Unlimited – liquidators' enlarged claim permissible following expiration of limitation period - Insolvency/Bankruptcy

This week's TGIF considers a NSW Court of Appeal decision which confirms that liquidators who bring a claim for preference payments within the limitation period may amend that claim to capture additional transactions otherwise subject to a statutory bar.

BACKGROUND

Sydney Recycling Park (SRP) provided "tipping services" to Cardinal Group (Cardinal), who were in the business of "waste management". Cardinal ran into some financial difficulties and on 1 February 2012, it was placed into liquidation.

On 11 December 2014 the liquidators of Cardinal commenced recovery proceedings seeking orders pursuant to s 588FF(1) of the Corporations Act 2001 (Cth) (the Act) that payments to SRP totalling $280,000 were unfair preferences (s 588FA), insolvent transactions (s 588FC) and voidable (s 588FE).

The claim was brought within the limitation period imposed by s 588FF(3)(a) of the Act, which provided, relevantly, that an application for orders under that section may be made within three years of the relation back day or 12 months after the first appointment of the liquidator, whichever is later.

A number of additional transactions were uncovered after the commencement of proceedings during investigations into Cardinal's affairs and finances and on 8 September 2015, after the limitation period had expired, the liquidators sought leave to file an amended statement of claim to include these additional transactions (increasing the quantum sought by $214,000).

The application to amend the originating process was made under ss 64 and 65 of the Civil Procedure Act 2005 (NSW) (CPA) which provides that a plaintiff may amend a pleading outside of the relevant limitation period in order to add or substitute a new cause of action that arises from "the same or substantially the same facts" as those already pleaded in the originating process.

SRP opposed the application on a number of basis, including that an amendment was subject to a statutory bar under s 588FF(3)(a) of the Act.

AT FIRST INSTANCE

At first instance, Black J granted leave to amend the statement of claim.

Relevantly, Black J drew on existing authority and a distinction between the making of an application and the amendment of an existing application, noting that the limitation stipulated in s 588FF(3) applied only to the former.

ON APPEAL

SRP appealed the decision of Black J on two grounds and argued that:

making an "application" for orders under s 588FF within the time limit was an essential pre-condition in respect of each particular transaction (Ground 1); and
s 588FF(3) precludes an amendment to include new "transactions" after the expiration of the time specified by s 588FF(3) such that the powers to amend in the CPA were not "picked up" (Ground 2).

Ultimately, the Court of Appeal unanimously dismissed the appeal.

In relation to Ground 1, the court rejected SRP's arguments that an application made within time had to be made with respect to each particular transaction or must particularise the transaction in respect of which it is made.

The Court also rejected an argument that policy considerations, namely, the need for commercial certainty with respect to those who might be the subject of proceedings, required the application of the limitation period. In doing so, the court noted the balance between creditor interests and those that might be the subject of proceedings.

Ultimately, the court followed the line of reasoning in Rodgers v Commissioner of Taxation (1998) 88 FCR 61 and the cases that followed, drawing a distinction between:

the making of an application under s 588FF(1) of the Corporations Act; and
the amendment of an application including the addition of further transactions arising from "the same or substantially the same facts" as those already pleaded in the original application.

In doing so, the Court rejected an argument that a number of recent High Court decisions had effectively overturned this position.

Given the Court drew the same distinction as was the case in Rodgers, the court ultimately rejected Ground 2 noting that the Federal statutory regime did not preclude the operation of ss 64 and 65 of the CPA.

COMMENT

This decision provides comfort to liquidators when faced with an impending statutory deadline, and incomplete books and records, that a Court may allow further transactions in a series of dealings to be added to a pleading after the expiry of time

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.