Assigning liquidators' rights of action to third parties

Jane Henderson explains how a liquidator can now assign certain rights of action and the proceeds of that action to other parties.  

A liquidator has a duty to take control of and realise company assets for the benefit of creditors. Once appointed, the liquidator will ingather and administer company assets, examine directors’ conduct, and investigate possible challengeable transactions.

Where appropriate, court action can be raised, but lack of funds often prevents action being taken. Recent changes to legislation may, however, change this.

A liquidator has a range of powers stemming from both statutory provisions and common law, and there are a number of actions that can be raised against the directors of companies and third parties.

As a result of recent legislative changes, it is now possible for a liquidator to assign certain rights of action to parties willing to purchase such rights and progress actions themselves. 

Which rights of action can be assigned?

The new provisions provide that, after a company has entered into liquidation, a liquidator can assign the following rights of action:

It is important to note that it is not just the right of action that is assigned, but also the proceeds of the action that are transferred. It has always been possible for creditors in Scotland to raise gratuitous alienation or unfair preference actions, but in practice, this is rarely done, because any sums recovered must be paid to the liquidator for the benefit of all creditors.

Considerations for the liquidator

If the liquidator identifies a challengeable transaction, they will need to consider a number of factors, such as what further investigation is required to obtain evidence to support the action, the potential value of the action, the prospect of success, the cost of raising proceedings and the enforcement prospects. Even if there appears to be a valuable claim with good prospects of success, the liquidator may have insufficient funds to raise an action.

Having considered all these factors, the liquidator may conclude that they are not in a position to raise an action, and if sold, the right of action would benefit creditors. To reflect the cost and uncertainty of liquidation, a liquidator may sell a claim for less than they could have sued for, but creditors will benefit from certainty of payment.

Benefits of assignation

A third party may be willing to pursue an action that the liquidator is unable to take. In addition to having the funds to litigate, a third party may be prepared to take greater commercial risk; they may also be in a better position to bring an action, perhaps by having relevant expertise, or as a result of prior involvement with the company.

The option to assign could put the liquidator in a better negotiating position. A director under the threat of having a claim against them assigned may be encouraged to settle matters directly with the liquidator, rather than have a third party raise an action against them.

One other potential impact of the new legislation is that it opens up the range of people who can bring an action, which could see more miscreant directors being held to account for their actions.

If a liquidator does decide to assign a claim, it is important that any agreement is well drafted to ensure that both parties are clear about their rights and obligations, particularly in relation to any continuing obligations and future costs.

About the author

Jane Henderson is a senior solicitor in the corporate restructuring and insolvency team at Brodies LLP.

See also: Directors beware: changes to administrator and liquidator powers