If you have ever dealt with a company that has gone into liquidation, you may have been on the receiving end of some of the powers that a liquidator can wield. In a variety of circumstances liquidators can apply to set aside or vary transactions which occurred before their appointment.
This might be because a transaction was unduly favourable to another party, or detrimental to the company, or resulted in one creditor being paid more than others in the period before the winding up occurred (ie an unfair preference).
Such transactions are referred to in the Corporations Act as “voidable transactions”. Liquidators are given the power to attack them in order to increase the money available to the unsecured creditors of the company. The various orders a liquidator can seek in relation to voidable transactions are set out in s588FF of the Act.
Time limits on recovering voidable transactions
Notwithstanding the importance of being able to recover voidable transactions, a demand by a liquidator for the repayment of money or the return of property, months or years after a voidable transaction occurred, can cause substantial hardship to the recipient. For this reason, liquidators are given a relatively short period of time to start chasing voidable transactions – broadly speaking they have to commence proceedings within 3 years of the start of the winding up.
This, however, can cause hardship in the other direction, as three years may not be a long time for a liquidator to identify and investigate voidable transactions, particularly in a large or complicated winding up. Section 588FF(3) provides that in some circumstances the court can extend the three year time period to ensure that unsecured creditors don’t miss out on a dividend because the liquidator runs out of time.
Sometimes, a liquidator will apply for a general extension of the three year period; in other words they will ask a court to give them more time to commence proceedings against anyone, not just people they have actually identified as potential targets for a voidable transaction claim. If granted, these are known as “shelf orders”, and they have presented particular challenges to the courts; people shouldn’t have to wait for years to find out if they will have to pay money or give property back to a liquidator, but liquidators need a reasonable chance to maximise the returns to unsecured creditors.
This balancing act was considered in a recent decision in the New South Wales Court of Appeal, Fortress Credit Corporation (Australia) II Pty Ltd & anor v Fletcher and others.
In September 2011 the liquidators of Octaviar Administration Pty Ltd applied for and were granted a shelf order, extending the time for bringing proceedings under s588FF to 3 April 2012. Fortress was not identified as an interested party at that time, and so was not told of the application.
On 3 April 2012, the liquidators commenced proceedings against Fortress to recover various voidable transactions. Fortress then sought to have the shelf order set aside, or varied so that it did not apply to Fortress; at the same time the liquidators sought to vary the order, after the expiration of the 3 April 2012 time limit, to make it specifically apply to Fortress. The decision on these matters in November 2012 was then appealed.
Outcome and comment
In considering the various arguments put up by Fortress, the Court of Appeal clarified some aspects of the law in this area.
Fortress argued that because it was affected by a decision of which it had no notice, and therefore no chance to oppose, it was entitled to have the shelf order against it set aside automatically. This argument did not succeed; it was found that while a court had a discretion to set aside a shelf order in these circumstances, it was not obliged to do so.
Fortress’s boldest contention, however, was that a general shelf order could not be made at all – it argued that if the liquidator did not identify the transaction they intended to attack, and the parties who would be affected, then s588FF did not permit the Court to extend the time for an application. This argument went directly against a previous decision of the New South Wales Court of Appeal, and was duly rejected. But it may well be that this submission was intended to clear the way for an appeal to the High Court.
The power of a court to make a shelf order is therefore fairly clear, for now, but if the matter is to go further, it may be too early to say that the law in this area is settled.
For more information please contact Tom Darbyshire on (08) 9321 3755.
The information published on this website is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.