The High Court has unanimously rejected a challenge to the ability of liquidators to obtain shelf orders extending the time period within which to commence voidable transaction recovery actions. The High Court affirmed the decision of the NSW Court of Appeal1 which found that a Court may make orders pursuant to s588FF(3)(b) of the Corporations Act 2001 (Act) extending the limitation period within which to commence s588FF(1) recovery actions, without identifying a prospective defendant or the voidable transaction under challenge.
The decision confirms the position as it had been understood by liquidators for over a decade.
In the present case, the defendant, Fortress submitted that the power of the Court to extend the limitation period under s588FF(3)(b) should be limited to circumstances in which a liquidator had identified the voidable transactions in respect of which recovery would be pursued and notice had been given to the affected parties at the time of making the extension application. This blanket proposition was rejected by the High Court.
The Court noted that the legislative purpose of s588FF was to "avoid" transactions that are unfair to the general body of unsecured creditors, but also to provide commercial certainty to those who had past dealings with the corporation. The Court also noted that this purposive construction had been applied and followed in NSW since 20032.
Extensions of the limitation period pursuant to s588FF(3)(b)
Section 588FF(1) sets out the types of orders a Court may make if it is satisfied on the application by a liquidator that a transaction is a voidable transaction. Orders may include orders that a person repay money or transfer property back to the company (in liquidation).
Section 588FF(3) establishes a limitation period in which a liquidator can make an application to the Court under s588FF(1) being:
(a) during the period beginning on the relation-back day and ending:
(i) 3 years after the relation-back day; or
(ii) 12 months after the first appointment of a liquidator in relation to the winding up of the company;
whichever is the later; or
(b) within such longer period as the Court orders on an application under this paragraph made by the liquidator during the paragraph (a) period.
Section 588FF(3) ensures that liquidators investigate voidable transactions in a diligent and timely manner, rather than leaving those investigations to the end of the liquidation. However, the discretion in s588FF(3)(b) to extend that limitation period affords some flexibility, especially in complex liquidations when a diligent liquidator may not complete their investigations within the time period set by s588FF(3)(a). This proved to be the situation faced by the liquidators of Octaviar Limited (in liquidation) and Octaviar Administration Pty Ltd (in liquidation) as they investigated accounts and records for the Octaviar Group of companies.
When will a liquidator seek a shelf order?
The Fortress decision is not an open door for liquidators to seek generic extensions of time without identifying prospective defendants. If the prospective defendants are known to the liquidator at the time of seeking the extension application, due process and procedural fairness requires that the liquidator notify those prospective defendants of the application, thereby permitting them to be heard on the issue of the granting of an extension. The "shelf order" is a course to be followed only in the case of necessity or other strong reason.
In situations when a prospective defendant has not been identified and notified at the time of the extension application, and a shelf order is granted, it remains open to the defendant to subsequently challenge that order. The Court retains the discretion whether or not to set aside a shelf order as against particular defendant who is later targeted.
In Fortress the evidence showed that the liquidators had investigated the affairs of Octaviar Group diligently since their appointments. Nevertheless due to the complexity of the liquidation, the fact that the liquidators were appointed 11 months after the relation-back date for OA, and the nature of the transaction itself, the liquidators had not identified Fortress as a prospective defendant at the time of making the extension application.
When the liquidators subsequently brought a claim against Fortress, Fortress challenged the shelf order. However Fortress was unable to establish a good basis for setting aside the shelf order in so far as it applied to Fortress. The NSW Supreme Court rejected an argument that Fortress had been prejudiced by loss of memory and the passage of time.
It is unlikely that the decision will see an increase in the number of applications by liquidators for shelf orders. However, the decision should give a level of comfort to liquidators who, despite diligent efforts, have been unable to identify prospective defendants at the time of an extension application that a shelf order may be available.
1 Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher (2014) 308 ALR 166.
2 Shelf orders have consistently been granted in New South Wales since 2003. In 2003, the New South Wales Court of Appeal approved the validity of shelf orders in BP Australia Ltd v Brown (2003) 58 NSWLR 322 ( BP v Brown ). BP v Brown has also been followed by the Full Court of the Supreme Court of South Australia in Ansell Ltd v Davies (2008) 219 FLR 329. However, there was uncertainty as to the correct position nationally because the Queensland Court of Appeal in Greig v Stramit Corp Pty Ltd (2004) 2 Qd R 17 suggested that s588FF(3)(b) did not authorise the making of shelf orders.