Corporations Act 2001 (Cth) - Application for extension of time to bring action against parties - Turns on own facts

Corporations Act 2001 (Cth), s 588FF

1 MASTER SANDERSON: By originating process filed 21 April 2008, the plaintiff seeks to extend the time limit in which an application for orders under s 588FF(1) of the Corporations Act 2001 (Cth) in relation to voidable transactions of the company can be brought. The process was served on each of the defendants, but only the second defendant entered an appearance. She opposes the orders being made.

2 Section 588FF(3) is in the following terms:

(3) An application under subsection (1) may only be made:

(a) during the period beginning on the relation-back day and ending:

(i) 3 years after the relation-back day; or

(ii) 12 months after the first appointment of a liquidator in relation to the winding up of the company;

(b) within such longer period as the Court orders on an application under this paragraph made by the liquidator during the paragraph (a) period.

3 There was no dispute between the parties as to the principles to be applied in considering an application of this type. The issues the court needs to consider are three-fold:

(a) the explanation for the delay in bringing the proceedings;

(b) a preliminary view of the 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; and

(c) whether the likely actual prejudice resulting from the grant of an extension is sufficiently substantial to outweigh the case for granting an extension.

4 For the sake of completeness, I should also make the point that the application is brought within the time specified in s 588FF(3)(b). That, too, was common ground between the parties. The application is supported by three affidavits of the plaintiff - the first sworn 21 April 2008, the second sworn 26 June 2008 and the third sworn 19 August 2008. In opposition to the application, the second defendant relies on three affidavits. Two of these were sworn by her - the first on 12 June 2008 and the second on 22 July 2008. In addition, the second defendant relies on an affidavit of Kelly Hudson sworn 15 September 2008.

5 In his first affidavit, Mr Francis says that he was appointed as liquidator of Zaratell Pty Ltd on 31 May 2005. As a result of his investigations, he became aware of a series of transactions relating to six properties which he refers to as 'the Zaratell properties'. Five of these properties were in Cannington and one was in Maddington. Prior to 2001, the Zaratell properties were used to secure a loan from a number of companies and individuals in an amount of $600,000. In or around 2001, Zaratell was unable to repay the loan and the Zaratell properties were sold under instructions from the mortgagees. The sale of the Zaratell properties was not sufficient to pay off the loan. That led to the winding up of Zaratell. Mr Francis says that as a consequence of reviewing these transactions, he is suspicious that the company could have been insolvent as at 2001.

6 On 6 November 2007, he made application to examine 10 individuals who had dealings with respect to the Zaratell properties. The three present defendants were among the individuals examined. As at the date of swearing his first affidavit, Mr Francis had examined the second and third defendants, but not the first defendant.

7 Mr Francis then refers to possible voidable transactions. In particular, he refers to three of the Zaratell properties - he describes them respectively as the Bent Street property, the 343 Sevenoaks Street property and the Station Street property. On or about 16 November 2001, Zaratell transferred to the first defendant each of the three properties. The first defendant was the real estate agent engaged by or on behalf of Zaratell to sell the Zaratell properties. The sale price for the Bent Street property was $76,000, for the 343 Sevenoaks Street property $95,400 and the Station Street property $85,600. Two weeks after the sale of these properties by Zaratell to the first defendant the first defendant sold two of them to the second defendant. The Bent Street property was sold for $128,000 and the Station Street property for $160,000. On 13 March 2002, the first defendant transferred to the third defendant the 343 Sevenoaks Street property for $145,000. On or about 8 July 2004, the third defendant transferred the 343 Sevenoaks Street property to the second defendant for $210,000.

8 Mr Francis goes on to deal with the delay in bringing this application. He says that the books of the company were not delivered to him by the directors as is required by the Corporations Act. None of the present three defendants were directors of the company. When Mr Francis began the liquidation, he was without funds. On 15 November 2007, a litigation funding agreement was approved by this court. Prior to that time, Mr Francis had not taken any steps to investigate the claim.

9 The second affidavit of Mr Francis deals with documents he obtained during the course of his examination of various persons. He refers, in particular, to documents he obtained in relation to the three properties mentioned above. For reasons which will become apparent, it is not necessary for me to say anything further about these documents. The affidavit says nothing more about the reasons for the delay in acting against the defendants, nor does it give any timetable for proceeding with any action.

10 Mr Francis' last affidavit deals directly with the issue of delay. Helpfully, the affidavit has as an annexure a 'Chronology of Major Events'. That chronology shows that between the date of Mr Francis' appointment on 31 May 2005 and 14 March 2007, Mr Francis attempted to obtain from the directors of the company a report as to affairs and the directors' questionnaire. Mr Francis also attempted to obtain the books and records of the company. These were never obtained and it appears that they may have been disposed of. On 21 May 2007, Mr Francis received an expression of interest from a third party regarding the funding of litigation. A meeting took place on 13 June 2007 and eventually on 29 August 2007 a deed of indemnity was executed with Jonelle Investments Pty Ltd. Application was then made to the court for approval of the funding agreement.

11 Based upon this evidence, it is clear that up until the time the funding agreement was approved the liquidator had taken no steps to advance any action against the defendants. That is not a criticism of Mr Francis. The reality is that he had no funds, minimal information and no cooperation from the directors of the company. He could not have been expected to advance any claim the plaintiff might have had against the defendants. But the fact is, there was delay.

12 It is the second defendant's position that the delay has not been adequately explained. It was submitted that there is no explanation why it took 29 months to have litigation funding approved. Further, it is submitted that there is no explanation why, during the six months following the approval of litigation funding, sufficient enquiries could not have been made to allow a decision to be taken as to whether to pursue the defendants.

13 I am not satisfied that there is an adequate explanation for the delay. I accept that Mr Francis was without funds and I accept that he received no cooperation from the directors. He does not say when he became aware of the situation with respect to the Zaratell properties. It may only have been after the examination of various parties. But there would appear to be no reason why a search of the property register conducted soon after Mr Francis became liquidator would not have thrown up the circumstances of the transfer of these properties. Even without the report as to affairs and the directors' questionnaire, it might have been expected that Mr Francis would have taken some steps to obtain funding. No details at all are given as to what steps, if any, were taken in that direction. To my mind, that represents a significant gap in the evidence and amounts to a failure to explain the delay.

14 The delay, such as it is, after obtaining the litigation funding, is perhaps easier to understand. Ten witnesses had to be examined. Given that no books and records of the company were available, it is understandable that no decision has yet been taken as to what proceedings, if any, should be brought against the defendants.

15 In summary, then, 29 months of delay has not been adequately explained and six months of delay has been adequately explained. On balance, this consideration weighs against the plaintiff.

16 The plaintiff submitted that as matters stand at present, no preliminary view on the merits could be formed. It was the second defendant's submission that given no view on the merits could be formed, this was a factor weighing against a grant of leave. In my view, this head is neutral and favours neither one party nor the other.

17 That leaves the question of prejudice. Searches annexed to the plaintiff's affidavit sworn 21 April 2008 show that the second defendant is presently the registered proprietor of the Bent Street, Station Street and Sevenoaks Street properties. More than six and a half years have elapsed since these properties were sold by the plaintiff company. In the case of the Bent Street and Station Street properties, they have been owned by the second defendant since they were sold. The 343 Sevenoaks Street property was acquired a little later. Particularly in relation to the two first mentioned properties, the second defendant submits that any claim against her may well be statute-barred. That is not something that I have to determine in the context of this application. However, it must be said that there is a real prospect that the time for taking any action will have expired. That is a factor weighing against the grant of the extension.

18 Furthermore, the second defendant has taken steps with respect to two of the properties. The Bent Street property has been subdivided and funds have been expended on its development. An application has been prepared to subdivide the Station Street property and it is expected that subdivision will proceed in the near future. The second defendant submits that such time has passed and her dealing with the properties is such that she would suffer significant prejudice if the extension was granted.

19 The second defendant also points to general prejudice as a consequence of the delay. She says that her grandfather who would have been a material witness in relation to the 343 Sevenoaks Street property passed away almost two years ago. She did not have the opportunity to obtain a statement of his evidence. Given that it is now more than six years since the transactions with respect to the property took place, her memory will be impaired and there is a reduced chance of retrieving documents relevant to her defence.

20 On balance, I am satisfied that the second defendant has made out that she will be prejudiced if this extension is granted. I accept that she will suffer the general prejudice that flows from any delay in legal proceedings. I am also satisfied there is a particular prejudice in relation to the Bent Street property. In my view, this prejudice is a powerful factor in refusing the extension.

21 Weighing all these factors together, I am satisfied that the application ought be dismissed. I am not satisfied there is a proper explanation for the long period of delay. I am satisfied that the second defendant will suffer real prejudice if the action is allowed to proceed. Weighing these two factors in the balance, and ever mindful of allowing parties who may have participated in insolvent transactions to walk away from a company leaving creditors to bear the loss, I am satisfied that no proceedings ought be sanctioned.

22 This application, as I mentioned at the outset, was defended only by the second defendant. None of the factors as to prejudice could arise with respect to the first and third defendants. There would therefore seem to be no reason why time in relation to those defendants should not be extended. However, were I to make that order, it may impact upon the second defendant. Accordingly, I will publish these reasons and allow the parties to make further submissions before determining the final orders. I will also hear the parties as to costs.