TGIF 3 May 2019: A Matter of Discretion: when will a court go behind a deal struck by a liquidator?

This week’s TGIF considers the decision in Erskine as liquidator of North Shore Property Developments Pty Ltd (in liq) v 72-74 Gordon Crescent Lane Cove Pty Ltd [2019] FCAFC 62, where a determination was upheld that Courts should not go behind a deed of release entered into by a liquidator without a valid basis for doing so.

This appeal to the full Federal Court involved the unsuccessful application of a newly appointed liquidator for an extension of time to possibly bring an application for unreasonable director-related transactions. The transactions in question were the subject of a Deed of Release and Settlement that had been entered into by the former liquidator.

WHAT HAPPENED?

In 2014, North Shore Property Developments Pty Ltd (Company) sold four apartments and four garage spaces for a total of $1.62m to Mr Eddy Haddad, the brother of the director of the Company, in circumstances where the apartments were said to be incomplete and with significant defects. Mr Haddad undertook rectification works and later sold the apartments and two of the garage spaces for a total of $4.069m. The Company was later placed into liquidation and Mr Iannuzzi was appointed liquidator.

In 2017, the liquidator made demand on Eddy Haddad for, initially, $322,508 in respect of the alleged unreasonable director related transaction and, later, for $7.55m for the value of the alleged uncommercial transactions for the sale of the four apartments. A resolution of these claims was reached between Eddy Haddad and the liquidator without any proceedings being issued.

A Deed of Settlement was entered under which Eddy Haddad paid $32,500 in consideration of a full release from the liquidator.

Subsequently, Mr Iannuzzi was replaced on application of the Commissioner of Taxation and the appellant in this proceeding was appointed as liquidator. On 3 October 2017, the newly appointed liquidator accessed Mr Iannuzzi’s files and conducted a preliminary review. She considered there was a real and not merely speculative prospect that the transactions the subject to the Deed were voidable.

Accordingly, she applied for an extension of time to bring an application for repayment of voidable transactions before the limitation period expired on 28 December 2017.

RELEVANT STATUTORY PROVISIONS

This decision considered section 588FF(3)(b) of the Corporations Act 2001 (Cth) (Act), which provides the court with discretionary powers to extend the time in which a liquidator may bring an application under the voidable transactions regime.

In exercising this discretion the court is required to consider:

1. the explanation for the delay in bringing the proceedings;
2. the merits of the proceedings; and
3. whether the likely prejudice resulting from an extension of time is substantial enough to outweigh the case for the extension.

Regarding the second factor, the Court is only required to form a preliminary view of the merits to ensure there are reasonable prospects, so as to avoid unfairly exposing the defendant to the continuing prospect of litigation.

Liquidators most commonly seek such an extension of time to allow further investigations to be undertaken. Where a liquidator seeks an extension to enable them to decide whether or not to bring proceedings, a preliminary enquiry into the merits of consequent proceeding may not be necessary.

PROCEEDINGS

The trial judge held that:

• the Deed (which contained the release) acted as a bar to the proposed proceeding; and
• the new liquidator failed to establish any basis on which to set aside the Deed,

meaning that there was no prospect of success in any future claim for the alleged potential unreasonable director-related transactions. This was fatal to her application.

The trial judge also considered the investigation and settlement by the former liquidator, and the time that had passed since the transactions, meant that a real and substantial prejudice would occur if an extension were granted.

DECISION ON APPEAL

In dismissing the appeal, the Court held:

• there is no universal principle establishing when a preliminary enquiry into the merits of the consequent proceeding should not be conducted. To apply the principle that a liquidator ‘should not be close out’ provided a satisfactory explanation for the delay is given, would in effect negate the existence of the discretion.
• the Court is entitled to consider the merits of the prospective proceedings at the time the application for extension is brought and distinguished these circumstances from a case where further investigation is required into circumstances which may give rise to a voidable transaction claim, but further investigation is required. In such a case, a satisfactory explanation for the delay in completing those investigations would be necessary.
• the liquidator was unable to point to any potential basis on which to set aside the Deed, requiring further investigation.
• the primary judge’s finding that a particular factor was decisive, is not to say that other factors have not been given proper consideration.

COMMENT

This case emphasises the discretionary nature of the power under section 588FF(3)(b) of the Act and highlights the balancing exercise to be undertaken by the Court in determining such applications.

It is also a clear reminder that courts will not grant extensions of time lightly, even in circumstances where the delay in bringing the claim may have, on its face, valid explanation (such as a recent appointment). Nor will courts be minded to look behind investigations or terms of settlement entered into by practitioners who are later replaced, without valid grounds for doing so.