Pursuant to section 588FF(3) of the Corporations Act 2001 (Cth) (the Act), a liquidator has three years from the “relation back day” or 12 months after their appointment (whichever is later) to apply to the Court for orders and declarations with respect to voidable transactions under section 588FE of the Act.  A liquidator is, however, entitled to apply to the Court to have the limitation period for such actions extended pursuant section 588FF(3)(b) of the Act.

A recent decision of the Federal Court of Australia, McCann v Mawson Restructures and Workouts Pty Limited, in the matter of Walton Construction (Qld) Pty Limited (in liquidation) [2016] FCA 1152, confirms what liquidators need to establish in order to extend the limitation period imposed by section 588FF(3) of the Act.

Relevant Background

In October 2013, administrators were appointed to Walton Construction (Qld) Pty Limited and Walton Construction Pty Limited (collectively the Companies).  The administrators of the Companies were subsequently appointed as the Companies’ liquidators.  Proceedings were brought for the removal of the liquidators who were ultimately replaced in July 2014.   The liquidators faced considerable obstacles in relation to recovering and reviewing the Companies’ books and records and with respect to funding various aspects of the liquidation.  The liquidators claimed to have identified four potential voidable transactions, totalling around $4 million and expected to uncover further voidable transactions in the course of undertaking further investigations.  Orders were sought extending the time to commence proceedings in both the identified claims and the as yet unidentified claims.

Application for an extension of time 

Shortly prior to the limitation period in section 588FF of the Act expiring, the liquidators made an application to the Federal Court of Australia to extend the time within which to commence the identified voidable transaction proceedings.  The application was opposed by the prospective defendants to the foreshadowed litigation.

Justice Edelman noted that in Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2015] HCA 10; (2015) 254 CLR 489 (Fortress) the High Court had held that section 588FF(3) entitled the Court to make “shelf orders” extending the limitation period in which to commence voidable transaction proceedings not yet identified.  As there is no criteria prescribed for the Court to exercise its discretion in section 588FF(3)(b) of the Act, Justice Edelman visited some recent cases which laid out what liquidators would usually need to show.  In particular, His Honour restated the matters that the Court should consider as set out in Walker v CBA Corporate Services (NSW) Pty Ltd [2012] FCA 328,  namely:

1. the explanation for the delay in commencing the proposed proceedings, such as complexity of the company’s affairs and information available to the liquidators;
2.  any prejudice likely to be suffered in the event the extension sought is granted; and
3. a preliminary view of the merits of the proposed proceeding, save in circumstances where the liquidator’s purpose in seeking the extension is to undertake further work to decide whether or not to bring proceedings.

The Court also considered the matters set out in Fortress with respect to which the Court should have regard in exercising its discretion to make shelf orders extending the limitation period in which to commence voidable transaction proceedings not yet identified, as follows:

(1) disadvantage to potential defendants not identified in a shelf order;
(2) the encouragement to liquidators not to identify potential defendants, thereby reducing the prospect of opposition at initial application;
(3) the risk of a multiplicity of litigation by successive defendants applying to reagitate extension applications of which they had not been given initial notice;
(4) the risk of inconsistent outcomes on applications to set aside extension orders by respective defendants;
(5) no finality, as claims by defendants that they were identifiable, but not identified, might cause ongoing challenges to any extension granted;
(6) want of certainty for liquidators and prospective defendants who might seek to have leave revoked after it had been granted and after proceedings had commenced;
(7) the potential for wasted costs to be incurred contrary to the interests of creditors; and
(8) the determination of applications by reference only to evidence that the liquidator elected to put before the court.

Consideration of the relevant matters

In determining that the limitation period should be extended and shelf orders should be made, His Honour had regard to the following:

• The appointment of the liquidators following the removal proceedings resulted in the liquidators having less than two years to conduct their investigations and make applications.
• The difficulties experienced by the liquidators in obtaining books and records of the Companies and dealing with matters relating to funding had been substantial.
• The opposing party would not suffer any prejudice beyond the general prejudice of delay which is suffered by any other party against whom a claim might be brought following an extension of time: a potential defendant will need to show more than general prejudice of delay in successfully establishing that shelf orders should not be made.
• Merits of a claim will only generally be relevant in the Court’s decision to exercise its discretion when the claim is actually identified, rather than where the reason for the extension is to investigate and consider potential claims.  The merits of a claim is however a factor to be considered with respect to identified transactions and potential proceedings.
• The Court will rarely be in a position to reach substantive conclusions as to the merits of any prospective claims or defences.

Conclusion

Justice Edelman noted that although shelf orders are not desirable he was satisfied that the liquidators should be given an extension of six months to continue investigations, obtain advice of counsel and commence proceedings.   The liquidators were also provided with an extension of the limitation period of six months with respect to three out of the four identified claims on the basis that the liquidators were resolving matters relating to funding to progress the claims.  The liquidators obtained an extension of the limitation period for eight weeks with respect to the identified claim against the Australian Taxation Office.

Liquidators looking to seek an extension of the limitation period imposed by section 588FF of the Act should be mindful as to the matters to which the Court will have regard in determining such an application.  For further information, please contact us.