Extending the “Shelf” Life of Voidable Transaction Claims: High Court Confirms Scope of Section 588FF(3) of the Corporations Act

March, 2015

By Ariel Borland, Partner, Jennifer O’Farrell, Lawyer and Anna O’Callaghan, Law Graduate

Two recent decisions of the High Court of Australia (High Court), Fortress Credit Corporation (Australia) II Pty Limited v Fletcher [2015] HCA 10 (Fortress) and Grant Samuel Corporate Finance Pty Limited v Fletcher; JP Morgan Chase Bank, National Association v Fletcher [2015] HCA 8 (Grant Samuel) confirm two important aspects of section 588FF(3) of the Corporations Act 2001 (Cth) (Act), namely:

a. a liquidator has 3 years from the “relation back day” or 12 months after the appointment of a liquidator (whichever is later) to commence applications to recover voidable transactions (Claims) under Part 5.7B of the Act (Original Time Period).  An Application to extend the time for pursuing such claims beyond this (Extension Application) can only be made during the Original Time Period (and not after, or during the extra time granted by the Extension Application); and
b. when applying for an Extension Application, the liquidator need not identify specific claims which he or she intends to pursue.  The liquidator may obtain an extension to pursue Claims generally (also known as a “shelf order”).

 

Therefore, where the Original Time Period is due to expire and a liquidator requires additional time to identify or investigate potential Claims, they must apply to the Court for an order extending the time for bringing such Claims before the expiry of the Original Time Period.  Failing to do so will shut the liquidator out from pursuing these Claims.

Importantly, a liquidator also needs to give careful consideration to how much time they will actually need to identify and investigate such Claims as a further extension, outside the Original Time Period, will not be granted if the liquidator requires additional time beyond the extension granted under 588FF(3).

Facts

The respondents in each case were joint and several liquidators of Octaviar Limited (OL) and Octaviar Administration Pty Limited (OA) (Liquidators).

In Grant Samuel, the relevant relation back day for OL was 4 June 2008, such that the Original Time Period was due to expire on 4 June 2011.  On 10 May 2011, the Liquidators successfully applied for an order under section 588FF(3)(b), extending their time period for commencing Claims to 3 October 2011 (First Extension Order).  On 19 September 2011, the Liquidators applied for a further extension to 3 April 2012 (Second Extension Order).  The New South Wales Supreme Court granted that order.

The appellants in Grant Samuel applied for orders setting aside the Second Extension Order.  In the High Court, the Liquidators argued that the Second Extension Order could be made notwithstanding that the Original Time Period had expired because the rules of Court in New South Wales, the Uniform Civil Procedure Rules 2005 (NSW) (UCPR), allowed time to be extended.

At issue was whether the Act comprehensively provided for the time limit to bring voidable transaction claims, such that the Act left “no room for the operation of the UCPR”.  If the Act was not comprehensive, then the Judiciary Act (1903) (Cth) would allow the UCPR to operate to extend time.

Separately, and in their capacity as liquidators of OA, the Liquidators sought orders that the time for pursuing certain claims under Part 5.7 of the act be extended to 3 April 2012.  The Court granted those orders, without identifying any specific claim(s) which OA could pursue in the extended period.  OA subsequently commenced proceedings against defendants (the appellants before the High Court in Fortress).  The appellants disputed that such a “general” order (sometimes referred to as a “shelf order”) could be made.  This dispute was the subject of the Fortress case.

The High Court’s decision

In Grant Samuel, the Court found that there was no room for the operation of the UCPR to further extend the time limits set out in section 588FF(3) of the Act.  That is, the only power given to a court to vary the time periods set out in section 588FF(3)(a) of the Act is that given by section 588FF(3)(b).  Accordingly, the first extension granted by the Court (to 3 October 2011) was “within power”, but the second extension, sought by the Liquidators on 19 September 2011 was not.

In Fortress, the High Court examined the history of and amendments to section 588FF(3) of the Act in some detail.  The High Court concluded that the function of section 588FF(3)(b) of the Act is to: “confer a discretion on the court to mitigate, in an appropriate case, the rigours of the time limits imposed by [s 588FF(3)(a)]…”: at [24].

The appellants outlined a number of “policy factors” which they submitted militated against a construction of section 588FF(b) which would allow a general order to be made.  These are set out in Fortress at paragraph [25].  The High Court said that these were considerations which would inform the court’s approach when considering whether an extension order was appropriate.  However, the court nonetheless had a discretion to grant a “shelf order” in the appropriate case.

Conclusion

Grant Samuel and Fortress provide certainty to liquidators.  If a liquidator is concerned that there may be voidable transaction Claims to pursue, he or she must apply to the Court – within the time prescribed by section 588FF(3)(a) of the Act – to extend that time.  Helpfully, the Court has confirmed that a liquidator need only apply for a general – “shelf” – order which does not specify the Claims that the order will cover.

An important lesson from Grant Samuel is that a liquidator must carefully consider how much time they will require to identify and further investigate Claims.  Evidently, in Grant Samuel, the First Extension sought (and obtained) was not long enough.  In the authors view, the practical result of the High Court’s decision in Grant Samuel will be that liquidators will apply for significantly longer extension periods under 588FF(3). Courts will likewise have an increasingly challenging task of balancing the two policy objectives of 588FF(3), namely certainty for third parties and creditors’ interests in recovery actions, when considering such applications.

Contact Mills Oakley

For more information, please contact:

ariel-borland

Ariel Borland | Partner
Melbourne
T: +61 3 9605 0015
E: aborland@millsoakley.com.au

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