Australia: Court of Appeal allows liquidators to amend pleadings to recover preference payments outside time limit

Services: Banking & Finance, Restructuring & Insolvency
Industry Focus: Financial Services

What you need to know

  • The NSW Court of Appeal recently confirmed that liquidators who bring a claim for preference payments within the three year time period prescribed by the Corporations Act may amend that claim to include additional preference payments that are otherwise out of time.
  • In reaching its conclusion, the Court commented on policy considerations underlying liquidators' ability to seek relief, and clarified that the three year time limit is concerned with the time within which proceedings for recovery payments must be commenced (not the time within which liquidators must amend pleadings in proceedings that are underway).
  • The decision is a sensible one, since an alternative finding might have brought about a result that would be impractical for both liquidators seeking to recover preference payments as well as the courts hearing their claims.

Liquidators often find themselves uncovering additional preference payments months or even years after an initial preference payment recovery claim has commenced.

On 29 November 2016, the NSW Court of Appeal released a decision1 affirming that the liquidators involved were entitled to amend their statement of claim to include additional preference payments, notwithstanding that those payments were to be added outside the three year time limit prescribed by section 588FF(3) of the Corporations Act 2001 (Cth).

This decision will likely be welcomed by liquidators who know how easily they might find themselves in a similar position to those in this case, seeking to recover amounts that were unknown when the initial claim was made.

Context

Cardinal Group Pty Limited (Cardinal) and its liquidators brought preference payment recovery proceedings against Sydney Recycling Park (SRP) in the NSW Supreme Court on 11 December 2014. The liquidators sought recovery of payments made by Cardinal between 17 June and 2 December 2011 in the amount of $280,000.

In September 2015, the liquidators sought leave to amend the claim to include a further $214,000 in alleged preference payments.

Issue – recovering payments out of time

SRP opposed Cardinal's application for leave, on the grounds that the additional payments the liquidators sought to recover were outside the three year time limit prescribed by section 588FF(3) of the Corporations Act. The relation-back day was 15 December 2011, meaning the three year time limit prescribed by the Corporations Act had expired on 15 December 2014.

The liquidators relied on a line of authorities, including Rodgers v Federal Commissioner of Taxation (1998) 88 FCR 61, to argue that a claim brought within the time prescribed by the Corporations Act may be amended to include additional transactions that would otherwise be out of time. This proposition has been widely adopted and accepted by liquidators, particularly when their ongoing inquiries uncover additional potential preference payments after proceedings have been commenced.

SRP submitted to the Court that these authorities were no longer applicable, following recent High Court judgments in Grant Samuel Corporate Finance Pty Ltd v Fletcher 2and Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher.3

In the Grant Samuel case, the High Court emphasised that the commencement of preference proceedings within the time limit under section 588FF(3) was a precondition to the Court's jurisdiction under 588FF. The High Court held that section 588FF prevailed over State law, such that an extension of time could not be supplemented or varied by procedural rules of the Court in which the application was brought.

The Supreme Court's decision

Justice Black of the NSW Supreme Court found that the liquidators were entitled to amend their claim to include the additional preference payments.

In doing so, Justice Black noted section 64 of the Civil Procedure Act 2005 (NSW) (CPA), which provides that at any stage in proceedings the Court may order that a party be granted leave to amend any document in the proceedings. Section 65 of the CPA further provides that a plaintiff may, with leave, amend their claim to add a new cause of action, together with a claim for relief, which, in the Court's opinion, arises from the same or substantially the same facts as those giving rise to an existing cause of action. An amendment made under section 65 is taken to have had effect from the date on which the proceedings were commenced.

Justice Black noted that the application brought by the liquidators would have placed SRP:

"on notice that preference claims were made against it, at least to the extent of those pleaded, and potentially to the extent of any further claims which might properly be introduced by reason of further investigation, evidence or discovery, by the amendment process permitted by the Civil Procedure Act. An approach that determined whether such an application was brought by reference to each individual transaction does not seem to me to be required by the policies identified by the High Court, where the bringing of the application will place the defendant on notice of those matters, and commercial certainty also does not seem to me to require that the content of that challenge then be fixed, at the point that the proceedings are commenced, so as to shut the liquidator and creditors out of, for example, any amendment that may later be necessary to take account of evidence led or discovery given in the proceedings".4

Justice Black determined that the Court should not treat the Grant Samuel decision as:

"overruling longstanding decisions, including two appellate decisions, that relate to the different question of the conduct of the proceedings after the application is brought, where no adverse reference was made to those decisions in the High Court's judgment and the High Court did not address the question whether the approach that they adopted was inconsistent with s 588FF of the Act or the policies to which the Court referred".5

Justice Black also found that the liquidators sought the proposed amendment in good faith and for a proper purpose, in a relatively timely way where it was foreshadowed within several months after commencement of the proceedings. Further, SRP did not demonstrate that any commercial decision would have been made differently had the additional payments been included in the original claim.

Additionally, Justice Black held that it should not be open to individual defendants in preference proceedings to say that the claim against them is of little significance to creditors, where the total of all claims against all such defendants may well be significant. Further, even where proceedings had been initiated to recover liquidators' costs or funding devoted to the conduct of the proceedings, both would constitute a proper purpose. Liquidators would less readily accept appointment, and litigation funders would less readily fund proper proceedings, if liquidators could not recover their remuneration or funders could not recover the funding they provided.

SRP appealed Justice Black's decision to the NSW Court of Appeal.

The Court of Appeal's decision

The matter was heard by Justice Bathurst (Chief Justice of the Supreme Court), President Beazley (President of the Court of Appeal), Justice Bergin (Chief Justice in Equity), Justice Ward and Justice Payne.

SRP's appeal was unanimously dismissed.

The Court of Appeal held:

  1. The scheme of the Corporations Act leaves the procedural conduct of an 'application' for orders under section 588FF(1) to the rules of the relevant State or Territory.
  2. The 'application' referred to in section 588FF(1) need not particularise each 'transaction' in respect of which it is made.
  3. The policy considerations underlying section 588FF do not support the construction of the three year time limit in section 588FF(3) as applying to each 'transaction' in respect of which relief is sought. Such a construction would have the effect of denying the amendment of applications commenced within time.
  4. The time limit in section 588FF(3) is concerned with the time for the making of an application for orders under section 588FF(1) – that is, the time for the commencement of proceedings. Section 588FF(3) is not concerned with the amendment of pleadings in proceedings that have been commenced within time.
  5. There is no inconsistency between sections 64 and 65 of the Civil Procedure Act, which provide for the amendment of existing proceedings, and section 588FF(3) of the Corporations Act, which prescribes the time for the commencement of proceedings.

President Beazley noted with approval Justice Black's observation that:

"where an application commenced within time has put the defendant on notice that orders under section 588FF(1) are sought, it does not seem to me that the policies identified by the High Court require that the liquidator be shut out from challenging additional transactions by amendment when they come to light".6

Key takeaways

The case upholds the authority that a claim brought within the three year time limit prescribed by the Corporations Act may be amended to include additional transactions that are otherwise outside of the three year period.

The decision appears to be a sensible one. If the Court had reached an alternative conclusion, one consequence would be that in the interests of prudence, any section 588FF applications brought by liquidators within time would invariably need to be accompanied by an application for an extension of time under section 588FF(3), preserving their position to bring a further application if additional payments came to light during the course of the proceedings. Such an outcome would be an unnecessary burden on liquidators and an unnecessary restriction on the courts' ability to apply established procedural principles to properly commenced proceedings.

DibbsBarker acted for the liquidators of Cardinal Group Pty Ltd.

Footnotes

1 Sydney Recycling Park Pty Ltd v Cardinal Group Pty Ltd (in liquidation) [2016] NSWCA 329

2 [2015] HCA 8; (2015) 89 ALJR 401

3 [2015] HCA 10; (2015) 89 ALJR 425

4 At [27]

5 At [28]

6 At [148]

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories

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