A pandemic leave pass: Court allows claim extension after delay caused by COVID-19 - Insolvency/Bankruptcy

This week's TGIF considers a decision of the Federal Court which concerned a request for an extension to bring a voidable transaction claim where, but for COVID-19, the application would have been filed.

Key takeaways

An application to extend the time to commence voidable transaction claims will depend on what is fair and just in all the circumstances.
Factors relevant include the explanation for the delay, the merits of the proceeding and whether prejudice outweighs the case for granting an extension.
Where COVID-19 has caused a genuine and unforeseeable delay for liquidators completing their investigations, courts are willing to grant an extension to bring proceedings (notwithstanding statutory limitation periods).

What happened

On 10 October 2017, a liquidator was appointed to Freshwater Bay Investments (the Company). Following a detailed analysis of the Company's affairs including, relevantly, the date of insolvency and certain payments made by the Company to a former director, the liquidator approached a funder in relation to the pursuit of voidable transaction claims.

A funding agreement was signed and an application filed for a public examination of the former director. However, following service of the summons, and a date being fixed for the examination, the COVID-19 pandemic resulted in the Court vacating all examination hearings.

As a result, the examination did not occur and the statutory deadline by which to commence a claim under section 588FF(1) against the former director expired. An application was filed by the liquidator seeking various orders relevant to his investigation, including to extend the period in which he may bring proceedings to recover unfair preferences.

The principles

The limitation period is prescribed to, amongst other things, prevent liquidators from deferring the recovery of unfair preferences to the conclusion of the winding-up and, importantly, to protect potential defendants from claims to repay monies received years earlier.

However, in exercising its discretion for an extension, a court will consider:

what is fair and just in all the circumstances;
the reasons for the delay;
likely prejudice; and
the merits (assessed preliminary) of the proceeding.

On the question of merits, such a review is unnecessary if a liquidator can demonstrate the reason for the extension is to allow further time to properly decide whether to bring the contemplated proceedings.

The decision

The evidence before the Court was sufficient to satisfy his Honour that an extension should be granted. Crucially, his Honour was persuaded that, but for the consequences of COVID-19 (in this instance, the vacating of previously listed examinations), the liquidator would have completed his investigations and determined whether to file a claim before the statutory deadline expired.

Further, the evidence demonstrated a significant amount of work had been done in the liquidation and, with respect to the preference claim, it passed the threshold for merit in order to justify the extension.

However, the Court noted that, on the question of likely prejudice, the potential defendant had neither been notified of the extension application nor provided an opportunity to be heard.

Having observed the weight of authority favoured notice being given (despite noting the potential for ex parte orders to reserve a right for subsequent variation or discharge), his Honour was told the former director would not be making any submissions and thus considered it appropriate to make the orders sought.

Comment

Although the legal principles applied by the Court in this instance were far from novel, the procedural point is instructive for liquidators and their advisers.

As a result of this decision, liquidators should take comfort in the knowledge that the Court has been minded to extend the time to bring voidable transaction claims, where the pandemic has caused a genuine and unforeseeable delay.

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.