Section 588FF of the Corporations Act 2001 (Cth) (CA) permits the Court, on application of the liquidator of a company, to make specified orders if the transaction is a voidable transaction within three years after the relation-back day (simply, the first insolvency event) or 12 months after the appointment of a liquidator.
The three year limitation period was introduced by the Corporate Law Reform Act 1992 (Cth) to give liquidators sufficient time to decide whether to commence action. It also overcame the fact that the previous limitation period of 6 years prolonged liquidations.
Occasionally, liquidators need to make an extension application under s 588FF(3)(b) CA for more time to commence voidable transaction proceedings, particularly where they are not able to complete investigations in time to commence proceedings within the statutory time.
The extension applications have significant implications for creditors of insolvent companies and business generally. There is an overriding duty of candour which requires liquidators to make comprehensive inquiries to identify all potential defendants, to disclose all relevant facts to the Court and that all potential parties affected by an application are given notice of it.
There are two recent Supreme Court cases which put different emphasis on what Courts require in allowing extension applications.
In In the Matter of Octaviar Limited (receivers and managers appointed)(in liquidation) and In the Matter of Octaviar Administration Pty Limited (in liquidation)(Octaviar)  NSWSC 1460 the Supreme Court of NSW refused to set aside an extension order made under s 588FF(3)(b) CA.
Octaviar Limited (OL) and Octaviar Administration Pty Ltd (OA) were both placed in voluntary administration in 2008. On 9 September 2009, liquidators were appointed to OA and OL.
On 30 May 2011, an ex parte order under s 588FF(3)(b) CA made the time for making a voidable transaction application in respect to OL extended to 3 October 2011. On 19 September 2011, the liquidators of OL and OA sought further ex parte orders that time for making applications in respect of OA and OL be extended to 3 April 2012. No putative defendant was referred to in the orders.
Fortress Credit Corporation and Fortress Investment Group (collectively Fortress) applied to have the OA Extension Order (the Order) varied to exclude any application to Fortress, or set aside where it applied to Fortress. Fortress submitted the Order should have been refused because (1) an order made in "shelf"1 terms is not specific enough to meet the requirements under s 588FF CA and (2) it was not an appropriate occasion for making a "shelf" order.
Fortress submitted there were no "exceptional circumstances" which warranted the order being made. Their submission found support from the decision of Dalton J in Williams (as liquidator of Willahra Pty Ltd)(in liq)) v Kim Management Pty Ltd (Williams)  QSC 143 at  who held that a shelf order should only be made in extraordinary circumstances, being the same type of extraordinary circumstances as an injunctive order made ex parte. However, in Black J's view, whilst the power is more likely to be exercised under "exceptional circumstances", his Honour was not prepared to find any threshold requirement of extraordinary circumstances that was not found in its terms.
The liquidators gave evidence that they had difficulty distinguishing between the transactions to OA or OL or other entities in the group.
Black J held the original Order was properly made, as:
- The power under s 588FF(3)(b) CA is broad enough to allow an order granting an extension of time in general terms;
- It is a discretionary power, exercised by referring to relevant facts and circumstances relevant to the scope and purpose of the section, and;
- Relevant circumstances include (i) The circumstances of the winding up and (ii) where a "shelf order" is made where persons affected by it will not have the opportunity to be heard.
Persons Identified by the Liquidators
A person whose interests are likely to be adversely affected by an extension of time should be joined as a defendant to the application, and as a person identified as the target if proposed proceedings by the liquidator under s 588FF(1) CA.2
Fortress also argued that if the liquidators had made proper enquiries it would have revealed Fortress as a potential target, which followed the approach in Williams.
In Williams, the dispute was whether or not at the time the application under s 588FF(3)(b) was made, the liquidator knew the defendant would be adversely affected by the order. Dalton J held if persons are identified but not given the opportunity to be heard, they are entitled ex debitio justitiae ("as of right") to have the order set aside. It was not necessary to show anything more than that the applicant was affected by the order and was not given an opportunity to be heard before it was made.
Dalton J found that the liquidator had a duty to make full and fair disclosure of all material facts to the court and make proper enquiries before making the application. The extent of enquiry was determined by the circumstances of the case (including the probable effect on the defendant and time available for making enquiries).
There are divergent views, whether or not a shelf order can be made ex parte has not been decided by the High Court.3
The NSW Supreme Court had reservations about following the approach in the QLD decision Williams:
- A broad approach required inquiries as to what liquidators did not, but should, have known. This raises the danger of "hind-sight" belief.
- Whether persons are affected depends upon the liquidators' belief at the relevant time.
- The "likely to affect" test could not be applied, as matters in Octaviar could not have been known to the liquidators at the time, including, the complexity of the litigation and the volume of documents to be reviewed.
- The fact that examinations were conducted, including of employees of Fortress, did not establish a finding in favour of Fortress due to the uncertainty in advance of examination whether the evidence given was in relation to either entity or both.
- There is an obvious distinction between investigation of a claim which may or may not be ultimately established, and having the evidence to establish it.
Black J found that even if Williams was applied, the factual basis for exercise of that power had not been established in this case.
Re-Exercising Discretion Factors
The relevant factors identified by the Court were:
- What was fair and just in all the circumstances of the case and having regard to the relevant factors;
- A perception that the quality of justice deteriorates where there is a delay;
- That potential defendants' should be aware of claims against them within a reasonable time;
- Whether the Liquidators' had diligently pursued the object of avoiding delay, and;
- Whether the likely prejudice as a result of granting an extension was sufficiently substantial to outweigh the case for granting it.
The Liquidators had the onus of showing why it is just and fair that the time limit under s 588FF(3) CA should not apply.
The Court ultimately found against Fortress and refused to set aside the OA Extension Order previously made by the Court.
Note: In early 2013 Addisons will be acting in a significant case which deals with this, in Victoria.
1The term "shelf" refers to the fact that it affects unspecified andpotentially multiple parties, i.e. it is a blanket order.
2In the Matter of Octaviar Limited (receivers and managersappointed)(in liquidation) and In the Matter of Octaviar AdministrationPty Limited (in liquidation)  NSWSC 1460 at .
3Williams (as liquidator of Willahra Pty Ltd)(in liq)) v Kim ManagementPty Ltd  QSC 143 at .
The assistance of Catherine Nguyen, Clerk, of Addisons in the preparation of this article is noted and greatly appreciated.
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.