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October 2007 Newsletter How to get more for your dollar - creditor indemnities An important role of a Liquidator is to maximise the return from the collection and sale of the assets of the company. This not only relates to the physical assets but includes such things as securing a return from voidable transactions (eg: preferential payments), taking action against directors for insolvent trading and pursuing and/or settling legal claims that existed at the time of the Liquidator’s appointment or which arise later. Unfortunately, in many cases the funds available to the Liquidator are insufficient to properly investigate and pursue these claims leaving the Liquidator to ask creditors for an indemnity for the costs of the investigation. This will often include undertaking a public examination, and legal recovery action. The Process Normally the Liquidator enquires of creditors whether or not they are willing to provide funding by sending a report on details of the proposed action; including particulars of any preliminary legal advice that has been received, the likelihood of success and an estimate of the ongoing costs. If creditors are willing to provide an indemnity, a formal meeting will be held at which creditors can resolve whether the Liquidator should proceed; with a course of action and a framework to go forward being agreed. What Indemnifying Creditors can Receive If some creditors provide an indemnity where other creditors do not, when funds are recovered, the indemnifying creditors can in addition to the repayment of the costs they have paid, be paid a greater proportion of the funds recovered as a result of the action they have funded. This is provided by section 564 of the Corporations Act 2001. The Corporations Act 2001 Section 564 of the Act states: “Where in a winding up: (a) property has been recovered under an indemnity for costs of litigation given by certain creditors, or has been protected or preserved by the payment of monies or the giving of indemnity by creditors; or (b) expenses in relation to which creditor has indemnified a liquidator have been recovered, the Court may make such orders, as it deems just with respect of the distribution of that property and the amount of those expenses so recovered with a view to giving those creditors an advantage over others in consideration of the risk assumed by them.” The Court The Court will decide what proportion of the funds recovered will be made available to the indemnifying creditors. In instances this has been up to 100% of those monies. Generally the Court balances the funding against the claims of other creditors and by considering the amounts owed to those creditors normally afforded priority in the administration; such as employee entitlements and amounts paid to employees by General Employee Entitlements Redundancy Scheme (“GEERS”). [After providing funds to a Liquidator for a company’s outstanding employee entitlements, GEERS are provided a priority of payment pursuant to section 560 of the Corporations Act]. When exercising its discretion to prefer indemnifying creditors, the Court will be guided by: The amount of risk assumed by the creditors in providing the indemnity; The quantum of the funds recovered from the action; The proportion between the debts of the indemnifying creditors and the non-indemnifying creditors. The Courts do encourage creditors to provide an indemnity in cases where no action can otherwise be taken to pursue a recovery of monies. In Summary In many administrations a Liquidator does not have sufficient funds with which to properly investigate and pursue actions that could increase the funds available to the administration. After consideration of the action and obtaining preliminary legal advice the Liquidator may seek an indemnity from creditors for the costs to pursue a course of action. Pursuant to section 564 of the Corporations Act 2001, an application can be made to Court whereby indemnifying creditors can be paid a greater proportion of the funds realised from the action than non-indemnifying creditors.
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