22 Sep Decisions, Decisions – Obligations & the Decision Making Process for Insolvency Practitioners
Practitioners strike a balance between legal obligations, interests of stakeholders and commercial considerations when selling assets and pursuing legal claims.
If a decision is not taken with care to get the best possible price or to claim only for the amount that fairly represents the interest in or value of the asset or transaction, it can be of significant adverse financial impact on creditors and other stakeholders.
Creditors understand that very little, if anything, is typically left for them in the insolvent entities which make them reliant on what the practitioners can generate from the asset recoveries and by containing costs. In addition, guarantors are exposed to uncertainty and loss when sale proceeds do not satisfy the secured debt.
Obligations of insolvency practitioners
Mortgagees in Possession, receivers, and controllers seek to sell at market value or otherwise the best possible price by taking all reasonable steps as required in the security agreement and section 420A of the Corporations Act 2001, particularly critical given flow-on effect for guarantors and unsecured creditors. Liquidators have comparable obligations (section 180 of the Corporations Act) to act with due care in the interest of creditors as a whole.
For Bankruptcy Trustees where an asset is jointly owned (or ought properly to be recognised), the Trustee has obligations to co-owners, observing duties enshrined in the Bankruptcy Act 1966, Schedule, Rules, Regulations, and court precedent.
The asset sale and other recoveries conducted by the Trustee in Bankruptcy must only be conducted if there is a cost-effective return to creditors and payment to the cost of the administration according to section 42-40 of Insolvency Practice Rules (Bankruptcy), consistent with the duty to act in a commercially sound way as set out in section 19(1)(k) of the Bankruptcy Act.
How do practitioners decide when considering commercial settlements and sale programs?
- confer with insurance advisers, obtain appraisals from real estate agents and valuations from valuers and other experts;
- determine the extent of ownership or interest in the asset by reviewing the validity of security interests registered on the Personal Property Securities Register, loan documents, contracts, certificate of title, permits, rental agreements, caveats, mortgages, third party claims and potential defences;
- advertise in ways that are relevant to the asset;
- assess the terms and risks offered by interested buyers, potential bidders, or co-owners;
- determine costs and benefits of selling an asset through an agent with expertise or assign statutory claims when there is no funding or intention to sue;
- assess impact to creditors, guarantors of secured debt and practitioners’ costs and engage the relevant parties particularly if the asset value is lower than expected due to market forces or previously unforeseen price drops which may trigger shortfalls and guarantees;
- securing sales at the best possible price in the commercial context which existed at the time;
- assess the costs and benefits of compromise settlement by taking into account various risks including adverse costs of parties in dispute particularly when claims remain unresolved over an extended period and financial capacity of another party; and
- report to creditors and seek approval (creditors or the court) if required.
Practitioners focus on the interest of stakeholders when selling assets or pursuing claims.
The merits and strategy of each claim or asset are assessed in each circumstance, with practitioners balancing their legal obligations and commercial risk to:
- get the best possible price for the asset at the least cost; or
- recover the maximum amount of a claim in the most cost effective manner
all with a view to maximising stakeholders’ outcomes.
Article written by Elny Martin (Supervisor) – SV Partners Perth