Australia: Know thy shelf: The High Court confirms the power of the court to make shelf orders under s 588FF(3)(B) of the Corporations Act

This week's TGIF examines a High Court decision which confirmed the power of a court under s 588FF(3) of the Corporations Act to extend the time for the commencement of voidable transaction proceedings, without identifying the particular transaction or transactions to which the extension would apply. Our article relating to the NSW Court of Appeal judgment which this decision affirmed can be found here.

BACKGROUND

On 9 September 2009, William Fletcher and Kate Barnet were appointed as liquidators of Octaviar Administration.

In September 2011, the liquidators were granted an order under s 588FF(3)(b) of the Corporations Act. This order extended the time for the commencement of proceedings for the recovery of voidable transactions under s 588FF(1).

Under s 588FF(3)(a), voidable transaction proceedings are ordinarily required to be commenced:

• 3 years after a winding up order is filed (or a company is otherwise wound up); or
• 1 year after a liquidator is appointed in relation to the winding up of the company,

whichever is later.

However, s 588FF(3)(b) gives power to the court to order a longer period for voidable transaction proceedings to be brought, so long as a party applies for such an order within the time limits listed above. In doing so, the court typically balances the need for commercial certainty on the part of those who had past dealings with the insolvent on the one hand, and the competing interest of the creditors of the insolvent on the other.

In this case, the NSW Supreme Court extended the time for the commencement of proceedings from 3 October 2011 to 3 April 2012.

CLAIM AGAINST FORTRESS

On 3 April 2012, the liquidators, acting pursuant to that extension, commenced proceedings against Fortress Credit Corporation (Australia) II Pty Limited (Fortress) for orders under s 588FF(1). Fortress lost its application to have the extension order set aside in the NSW Supreme Court, and its subsequent appeal to the NSW Court of Appeal was dismissed. Fortress then appealed to the High Court.

The key question for determination was whether such an extension could 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. The latter form of order, the validity of which had been questioned, is generally referred to as a 'shelf order'.

CAN SHELF ORDERS BE GRANTED?

The appellant's primary argument was that the extension of time order was required to specify the particular transaction in respect of which the order was made, the time that it was done and the act done to give effect to it within a relevant period; that is, that a court cannot make shelf orders. This, it was argued, was the preferred construction based on the underlying premise of the section and policy factors said to weigh against such a broad construction.

The Court disagreed.

The Court found that there was no independent basis for the assertion that an extension of time order needs to identify a particular transaction. Indeed, the only express essential condition upon the exercise of the power was that the application be made within the time limit specified.

Furthermore, the power of the Court to extend time under s 588FF(3)(b) was discretionary, with questions of "what is a reasonable or unreasonable prolongation of uncertainty" being best left for the Court to determine on a case-by-case basis, rather than globally in judicial interpretation of the provision.

The Court found that this discretion was to mitigate the strictness of the time limits imposed by s 588FF(3)(a) in appropriate cases, a fact which was reinforced by the legislative history of the provision.

WHAT IS THE SIGNIFICANCE OF THE DECISION?

The Court's decision provides comfort to liquidators as to the ability of a court to make shelf orders at a time when it may not be possible to identify precisely those transactions which are vulnerable to challenge under the voidable transaction provisions of the Corporations Act.

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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