviewed in court at a later date.

The progression of the shareholder's appeal will take priority, effectively pausing any proceedings related to the creditor's original liquidation claim against the company. This development ensures that the creditor cannot move forward with their application until the appeal has been resolved.

Afristrat has promised to keep its shareholders informed with further announcements through SENS as the situation develops.