Octaviar - the perils of procrastination

In brief

In two decisions arising from the Octaviar liquidation, the High Court has given guidance on liquidators' ability to seek extensions of time for bringing voidable transaction claims. The decisions also highlight the risks of such applications. Partner Christopher Prestwich and Lawyer Julia Baine report.

How does this affect you?

The High Court has confirmed that:

• liquidators can only seek an extension of time for bringing voidable transaction claims within the three-year limitation period. It is not open to liquidators later to ask a court to vary an earlier extension order if that initial limitation period has since expired; and
• liquidators can seek 'shelf orders', extending the time for bringing voidable transaction claims against possible defendants who have not been identified at the time of the extension application.

The decisions give liquidators guidance regarding the available options if they need to seek additional time to bring voidable transaction claims. Nonetheless, the safest course for liquidators remains to bring proceedings within the three-year limitation period, as seeking an extension will add risk. In this case, the consequence for the liquidators of relying on extensions of time granted by the court and that were then successfully challenged was that the liquidators lost their ability to pursue some claims altogether.

Can the court vary an earlier extension order for voidable transaction claims?

In recent years, it has not been unusual for liquidators to seek additional time to bring unfair preference or uncommercial transaction claims. Liquidators might, for example, need additional time to investigate the claims or to arrange litigation funding to meet the costs of the proceedings.

While there is a three-year limitation period for bringing voidable transactions claims, section 588FF(3)(b) of the Corporations Act allows the court to extend that period on application by the liquidator during that period. In this case, before the expiry of the limitation period, the Octaviar liquidators obtained a four-month extension. Shortly before expiry of that extension, the Octaviar liquidators made another application to the court, and obtained orders varying the earlier extension orders and extending the period for bringing claims by another six months. This second application was obtained not under s588FF, but using the court's apparent procedural powers to vary its earlier orders.

When the proceedings were eventually served on the defendants, they challenged that six-month extension, on the basis that the Corporations Act only permits extensions of time to be made during the limitation period. The liquidators argued that the court rules permit a variation of earlier orders, and that provided a means by which the limitation period could be further extended, even after the three-year period had passed.

On 11 March 2015, the High Court¹ unanimously rejected the argument that the court rules could be used to vary its earlier orders in these circumstances. It was held that those rules cannot rise above the strict words of the Corporations Act, which provide that any application for an extension of time 'may only be made' during the time limit stated in 588FF(3)(a). As such, once the three-year period from the 'relation-back day' has expired, no further extensions of time are permitted, even if framed as a variation of earlier orders.

As a consequence, the voidable transaction claims that the liquidators served during the six month extension period are time-barred and those claims will fall away.

Can liquidators use 'shelf orders' when seeking more time?

In a separate decision, the High Court considered whether, in relation to extensions of time for bringing voidable transaction claims, an extension can only be ordered in relation to specified transactions, or if the extension can extend to transactions that are not able to be identified at the time of the order. The latter form of order is sometimes referred to as a 'shelf order'. Shelf orders are attractive to liquidators whose investigations of the company's affairs are not yet sufficiently advanced to identify specific claims.

At the time that the first extension was granted, the Octaviar liquidators were still in the process of investigating and uncovering transactions that may give rise to potential claims. They were not aware of the possibility of a voidable transaction claim against the Fortress Investment Group LLC. Consequently, Fortress was not named in the application for the extension or notified of the application.

A 'shelf order' was, however, made, extending the time for bringing all voidable transaction claims.

The liquidators subsequently brought a voidable transaction claim against Fortress. Fortress sought to have the extension of time against it set aside, on the basis of a number of 'policy factors' as to why shelf orders should not be permitted (such as certainty for creditors and requiring liquidators to promptly identify claims and expedite the liquidation).

The High Court unanimously held² that a liquidator may seek an order extending time under s588FF(3)(b) without having, specifically and exhaustively, to identify every transaction to which that order may apply. The 'policy factors' relied upon by Fortress were a matter that could be considered by the court in the exercise of its discretion when deciding whether or not to grant an order on a case-by-case basis. As such, 'shelf orders' are permitted.

Comment

The High Court decisions provide welcome clarification about the options available to liquidators. However, any application for an extension of time by a liquidator is replete with risk:

• a separate decision in the Octaviar liquidation concerning a voidable transaction claim illustrates that an extension can be later set aside if the correct parties are not notified of the extension application;³ and
• as highlighted in our Focus on the NSW Supreme Court One.Tel Limited decision, it is open to the defendants, once served, to apply to have 'ex parte' extensions of time set aside.

The safest course for a liquidator to take is to file the proceeding within the limitation period, rather than risk later losing the ability to make the claim at all.