TGIF 5 February 2021 – Serve to preserve: Court grants limited extension to preserve liquidators’ claim

This week’s TGIF considers a recent decision of the NSW Supreme Court which determined an application to extend the time to bring voidable transaction claims, where the potential defendants were themselves insolvent, deregistered or bankrupt and the prospect of returns from the proceedings unclear.    

Key takeaways 

• The Courts often hear applications for extensions of time to commence voidable transaction claims but never in circumstances where the extension was sought until it was clear there was practical utility in proceedings being filed.
  
  
• The policy underpinning Section 588FF(3)  of the Corporations Act is inconsistent with extensions being granted on that basis. It is directed towards promoting the timely resolution of such claims and allowing defendants to have certainty.  
  
  
• Possible ways to preserve such claims include, depending on the court you are in, filing a proceeding but not serving for a period or, alternatively, filing and explaining to the Court that the proceedings have been filed to preserve a statute of limitation and the practical reasons to defer their progress.

What happened?

On 16 October 2020, liquidators applied for an order that would extend the time for proceedings to be commenced under s 588FF of the Corporations Act 2001 (Cth) (the Act) for a period of three years.    

Since their appointment, the liquidators had identified at least four parties against whom proceedings could be commenced in respect of alleged voidable transactions. However, three of the four were in liquidation or deregistered, with the fourth a bankrupt individual.

The evidence revealed that the proposed corporate defendants had claims available to them which could achieve recoveries which, in turn, may be available to meet the claims of the liquidators. As a consequence, the liquidators wished to avoid commencing proceedings until it was known whether there were any funds to potentially be recovered by way of litigation.

Section 588FF(3)

Time limitations apply to proceedings under this section of the Act so as to provide certainty to persons who had dealings with insolvent companies and to preserve the quality of justice (which may deteriorate following delay).

Matters relevant to an application include whether it is fair and just to grant an extension, having regard to the reasons for the delay and any potential prejudice a defendant might suffer. Strength of the foreshadowed claim is also relevant in the sense that exposing a party to a hopeless suit would be unfair.  

Counsel for the liquidators argued there was little prejudice as the potential defendants were insolvent and their solicitors had indicated the application was not opposed. It was further contended the claim was a strong one of significant value, at least if the defendants had capacity to meet judgment.  

Decision

While Justice Black acknowledged the ‘commercial logic’ of the liquidators’ analysis, his Honour concluded the extension of time which was sought (that is, a period of three years) could not be properly granted under Section 588FF(3). That was because the policy underpinning the section was to promote the timely resolution of voidable transaction claims rather than allowing them to be deferred until commercially viable to run.

However, a shorter extension of three months was granted to allow sufficient time for the liquidators to consider alternative methods by which their claims could be preserved, such as filing and not serving proceedings, or filing and serving proceedings and ‘frankly explaining’ to the Corporations List judge why they may wish delay their progress.  His Honour observed that, while each case would be assessed on its merits, this approach would allow the claim to be adjourned, with the limitation period preserved and the parties not exposed to incurring unnecessary costs.

Comment

Applications for extensions of time under Section 588FF(3) are not unusual however neither Counsel nor the Court could identify a case which involved a similar issue. This decision provides useful guidance on both the scope of the section and possible methods of preserving voidable transaction claims where returns are uncertain and the expiry of a limitation period is imminent.