The first of many? The ATO takes its first assignment, but it’s secret!

Since the introduction of the Insolvency Practice Schedule (“IPS”) into the Corporations Act 2001 (“the Act”) in 2017, liquidators have been permitted to assign causes of action held in their name to third parties[1].

However, it appears that the Commissioner of Taxation has not availed himself of that provision, until recently.

Steve Nicols is the liquidator of Anatax Pty Ltd (“Anatax”).  Mr Nicols had agreed to assign all causes of action (presumably in the company’s name and his own) to the Commissioner of Taxation by a deed dated 18 April 2019.  The Federal Court had already provided approval for him to enter into that assignment[2].  That application was based upon the general power to dispose of assets given to liquidators in section 477 of the Act, but since the assignment imposed obligations upon Anatax for longer than 3 months, the liquidator was required to obtain the approval of the Court before the assignment was effective[3].  It was a simple decision for Justice Perram last year, since Mr Nicols was uunfunded; the ATO is the only creditor of Anatax; and the ATO claims to be owed more than $5mil.

There was no mention in the judgment of Justice Perram last year regarding the novelty of this assignment for the ATO. Mr Nicols more recently sought extended confidentiality orders from the Federal Court of Australia over the assignment documents, and the affidavits and exhibits upon which he relied.  It was in that judgment that it was disclosed that it was the first of its kind for the Commissioner of Taxation.

Extent of s100-5

Firstly, it is important to note what can and cannot be assigned by an “external administrator”[4] of a company.  Section 477(2)(c) of the Act permits a sale or disposal of any “property” of the company.  Section 100-5 permits the external administrator to assign “any right to sue that is conferred on the external administrator” by the Act (my emphasis).

There are certain rights that are conferred only upon a liquidator in the Act to make applications for orders, including all the “voidable transactions” referred to in Part 5.7B of the Act.  These include unfair preferences, uncommercial transactions, unfair loans, unreasonable director-related transactions and the new kid on the block: creditor-defeating dispositions.  It also extends to insolvent trading claims against directors.

One slight wrinkle in this assignment power is if the court action has already been commenced, then the liquidator requires approval of the Court to assign the action[5].

The liquidator also must give creditors written notice of any proposed assignment.

However, if the company has a cause of action based, for instance, on a breach of contract with a third party, that action is not a right that is conferred upon the liquidator.  Likewise, “personal” causes of action based upon negligence or other torts, remain in the name of the company.  Those “bare” causes of action are more difficult to assign[6], but it is clear that they are not causes of action “conferred on” a liquidator by the Act.  They could therefore not be assigned under s100-5 of the IPS.

Why assign?

In circumstances where the ATO is often the largest, or one of the largest, creditors in many corporate liquidations, it stands to gain the major benefit of any recovery from these claims that would be available to liquidators.  Moreover, liquidators are often unfunded to commence and conduct such claims.

If a liquidator can be paid by the ATO to assign such claims, all the creditors can – or at least certainly should – benefit from the assignment fee paid into the liquidation.

But what is the price to be paid?  It cannot be a nominal amount, as no benefit would be achieved by the liquidator or the creditors.

And if the ATO is now prepared to “buy” these causes of action, wouldn’t all liquidators surely like to know what was paid in the case of Anatax?

This is precisely what the Federal Court was asked to focus upon when making confidentiality orders over this particular assignment.

The first one for the ATO

Justice Markovic of the Federal Court noted in her judgment delivered on 16 September 2020[7] that “this is the first time that the Commissioner has taken an assignment of that nature pursuant to s100-5”.  The Commissioner for Taxation had also confirmed that “there may be other present or future instances where the Commissioner wishes to negotiate a similar or different arrangement pursuant to s 100-5 of the IPS and, in those circumstances, the Commissioner is concerned that access to and disclosure of the deed of assignment might affect any negotiations in the future for a similar transaction.”

Justice Markovic agreed and concluded that “the Commissioner sought the assignment so that he could take action for the recovery of monies. This is the first time he has done so in furtherance of his role as the person charged with the administration of the Tax Administration Act. He may wish to do so again in order to recover funds owing by taxpayers for the benefit of creditors including the Commonwealth. His ability to do so may be compromised if the terms on which this assignment was effected become known at least in the near future.”

All the documents concerning the assignment were therefore ordered to remain confidential until 30 June 2021.

Anatax would probably set the high bar for the price a creditor might pay to take an assignment of such causes of action, because the ATO is the only creditor in that liquidation and is owed more than $5mil.  It was the only one who stood to gain from running the claims.  The ATO might therefore have been prepared to pay a premium for the right to sue various parties.  On the other hand, if the ATO is only one of hundreds of creditors, and it may not be the largest, obviously the price it might be prepared to pay will be less.

You may also be asking yourself: if the ATO is the sole creditor, why did it not just fund the liquidator to run the actions?  This is particularly so, if the liquidator also has powers to compel documents to be produced and answers to be given at a Public Examination, which the ATO probably will not have merely by virtue of the assignment of the cause of actions.  Perhaps the reason might be that the ATO would keep its costs “in-house”, rather than having to pay for the liquidator’s external lawyers, and the ongoing fees of the liquidator.

Whatever was the reasoning behind the ATO’s first assignment from a liquidator, I expect that it will have undertaken quite a number of these assignments from liquidators before we learn all the facts come 30 June next year.

[1] Pursuant to s100-5 of Insolvency Practice Schedule, Schedule 2 Corporations Act 2001

[2] Nicols, in the matter of Anatax Pty Ltd (in liquidation) [2019] FCA 1528

[3] Section 477(2B) of the Act

[4] Defined in s5-20 of the Insolvency Practice Schedule as an Administrator, Deed Administrator, liquidator or provisional liquidator of a company

[5] s100-5(2)

[6] And are still debated in Australian courts.

[7] Nicols, in the matter of Anatax Pty Ltd (in liq) [2020] FCA 1320