Octaviar: Court of Appeal confirms use of "shelf orders"

Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2014] NSWCA 148

May 2014
The NSW Court of Appeal has confirmed the validity of orders extending the time for commencement of voidable transaction proceedings against a party that had not been identified by the liquidators at the time that the orders were obtained.

On 14 May 2014, the New South Wales Court of Appeal delivered judgment in Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2014] NSWCA 148. The Court sat a bench of 5 judges, who unanimously dismissed an appeal commenced by a party that was affected by extension orders obtained by the liquidators under s 588FF(3)(b) of the Corporations Act 2001 (Cth) (Act).
 

Summary

The decision of the Court of Appeal has clarified a number of important issues relating to the extension of time for the commencement of voidable transaction proceedings under the Act, including:

  • the power of the court to make a “shelf order”, being an order that does not specifically refer to named parties or transactions, but rather, extends the time for the commencement of any proceedings under s588FF(1) of the Act
  • the rights of a party who is not notified of an application for a “shelf order” to seek to have that order set aside
  • the policy considerations to be taken into account by the court when determining an application under s588FF(3) for an extension to commence proceedings under s588FF(1).

“Shelf” extension orders are permitted under s 588FF

Section 588FF of the Act deals with the recovery of voidable transactions by a liquidator. Generally, any such proceedings must be commenced within the 3 year period following the relation-back day for the relevant company, unless an extension of time is obtained. Section 588FF(3)(b) of the Act provides a mechanism to extend that time limit in circumstances where a liquidator is not in a position to commence proceedings within the mandated time period.

The Court of Appeal has now clarified that section 588FF(3)(b) accommodates the possibility of orders being made so as to extend the time for commencement of proceedings in relation not only to identified parties and transactions, but also in respect of some identified class of s 588FF(1) applications or indeed, any s 588FF(1) application not capable of precise identification and formulation. In this respect, his Honour Justice Barrett observed:

“Section 588FF(3) is a provision that directs liquidators as to how they are to conduct windings up and places in the hands of the court the ability to deal with circumstances in which, for some good reason shown, the liquidator requires more time to initiate proceedings under the voidable transaction provisions. The section’s mechanism for extension of time can be used to deal with an identified application or identified applications that the liquidator proposes making under s 588FF(1) or with some delineated class of s 588FF(1) applications not capable of precise identification and formulation or with all of s 588FF(1) applications not capable of precise identification and formulation. Each of these possibilities is accommodated by the words of the legislation.”


Notification to parties affected by a “shelf order”

Further, the Court of Appeal has confirmed that an order obtained under s 588FF(3)(b) in respect of a creditor who was not notified prior to the order being made because the creditor was not a target at the time is not liable to be set aside ex debito justitiae. Rather, the Court retains a discretion as to whether or not to set aside the order as against that creditor.

Chief Justice Bathurst, with whom the other members of the Court agreed, observed:

“...once is it accepted that BP v Brown was correctly decided it follows, in my view, that although there is a power to set aside the order on the application of a creditor who was not notified prior to its being made because the creditor was not a target at the time, the Court retains a discretion whether or not to set it aside as against that creditor.”

 

Balancing of interests affected by extension orders

The Court of Appeal has also made it clear that considerations of certainty pertaining to parties that have had dealings with the company prior to the commencement of the winding up must be balanced against the nature and purpose of the s 588FF(3)(b) extension power and the variety of circumstances in which a company liquidator may seek an extension of time for commencing proceedings in respect of voidable transactions. His Honour Justice Gleeson summarised the position in the following terms:

“…The proper construction of s588FF(3)(b) is not to be approached with mindset that providing certainty to persons who have dealt with the company after a finite time period is the paramount consideration. A more balanced approach is required having regard to the nature and purpose of the extension power and the variety of circumstances in which a company liquidator may seek an extension of time for commencing proceedings in respect of voidable transactions…”

The decision of the Court of Appeal removes any lingering uncertainty as to the extent of the extension powers under s 588FF(3)(b), and will facilitate a more certain outcome for liquidators proceeding under that section in future. It also provides confirmation that the Court will have regard to the unique circumstances of a particular liquidation when determining whether to grant an extension, assuring persons with rights to participate under a winding up that the time limit will not have an inflexible and arbitrary operation and may be relaxed in an appropriate case.

Scott Atkins

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Scott is a trusted adviser to Australia's leading banks and insolvency and restructuring practitioners and has acted on some of the industry's most complex and sensitive banking and insolvency advisory and dispute resolution matters.

Prior to joining HDY, Scott practiced for 7 years as in-house counsel with Commonwealth Bank Group. He is now our Client Relationship Partner for the CBA Group. He is also the co-leader of our cross-border insolvency practice and our regulatory enforcement practice. Scott is recognised by his peers for his leading expertise in cross-border insolvency, acting on both inbound engagements in Australia and advising Australian clients on outbound engagements in the USA, UK, Cayman Islands, Hong Kong and The Netherlands, among other jurisdictions.

Scott was the Australian delegate on the Advisory Committee on Comparative Law established by the American Bankruptcy Institute as part of its Commission to Study the Reform of Chapter 11 of the US Bankruptcy Code. This resulted in a landmark report for the reform of Chapter 11.

He is a published author on insolvency and cross-border insolvency. Most recently, Scott was one of the Australian contributors to the 2015 publication 'International Contributions to the reform of Chapter 11 U.S. bankruptcy code' which is volume 2 of the European and International Insolvency Law Studies series. He also authored the Australian chapter of Avoidance of Antecedent Transactions and Cross-Border Insolvency (INSOL International). Among other publications, he is the co-author, together with Professor Rosalind Mason, of the Australian chapter of Look Chan Ho's leading text: Cross-Border Insolvency: Cases and Materials (Kluwer International).

Scott is a visiting lecturer on cross-border insolvency at the University of Sydney in its undergraduate and postgraduate law programs lead by Professor John Stumbles.

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Kathy has extensive experience in the areas of insolvency, directors and officers duties, professional negligence claims, and regulatory and other investigations, representing parties whether as plaintiffs, defendants, investigators or the subject of investigation.

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