BP Australia Ltd v Brown

Supreme Court of NSW|2020-12-07|Before: Gleeson J, Mr P

Solicitors: Hugh & Associates Lawyers (Plaintiff) File Number(s): 2020/336630

Judgment

GLEESON J: Application is made by Bradd Morelli, the current liquidator of Jehovah Jireh Enterprises Pty Ltd (in liq) (the company), for an extension of time under s 588FF(3) of the Corporations Act 2001 (Cth) within which to bring an application under s 588FF(1) in relation to any voidable transactions by the company. The effect of s 588FF(3) is that unless the Court allows a longer period, any voidable transaction application must be made by the latter of three years after the relation-back date or twelve months after the first appointment of a liquidator in relation to the winding-up, whichever is the later.

Background

The company was placed into a voluntary winding-up by resolution of its sole member, Jeremy Jonathan Bell, on 11 February 2018 and has proceeded as a creditors' voluntary winding-up. On the same date, Marcus Watters, of the firm GM Advisory, was appointed liquidator. Accordingly, the relation-back date is 11 February 2018: Corporations Act, s 91, Item 15, and s 513B(e). Three years after the relation-back date is 11 February 2021.
In March 2018, Mr Watters became a partner of Jirsch Sutherland. In February 2020, Mr Watters resigned from Jirsch Sutherland and on 20 April 2020, this Court ordered that Mr Morelli replace Mr Watters as liquidator of the company. That order took effect on 23 April 2020 when notice of the order was given to ASIC.
The company carried on business of specialised cleaning of construction sites in south east Queensland as trustee for the Bell Family Trust (BFT). On 14 January 2018, the company was removed as trustee of the BFT and Commercial Cleaning Group (QLD) Pty Ltd, now known as Bell's Family (QLD) Pty Ltd, was appointed as trustee of the BFT. On 15 January 2018, Commercial Cleaning Group (QLD) Pty Ltd sold the business of the BFT to Construction Cleaning Group (QLD) Pty Ltd as trustee for the Construction Cleaning Group (QLD) Unit Trust.
The current liquidator seeks a general or "shelf" order extending the time without specifying any particular potential defendant or transaction in the orders. Such an order is within power: Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher (2015) 254 CLR 489; [2015] HCA 10. In the originating process, the liquidator sought an 18-month extension of time from 11 February 2021 to 11 August 2022. In oral submissions, counsel for the liquidator accepted that a lesser time of twelve months may be more appropriate.
The application is made ex parte. When exercising the power to extend time under s 588FF(1) and s 588FF(3), the Court must afford procedural fairness to potentially affected persons: BP Australia Ltd v Brown (2003) 58 NSWLR 322; [2003] NSWCA 216 at [133]-[136]. This is relevant to whether there is a clearly identified party with a substantial interest in the question to be determined, who has not been given notice of the application.

Legal principles

Whilst s 588FF(3)(b) does not prescribe any criteria for the exercise of the discretion, the Court's task is to ascertain what is "fair and just in all the circumstances": BP Australia Limited v Brown at [187] (Spigelman CJ, Mason P and Handley JA agreeing). The onus is on the liquidator to show why the general rule established by s 588FF(3)(a) should not apply: New Cap Reinsurance v Reaseguras Allianza SA [2004] NSWSC 787; (2004) 186 FLR 175 at [55] (White J), citing Ipp JA in Itek Graphix Pty Ltd v Elliott (2002) 54 NSWLR 207; [2002] NSWCA 104 at [88]-[89].
The factors relevant to the exercise of the discretion had been referred to in many cases. In Green v Chiswell Furniture Pty Ltd (in liq) [1999] NSWSC 608, Austin J said with reference to the decision of Finn J in Taylor v Woden Constructions Pty Ltd (Federal Court, 23/8/98, unreported): The following propositions, with which I respectfully agree, emerge from that case: (a) ordinarily, the issues raised on an extension application are threefold: (i) the explanation for the delay in bringing the proceedings; (ii) a preliminary review of merits of the foreshadowed proceedings - that is, an investigation as to whether such proceedings would be so devoid of prospects that it would be unfair, by granting an extension, to expose the other party to the continuing prospect of suit; (iii) whether the likely actual prejudice resulting form the grant of an extension is sufficiently substantial to outweigh the case for granting an extension; (b) where the liquidator's purpose in seeking the extension of time is simply to put himself into a position where he can properly decide whether or not to bring proceedings, a preliminary inquiry into the merits of any consequent proceedings may not always be necessary.
Reference should also be made to the remarks of the High Court in Fortress Credit at [25] which described a number of considerations which might inform the approach to the exercise of the Court's discretion in the case of a "shelf" order: (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

The affidavit of the current liquidator, Mr Morelli, deposed that unsecured creditors of the company are owed more than $1.1 million. Mr Morelli explains the work done by the former liquidator, Mr Watters, in investigating and evaluating potential s 588FF(1) claims during 2018 and 2019, principally by reference to the former liquidator's reports to creditors dated 23 February 2018, 10 May 2018, and 11 October 2018.
The May 2018 report to creditors stated that having reviewed the Westpac Bank statements and documents obtained under the Freedom of Information Act 1982 from the ATO: 1. potentially unfair preference payments comprised approximately $170,000 paid by the company to the ATO and other separate payments totalling $285,430.17 which required further investigation; 2. payments totalling $254,383.23 required additional investigation as they could potentially be uncommercial transactions; 3. payments totalling $315,047.50 required additional investigation as they could potentially be uncommercial director-related transactions. Of this amount, a total of $252,964.54 was paid to an ANZ overdraft account, but the ANZ Bank had not confirmed if the company held accounts with that bank. The remaining $62,082.96 was comprised of transfers to "J E Bell" or "Jeremy".
In July 2018, the former liquidator entered into a deed of settlement with Commercial Cleaning Group (QLD) Pty Ltd and Construction Cleaning Group (QLD) Pty Ltd in relation to the liquidator's claims that the company has a right of indemnity against the assets of BFT and that the sale of the business to the new unit trust may be an uncommercial transaction. The amount recovered was $30,542.65. In addition, the former liquidator recovered an amount of $140,000 from the Australian Taxation Office in settlement of an alleged unfair preference claim, as reported to creditors in October 2018.
In June 2019, the former liquidator instructed Mr Oliver Schweizer to prepare an expert report on insolvency. That report was not provided until August 2020, for reasons not known to Mr Morelli.
Mr Morelli acknowledged that there is some degree of uncertainty as to what, if any, assistance the former liquidator received from Mr Bell. Mr Morelli deposed that the liquidation file records that the three boxes of material may have been provided to the former liquidator by Mr Bell, however, the former liquidator has advised that he does not recall receiving three boxes, although a member of his staff does. In any event, those documents, assuming they exist, have never been provided to Mr Morelli.

Delay

There are two periods of delay by the former liquidator. The first is between October 2018 and June 2019 when Mr Schweizer was instructed to prepare an insolvency report. The second is between June 2019 and February 2020 when the former liquidator resigned from Jirsch Sutherland. Of course, not all of the total period of 15 months involved delay by the former liquidator. Some allowance should be made for the time taken by the former liquidator in deciding to obtain an insolvency report, instructing the expert and for the expert to prepare such a report in the ordinary course. Some allowance should also be made for the Christmas vacation included in these two periods. Nevertheless, even after making such allowances, there is a total period of about 8 months unexplained delay by the former liquidator.
Counsel for the current liquidator properly accepted that the Court should have regard to the entire period of the liquidation, not just the period that the current liquidator has conducted the winding-up of the company, referring to the decision of Sifris J in Re Cohalan & Mitchell Roofing (in liq) [2020] VSC 222 at [46]. A similar approach was taken in Marsden (liquidator) v CVS Lane PV Pty Ltd, in the matter of Pentridge Village Pty Ltd (in liq) (Receiver & Manager Appointed) (Controller Appointed) [2018] FCA 102 at [67], where the previous liquidators and the current liquidator were members of the same firm.
In Mitchell Roofing, the current liquidator had conduct of the winding-up for a period of 19 months, compared to the former liquidators of 17 months. The application for an extension of time was made one day before the limitation period in s 588FF(1) was to expire. In allowing an appeal against a decision of an associate judge extending time under s 588FF(3), Sifris J was not satisfied that the current liquidator had not contributed to the delay.
McCann v Mawson Restructures and Workouts Pty Ltd, in the matter of Walton Construction (QLD) Pty Ltd (in liq) [2016] FCA 1152 is distinguishable on the facts from the present case. There, the former liquidators had been replaced by a separate firm of liquidators owing to a conflict of interest. Edelman J approached the matter on the basis that the current liquidators had less than the three-year period that would ordinarily apply.
No evidence was adduced of any particular circumstances relating to the former liquidator which might explain the relative inactivity in the administration in the two periods identified at [15] above. It is not suggested that there was an absence of funding available to the former liquidator. Nor is it suggested that there was an absence of co-operation by Mr Bell. I accept that in the absence of the insolvency report, the former liquidator was inhibited in evaluating the viability of any unfair preference claims which depended upon establishing the date of insolvency of the company. The inference is that the former liquidator was not diligent in pursuing the expert to provide that report in a timely manner.
I also accept that the former liquidator is likely to have been inhibited in evaluating the viability of voidable transaction claims generally by the absence of bank records identifying the recipients of moneys paid from the company's accounts. That however does not explain why the former liquidator did not seek to conduct public examinations, as the current liquidator has now made application to do, to obtain the required information.
Accepting the relative inactivity of the former liquidator in the two periods referred to above ended in February 2020, I do not infer that there was a deliberate decision on the part of the former liquidator not to pursue, in a timely fashion, the investigations for which an extension is now sought by the current liquidator, such that any prejudice occasioned might also be said to be self-inflicted: Re Clarecastle Pty Ltd (in liq) [2011] NSWSC 857; (2011) 85 ACSR 260 at [141] (Ward J)
Mr Morelli has been liquidator of the company since 21 April 2020, that is, for approximately seven months. I accept that Mr Morelli has not caused any delay. I am satisfied, based on his affidavit evidence, that he has been proactively progressing the administration since his appointment, notwithstanding the difficulties associated with restrictions on the liquidator and his staff attending their office during the Covid-19 pandemic restrictions.
I accept that Mr Morelli has been actively investigating to the extent that he could having regard to the limited books and records available to him, potential voidable transaction claims; seeking to obtain a copy of a forensic trace of certain payments or withdrawals made from the company's bank accounts in the six months prior to the relation-back date; investigating payments made by the company to ANZ for an overdraft facility (when ANZ has said the company did not have any ANZ accounts); instructing solicitors in relation to conducting further investigations, including considering a public examination of Mr Bell pursuant to s 596A of the Corporations Act; and instructing solicitors to prepare an application for a public examination and for the issue of orders for production to various persons. The application for a public examination has been filed and counsel for the liquidator informed the Court that it is expected that examination dates will be given for March 2021.
Mr Morelli deposed that he seeks an extension of time under s 588FF(3) to investigate and evaluate various payments totalling approximately $737,000 as potential voidable transaction claims. Counsel for Mr Morelli accepted that this amount generally corresponded to the three categories of potential recoveries identified by the former liquidator, as referred to in [11] above.
Subject to the three payments by the company (two to "J E Bell" and one to "Jeremy", who I infer is Mr Bell), I accept Mr Morelli's evidence that he has not been able to determine the recipients of the payments totalling approximately $737,000, or for what purpose the payments were made. Mr Morelli has requested forensic traces from the company's bank, Westpac, and only received a reply on 10 November 2020. The staff assisting Mr Morelli are in the process of reviewing the information provided to ascertain the identity of the recipients and are investigating the nature and purpose of these payments. Significantly, however, Westpac did not, despite requests by Mr Morelli, provide the name of the account holders or identity of the recipient of the funds. Westpac has only provided the account numbers for some of the accounts into which the company's funds were paid.

Merits of potential claims

Given that the current liquidator's purpose in seeking the extension of time is to put himself into a position where he can properly decide whether or not to bring proceedings, a preliminary inquiry into the merits of any consequent proceedings is not necessary in this case: Green v Chiswell Furniture.

Prejudice

As to prejudice, it is necessary to keep in mind the four broad rationales for the enactment of limitation periods, referred to by McHugh J in Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541 at 555; [1996] HCA 25 at 552 and 554. I also had regard to the remarks of Spigelman CJ in BP Australia Ltd v Brown (2003) 58 NSWLR 322; [2003] NSWCA 216 at [112]-[114].
Counsel for the liquidator submitted that in the absence of specific claims and identifiable defendants, Mr Morelli is not in a position to specify the precise prejudice that may arise if an extension is granted. I accept that submission, subject to two qualifications.
One is that presumptive prejudice of the kind identified in Brisbane is a presumption of actual prejudice: Clarecastle at [223]. The prejudice may exist without it being able to be identified because facts which were once known may now be forgotten, or their significance may not now be appreciated: Brisbane at 551; New Cap at [71].
The other matter is that the former liquidator has already identified the recipients of certain potential unreasonable director-related transactions in his May 2018 report to creditors, namely J E Bell and "Jeremy": see [11(3)] above.
As to this last matter, counsel for the liquidator initially submitted that an extension order should be made ex parte on condition that Mr Bell be given notice of the order and an opportunity to seek to set aside that order. That is not the preferable course in circumstances where the Court is obliged to comply with procedural fairness and nothing appeared by way of urgency or otherwise with respect to Mr Bell to require an ex parte order to be made. As Spigelman CJ said at [136] in BP Australia Ltd v Brown, "the appellant was unnecessarily placed in the position of applying to the Court, pursuant to leave reserved by order of the Court, to have the order discharged".
In my view, in the absence of notice of this application having been given to Mr Bell or J E Bell, any order extending time under s 588FF(3) should be subject to a carve out in relation to the three potential unreasonable director-related transactions listed on p 129 of Exhibit A totalling $60,082.96 ($49,912.13, $5,000 and $5,170.83). I note that the reference to the slightly higher amount of $62,082.96 in the former liquidator's report of May 2018 appears to be an error.
In exercising the discretion to extend time it is necessary to consider all the circumstances of the case when balancing the interests of two potential defendants to voidable transaction claims. against the interests of creditors of the company. Here, taking into account the presumptive prejudice of delay to potential defendants to voidable transaction claims and the rationales underlying the three year limitation period in the context of company liquidations, I am satisfied that an extension of time is appropriate given the interests of creditors in the potential recovery by the liquidator of voidable transaction claims of significant value that the liquidator considers warrant further investigation. Importantly, the period of unexplained delay by the former liquidator ceased about a year prior to the expiry of the three year limitation period in s 588FF(3)(a), the current liquidator has acted diligently since his appointment in April 2020 but has experienced difficulties in investigation potential voidable transactions because of the deficiencies in the company's records, the lack of co-operation from the company's banks in providing information requested, and the general difficulties associated with the COVID 19 pandemic restrictions on attending the liquidator's office. In addition, the earliest public examination dates that the Court can fix are in March 2021.
As to the length of the extension, I am not persuaded that an extension of 18 months to 11 August 2022 as sought in the originating process is justified. Taking into account the forthcoming Christmas vacation and balancing the need to commence proceedings quickly after the proposed public examinations in March 2021, against the various steps that would need to be taken by the liquidator when deciding to commence proceedings, including obtaining legal advice and drafting proceedings, in my view, a more limited extension to 11 September 2021 is appropriate.

Conclusions

The liquidator seeks a general "shelf" order extension of 18 months. An extension of that length is unjustified. However, I am satisfied that in all of the circumstances of this case, an extension of seven months to investigate and evaluate bringing any further claim based on s 588FF(1) of the Corporations Act is appropriate, subject to three carve outs.
First, the extension should not apply to any application under s 588FF(1) against the Australian Taxation Office.
Second, the extension should not apply to any application under s 588FF(1) against Commercial Cleaning Group (QLD) Pty Ltd (in its own right and as trustee for the Bell's Family Trust) and Construction Cleaning Group (QLD) Pty Ltd (as trustee for the Construction Cleaning Group (QLD) Unit Trust), being parties to the deed of settlement dated 26 July 2018 with the former liquidator of the company.
Third, the extension should not apply to any application under s 588FF(1) against J E Bell or Mr Jeremy Bell in respect of any of the potential unreasonable director-related transactions within s 588FDA(1) of the Corporations Act identified by the former liquidator in respect of amounts paid by the company on 22 September 2017 ($49,912.13), on 27 October 2017 ($5,000), and on 18 December 2017 ($5,170.83).
Accordingly, the Court orders that: 1. Pursuant to s 588FF(3) of the Corporations Act 2001 (Cth), the time for making any application in respect of Jehovah Jireh Enterprises Pty Ltd (in liq) under s 588FF(1) of the Corporations Act be extended to 11 September 2021. 2. Order 1 above does not apply to any application under s 588FF(1) of the Corporations Act against: 1. the Australian Taxation Office; 2. Commercial Cleaning Group (QLD) Pty Ltd in its own right and as trustee for the Bell's Family Trust; 3. Construction Cleaning Group (QLD) Pty Ltd in its own right and as trustee for the Construction Cleaning Group (QLD) Unit Trust; and 4. J E Bell or Jeremy Jonathan Bell in relation to any potential unreasonable director-related transactions within the meaning of s 588FDA(1) of the Corporations Act identified by the former liquidator of the company with respect to payments made by the company on the following dates: 22 September 2017 - $49,912.13 27 October 2017 - $5,000 18 December 2017 - $5,170.83.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 10 December 2020

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