Australia: Not shelved… yet: NSW Court of Appeal confirms shelf orders are valid

Last Updated: 4 August 2014
Article by James Laman and Peter Harkin

In brief - Reassurance for liquidators in Fortress Credit v Fletcher decision

The Court of Appeal's decision last month in Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2014] NSWCA 148 provides much needed reassurance to liquidators that shelf orders are valid. Prior to this decision there was a perception of discord between state courts as to whether or not this is the case. However, the reassurance brought by the decision comes with a slight caveat, with an application for special leave to appeal filed in the High Court.

What is a shelf order in the context of company liquidation?

As set out in the judgment summary to the decision, section 588FF(1) of the Corporations Act 2001 (Cth) allows a liquidator to apply to the court to declare certain transactions made by an insolvent company prior to its liquidation as "voidable transactions" and obtain relief. Section 588FF(3)(a) sets the time in which an application must be made under section 588FF(1).

An application may be made under section 588FF(3)(b) to extend the time for making an application under section 588FF(1) beyond the time set in section 588FF(3)(a). A shelf order is an order that is made under section 588FF(3)(b) that generally extends the time for a liquidator to make an application under section 588FF(1) without specifying a particular transaction or specific parties.

Applicants seek to have shelf order set aside

The subject of the decision concerned a shelf order obtained by the respondent (a liquidator). The applicants were affected by the general terms of the shelf order and sought to set it aside on the grounds that it was invalid.

The decision largely turned on the meaning of the chapeau to section 588FF(3) which states "an application under section 588FF(1)...". This raised the question of whether orders extending time under section 588FF(3) needed to provide the specific details of a transaction required by section 588FF(1). Inherently shelf orders do not do this.

Court confirms shelf order need not identify specific transaction

In separate judgments, a majority of the Court upheld an earlier NSW Court of Appeal decision, BP Australia Ltd v Brown [2003] NSWCA 216, that had found shelf orders were valid, and that the opening words in section 588FF(3) did not need to be read so strictly as to require an order under the provision to identify the specific transaction, as required by section 588FF(1).

Reconciling shelf order precedents between states highly desirable

Importantly, Bathurst CJ opined that BP v Brown was not inconsistent with a decision of the Queensland Court of Appeal in Greig v Stramit Corporation Pty Ltd [2003] QCA 298 (other members of the bench agreed with him).

The decision thus provides a way in which decisions of the NSW and Queensland courts of appeal, previously considered to be in conflict, may be reconciled. Given the national regulation of insolvencies, such a reconciliation of precedent between states is highly desirable. This might potentially remove any hesitancy felt within the legal industry as to whether shelf orders are indeed valid.

However, it should be noted that the decision, while persuasive, is not binding and it is possible that the Queensland Court of Appeal could, in turn, distinguish BP v Brown and maintain that Greig v Stramit is correct. Furthermore, Fortress Credit v Fletcher is subject to a special leave application, so in any event the future position in relation to shelf orders remains unclear.

Striving for balance between rights of creditors and needs of liquidators

For creditors, however, the decision has more negative ramifications. As noted by Bathurst CJ at [106] "a powerful reason against the making of a shelf order is its potential to affect creditors who have no notice of its application and whose rights are adversely affected".

Arguably, in light of other recent decisions made by the NSW Court of Appeal (see for instance JPMorgan Chase Bank National Association v Fletcher [2014] NSWCA 31), the balance between the competing needs of creditors (entitled to a degree of certainty) and of liquidators (trying to recapture voidable transactions to best administer the insolvent company) has swung too far in favour of liquidators.

Practical considerations in overturning precedents

An interesting distinction of note, however, is the slight divide between the judgment of Bathurst CJ and the remainder of the bench. Whilst Bathurst CJ was of the view that the applicant's submissions had "considerable force" and that BP v Brown was not plainly wrong, the majority went further and said BP v Brown was in fact correct (see for instance Beazley P at [114], Macfarlan JA at [119] and Gleeson JA at [137]).

It appears a key consideration for Bathurst CJ as to why BP v Brown was not to be considered "plainly wrong", even if not correct, was the fact that presumably liquidators and their advisors "have been acting on the assumption that... [BP v Brown] is correct. Reversing the decision in these circumstances could be productive of a substantial injustice" (at [100]). The decision therefore shows an interesting practical consideration being accounted for in the judicial reasoning of whether precedent should be overturned.

Liquidators to await result of application for special leave to appeal

This will no doubt come as a relief to liquidators and legal advisers collectively. However, with such a slight distinction between the judgments, the danger that an appeal to the High Court will be made cannot be overlooked and therefore liquidators perhaps cannot breathe a sigh of relief until it is confirmed that no such appeal is being made.

As at the date of this article, an application for special leave in Fortress Credit v Fletcher had been filed in the High Court.

For more information:

James Laman Peter Harkin
Restructuring and insolvency
CBP Lawyers

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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James Laman
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