Assessing Defendant Recovery Risk during the COVID-19 Pandemic

COVID-19 has put a range of industries, businesses and people under financial strain. This strain is likely to be felt more broadly and become more severe once current government subsidies, like JobKeeper, end. Financial strain will also become more pronounced for many businesses with a presence in Melbourne as metropolitan Melbourne enters a second period of COVID-19-related lockdown which is expected to last at least six weeks.

In the context of litigation, the prevailing economic climate might incentivise parties to settle earlier, but it also impacts defendants’ ability to satisfy judgments levied against them. This increases the risk that plaintiffs will be unable to recover from defendants. While it may appear that a plaintiff’s prospects of recovery are good when proceedings are commenced, intervening actions by the defendant or matters outside its control, like a pandemic, may diminish those prospects. Robustly assessing this recovery risk over the course of a proceeding will help plaintiffs and their lawyers plot (and revise) a strategy that improves the odds of achieving a recovery.

Comprehensively assessing defendant recovery risk is a large task, one that can only be accomplished taking into account the particulars of a given case. Broadly, it involves assessing a defendant’s ability and willingness to make payment. This article focusses primarily on the ability of a defendant to make payment, and, if insolvency/bankruptcy proceedings are brought to enforce a judgment, whether the assets of the defendant are sufficient to discharge its debts, including a judgment debt owed to the plaintiff. We have set out below some of the most basic questions plaintiffs should be thinking about and some basic tools that can be used in answering those questions.

Is the defendant insolvent/bankrupt or have proceedings been initiated to effect insolvency/bankruptcy?

If the defendant is a company, particularly an unlisted company (assumed throughout where a company is mentioned), the plaintiff should undertake an online search of ASIC Insolvency Notices to determine whether the defendant is in administration or liquidation. If the defendant is an individual, the plaintiff should use the Federal Law Search function of the Commonwealth Courts Portal to determine whether a creditor’s petition has been lodged against the defendant and should undertake a search of the National Personal Insolvency Index to determine whether the defendant is already bankrupt.

An indication that a defendant company is in administration or liquidation or an individual defendant has had a creditor’s petition lodged against her or him would be cause for alarm because, not only would insolvency or bankruptcy jeopardise recovery, it would likely lead the Court to stay the plaintiff’s proceedings against the defendant. In a creditor’s petition context, the imposition of a stay under the Bankruptcy Act 1966 (Cth) turns upon the nature of the plaintiff’s claims.

Is the defendant financially distressed? Does the defendant have the ability to pay?

Plaintiffs can use certain search providers or credit reporting companies (eg Equifax) to obtain a defendant’s credit report which includes credit enquiries and adverse credit events. The search results might assist a plaintiff in determining whether the defendant has sought credit recently or paid invoices late, both being indicators of potential financial distress.

Plaintiffs might also wish to search the Personal Property Securities Register to see how recently security has been granted by the defendant and to whom. The identity of the secured party should illuminate why security was taken and might say something about the defendant’s financial health.

Plaintiffs might interrogate any changes to a defendant company’s workforce. Have employees been laid off or stood down? In the context of COVID-19, a plaintiff might seek intelligence about whether a defendant has received JobKeeper payments. For example, were employees stood down or laid off around the onset of the pandemic but subsequently brought back on? This might indicate that the defendant is receiving JobKeeper payments. Changes to the workforce, in either of the two aforementioned scenarios, might be a cause for concern. After all, if the defendant has laid off or stood down staff, it is likely experiencing financial strain. Similarly, if the defendant has received JobKeeper support to retain staff, they will have suffered at least a 30% drop in revenue.*

What assets would be available to creditors and, if liquidated, are they likely to be sufficiently valuable to discharge debts to creditors? What are the obstacles to their liquidation? What creditors stand before the plaintiff?

Title searches can be undertaken on real property associated with the defendant (eg principal place of business and registered office) to determine whether the defendant is the owner and whether the property is encumbered (for example, mortgaged). Once ownership of real property has been established, the plaintiff can undertake online searches to determine the approximate value of the property. Plaintiffs might also wish to search the Personal Property Securities Register to discover a defendant’s further assets and to understand where the plaintiff is likely to rank in the line of creditors in relation to those assets.

As always, plaintiffs should be wary of assets held in discretionary trusts as they will be effectively shielded from creditors.

Further enquiries and forming a view

None of the tools discussed in relation to second and third sets of questions (above) in isolation should bring a plaintiff to a concluded view about whether the risk the defendant poses to the plaintiff’s successful recovery is acceptable. There will be many additional enquiries unique to the circumstances of the particular defendant and the particular dispute that will require resolution. And, as previously discussed, the defendant’s willingness to pay must also be taken into account, and this will turn upon a number of considerations. Additionally, once proceedings are afoot, the plaintiff may have more tools at its disposal. For instance, the plaintiff might be able to extract undertakings from the defendant in relation to its assets, the plaintiff might be able to subpoena/summon information in relation to the defendant’s financial position or rely on evidence led by the defendant as to its financial position.

Litigation funding and recovery risk

Lexvestor, in vetting disputes for funding, thoroughly assesses defendant recovery risk and can absorb that risk for suitable cases. Lexvestor encourages plaintiffs:

  • concerned about recovery at any stage of a proceeding (including prior to commencing proceedings); or

  • bringing or contemplating enforcement proceedings,

to get in contact to discuss funding solutions.

* assuming turnover is less than $1b and defendant is not a charity or school.