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Subrogation and Liquidation – a harmonious melody or one out of tune?

Insolvency proceedings can often be a very chaotic and drawn out process. Amidst the flurry of activity undertaken by creditors, liquidators and directors, a question to consider is what happens when we throw an insurer’s rights of subrogation into the mix.

Subrogation

Subrogation is the act of one party (normally an insurer) having standing to prosecute a cause of action in the name of another, where the former has reimbursed the latter for losses.

When subrogation and liquidation intersect however, an insured company in liquidation can affect an insurer’s ability to exercise its subrogated rights.

William Roberts recently acted for a major insurer and was instructed to issue recovery proceedings in the name of an insured owner to recover against a third party in a motor vehicle claim. Upon making further enquiries, it came to light that the insured owner was a company that was in liquidation, but had not yet been wound up.

It was an uncommon scenario, as the insured owner was the anticipated Plaintiff in the recovery proceeding, as opposed to being a proposed Defendant that was being pursued by creditors.

Liquidation and Stay on Proceedings

Unsecured creditors who seek to recover monies owed to them by companies in liquidation often face a limitation due to the operation of section 471B of the Corporations Act.

This provision places a stay on proceedings (current and anticipated) and suspends enforcement action if a company is being wound up in insolvency or where a provisional liquidator is acting, except with the leave of the Court.  Even if leave is given, the Court may still impose conditions such as the requirement that the company will not attempt to enforce a judgment against the company, without further leave of the Court.

In the matter that William Roberts was acting, at first blush, there were arguably two concurrent and potentially competing actions, namely:

  1. an insurer’s right to issue proceedings pursuant to the doctrine of subrogation; and
  2. the process of liquidating the insured company that was already underway.
Subrogation in an impending wind up action

A central concern was ensuring that the insurer’s rights of subrogation were not prejudiced by the impending winding up of the insured owner. Once a company is wound up and ceases to have legal personality, proceedings cannot be instituted against it, nor can proceedings be issued in its name (unless the company is returned to the register).

It would appear that in a prospective action where an insured owner is in liquidation and is the proposed Plaintiff, there could be recourse under section 477(2)(a) of the Corporations Act.

This provision enables a liquidator of the company to bring or defend any legal proceeding in the name and on behalf of the company and pursuant to section 477(2)(b) of the Corporations Act to appoint a solicitor to assist the liquidator in their duties.

However, this provision would only apply in the event that the winding up of the insured owner has not yet been completed and where the liquidator has provided their consent.

Should an insurer find itself in this situation, consideration should be given to:

  1. the amount of the subrogated claim;
  2. the anticipated time frame that remains before the company will be wound up;
  3. the credibility of the witnesses whose evidence will be critical in prosecuting the claim; and
  4. the commerciality of proceeding down this route, as an appointed liquidator may seek to charge for their time to liaise with the insurer and its representatives to issue proceedings.1


1 Conlan v Adams (2008) ACSR 521

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