If you have ever dealt with a company that has gone into
liquidation, you may have been on the receiving end of some of the
powers that a liquidator can wield. In a variety of circumstances
liquidators can apply to set aside or vary transactions which
occurred before their appointment. This might be because a
transaction was unduly favourable to another party, or detrimental
to the company, or resulted in one creditor being paid more than
others in the period before the winding up occurred (ie an unfair
Such transactions are referred to in the Corporations Act as
"voidable transactions". Liquidators are given the power
to attack them in order to increase the money available to the
unsecured creditors of the company. The various orders a liquidator
can seek in relation to voidable transactions are set out in s588FF
of the Act.
Time limits on recovering voidable transactions
Notwithstanding the importance of being able to recover voidable
transactions, a demand by a liquidator for the repayment of money
or the return of property, months or years after a voidable
transaction occurred, can cause substantial hardship to the
recipient. For this reason, liquidators are given a relatively
short period of time to start chasing voidable transactions –
broadly speaking they have to commence proceedings within 3 years
of the start of the winding up.
This, however, can cause hardship in the other direction, as
three years may not be a long time for a liquidator to identify and
investigate voidable transactions, particularly in a large or
complicated winding up. Section 588FF(3) provides that in some
circumstances the court can extend the three year time period to
ensure that unsecured creditors don't miss out on a dividend
because the liquidator runs out of time.
Sometimes, a liquidator will apply for a general extension of
the three year period; in other words they will ask a court to give
them more time to commence proceedings against anyone, not just
people they have actually identified as potential targets for a
voidable transaction claim. If granted, these are known as
"shelf orders", and they have presented particular
challenges to the courts; people shouldn't have to wait for
years to find out if they will have to pay money or give property
back to a liquidator, but liquidators need a reasonable chance to
maximise the returns to unsecured creditors.
This balancing act was considered in a recent decision in
the New South Wales Court of Appeal, Fortress Credit Corporation
(Australia) II Pty Ltd & anor v Fletcher and others.
In September 2011 the liquidators of Octaviar Administration Pty
Ltd applied for and were granted a shelf order, extending the time
for bringing proceedings under s588FF to 3 April 2012. Fortress was
not identified as an interested party at that time, and so was not
told of the application.
On 3 April 2012, the liquidators commenced proceedings against
Fortress to recover various voidable transactions. Fortress then
sought to have the shelf order set aside, or varied so that it did
not apply to Fortress; at the same time the liquidators sought to
vary the order, after the expiration of the 3 April 2012 time
limit, to make it specifically apply to Fortress. The decision on
these matters in November 2012 was then appealed.
Outcome and comment
In considering the various arguments put up by Fortress, the
Court of Appeal clarified some aspects of the law in this area.
Fortress argued that because it was affected by a decision of
which it had no notice, and therefore no chance to oppose, it was
entitled to have the shelf order against it set aside
automatically. This argument did not succeed; it was found that
while a court had a discretion to set aside a shelf order in these
circumstances, it was not obliged to do so.
Fortress's boldest contention, however, was that a general
shelf order could not be made at all – it argued that if the
liquidator did not identify the transaction they intended to
attack, and the parties who would be affected, then s588FF did not
permit the Court to extend the time for an application. This
argument went directly against a previous decision of the New South
Wales Court of Appeal, and was duly rejected. But it may well be
that this submission was intended to clear the way for an appeal to
the High Court.
The power of a court to make a shelf order is therefore fairly
clear, for now, but if the matter is to go further, it may be too
early to say that the law in this area is settled.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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This Update highlights two recent cases that considered circumstances where liens could take priority over a registered security interest.
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