Implications for insolvency proceedings 4 min read
In a special leave application filed with the High Court of Australia, a judgment debtor is seeking to avoid being wound up in insolvency on the basis that an order to extend the statutory six-month period was ineffective as it was granted to 'a date to be fixed'; an indefinite time.
Background
In 2015, the liquidators of Gunns Limited (Liquidators) commenced a proceeding against Badenoch Integrated Logging Pty Ltd (Badenoch) seeking to recover unfair preference payments (Primary Proceeding). The Liquidators were successful in the Primary Proceeding. Badenoch appealed to the Full Court of the Federal Court of Australia and was successful, in part, in reducing their judgment debt (Appeal Proceeding).
In November 2020, after judgment in the Primary Proceeding but during the conduct of the Appeal Proceeding, the Liquidators commenced a separate proceeding in the Federal Court seeking orders that Badenoch be wound up in insolvency (Winding Up Proceeding).
Given that the Winding Up Proceeding was to be determined within six months (see s459R(1) of the Corporations Act 2001 (Cth) (Act)) and that the Appeal Proceeding was still ongoing, the parties agreed consent orders in the following terms:
Pursuant to section 459R(2) of the [Act], the period within which the [Liquidators'] application in [the Winding Up Proceeding] be determined (as required by section 459R(1) of the Act) be extended to a date to be fixed, such date to be not prior to six months after the determination of [the Appeal Proceeding]… (Extension Order).
Following the determination of the Appeal Proceeding and the subsequent landmark High Court decision to abolish the peak indebtedness rule, the Liquidators demanded payment of the judgment debt from Badenoch. Badenoch did not pay the amount. Instead, Badenoch filed an interlocutory application seeking a declaration that the Winding Up Proceeding had been dismissed automatically pursuant to s459R(3) of the Act or, alternatively, an order that the proceeding be dismissed as an abuse of process or for want of prosecution.
The decisions
Federal Court decision
In the first instance, the Federal Court found in Badenoch's favour. The primary judge concluded that an effective exercise of the power under s459R(2) of the Act required that 'the period' as extended be one that is 'definite, measured by a period of time'. The primary judge concluded that the period may be fixed by stipulating a date, or it may be determined by reference to a number of days or months, but it could not be fixed by reference to the occurrence of an event. On this basis, the primary judge found that the Extension Order was not effective in extending the statutory period for determination of the application to wind up in insolvency as required by s459R(2) of the Act and, as a consequence, the application was taken to have been dismissed by operation of s459R(3) upon expiry of the six-month period.
The Full Court decision
On appeal, the Full Court overturned the primary judge's decision and found that the Extension Order was effective in extending the period in which the application to wind up Badenoch in insolvency was to be determined. When considering the section of the Act, the Full Court noted that the only prerequisites for the exercise of the court’s discretion are that:
- the court is satisfied that special circumstances justify the extension; and
- the extension order is made within the six-month period, or within the period as last extended.
Noting this, the court's discretion should not be fettered by requiring that an extension under s459R be made to a specified time or measure of time after an event. In this regard, the Full Court found that the Extension Order was effective because the language of s459R of the Act does not suggest that 'the period' means a period 'of time' or which must be fixed to a specified date or by reference to time. While the Full Court agreed with the primary judge that 'the period' in s459R(2) of the Act must be definite, it noted that 'the period' as extended will be definite if it is:
- fixed to a specific date;
- measured by reference to time (ie a number of weeks); or
- an interval that is able to be identified when the extension order is made, such as by reference to an identifiable event.
Given the Extension Order referred to a date to be fixed by the court after the occurrence of an event that was certain and identifiable at that time (ie the Appeal Proceeding), the Full Court held that the Extension Order was effective.
Stay tuned
In January 2025, Badenoch filed an application for special leave which is yet to be heard by the High Court.
In any event, should the High Court determine that this issue should be considered, we don't expect judgment to be delivered until the second half of this year.
Should you wish to discuss further, please do not hesitate to contact one of our experts