Section 588FF(1) of the Corporations Act 2001 (Cth) (Act) allows liquidators to apply to a court for orders in relation to voidable transactions.  Liquidators commonly seek to use this provision to “claw back” unfair preferences to particular creditors, but it also covers claims in respect of uncommercial transactions, unfair loans and unreasonable director-related transactions.

Section 588FF(1) of the Act generally imposes a three year time limit, beginning on the relation-back day, on bringing a voidable transaction claim.

The three year time limit can only be extended by a court order made under section 588FF(3)(b) and which is applied for before the expiry of the three year period.

The High Court recently handed down two judgments concerning the operation of section 588FF(3)(b):

1.    Grant Samuel Corporate Finance Pty Ltd v Fletcher; JPMorgan Chase Bank, National Association v Fletcher [2015] HCA 8 (GSCF), in which the court considered whether an extension to the three year period could effectively be obtained by utilising a court’s general civil procedure rules after an extension of time had already been granted under section 588FF(3)(b); and

2.   Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2015] HCA 10 (Fortress), in which the court considered whether liquidators, in bringing an application for an extension of time under section 588FF(3)(b) must identify the particular transactions that will be the subject of the claim.

GSCF

3.   In GSCF, the relevant relation-back day was 4 June 2008, being the date it was resolved to wind up the company.

4.    Within the three year period, the liquidators successfully made application for an extension under 588FF(3)(b), permitting them to bring voidable transaction claims by 3 October 2011.

5.   Prior to the expiry of the extended period, and pursuant to rule 36.16(2)(b) of the Uniform Civil Procedure Rules 2005 (NSW) (rules), the liquidators successfully sought a further extension. 

6.   Importantly, the extension was not applied for under section 588FF(3)(b).

7.   Proceedings were subsequently issued challenging the extension granted to the liquidators under the general provisions in the rules rather than in accordance with the Act. 

8.   The New South Wales Court of Appeal dismissed an appeal challenging the validity of the further extension and special leave to appeal the Court of Appeal’s decision was successfully granted by the High Court.

9.   The High Court, in unanimously allowing the appeal, held:

9.1.            the first extension order was within power and therefore the relevant period in which the liquidator was entitled to bring a voidable transaction claim was extended until 3 October 2011; and

9.2.            no further extension could be granted subsequent to the expiry of the original three year period, and the rules could not be used to alter existing orders to further extend the time in which to bring proceedings.

10.   Accordingly, the liquidators were held to be out of time and could not bring further voidable transactions claims.

11.   The Court ruled that the Act’s language – specifically the phrase that an application “may only” be made pursuant to section 588FF(3)(b) limited a court’s jurisdiction to grant extensions on applications made outside the three year period. 

12.   Accordingly, a liquidator cannot make an application for a further extension unless the application for a further extension is also made during the original three year period.

Fortress

13.   The issue before the court was whether “an extension can only be ordered in relation to a transaction or transactions identified in the order, or may apply to transactions not able to be identified at the time of the order”.

14.   The respondent liquidator had successfully made application for an extension of the three year period.

15.   The appellants submitted that the relevant extension order should be set aside because the respondent liquidator had failed to identify in the application the particular transactions to which the extension order related.

16.   The appellants set out a number of “policy factors” which they said “militated against” a court being able to issue broad “shelf orders”, including:

16.1.          disadvantage to potential defendants not identified in a shelf order;

16.2.          the encouragement to liquidators not to identify potential defendants, thereby reducing the prospect of opposition at initial applications;

16.3.          the risk of a multiplicity of litigation by successive defendants applying to re-agitate extension applications of which they had not been given initial notice;

16.4.          the risk of inconsistent outcomes on applications to set aside extension orders by respective defendants;

16.5.          no finality, as claims by defendnats that they were identifiable, but not identified, might cause ongoing challenges to any extension granted;

16.6.          want of certainty for liquidators and prospective defendants who might seek to have leave revoked after it had been granted and after proceedings had commenced;

16.7.          the potential for wasted costs to be incurred contrary to the interests of creditors; and

16.8.          the determination of applications by reference only to evidence that the liquidator elected to put before the court.

17.   The appeal was dismissed unanimously, and costs awarded against to the respondent.  In its judgment, the court noted the Act imposed no limits on a court’s discretion under section 588FF(3)(b) to grant an extension, other than the strict timeframes discussed above in GSCF.

18.   At 26-27, the Court held:

[26] All of those [the matters referred to in para 16] are considerations which may inform the approach to the exercise of discretion by the court in cases in which applications are made for shelf orders under s 588FF(3)(b).  They are considerations which could have moved but did not move the legislature, when it amended s 588FF(3), to exclude the application of the power conferred by par (b) to shelf orders.

[27] In the end, as the appellants accepted, the availability of shelf orders is a construction open on the text of s 588FF(3)(b).  It is a construction which is consistent with the evident purpose of that provision, to allow the court to mitigate the strictness of the time limits imposed by par (a) in an appropriate case.  The effect of re-enactment of s 588FF(3), in light of the construction adopted by the Court of Appeal, is no barrier to that construction.  Indeed it may be taken to support it.

19.   Accordingly, extensions by way of general “shelf-orders” are permitted under s 588FF(3)(b). 

For more information contact:

Benjamin Broadhead
Special Counsel
Harwood Andrews
T: 03 5226 8549
E: bbroadhead@harwoodandrews.com.au