Green v Chiswell Furniture

THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2092/99 - MARTIN JOHN GREEN V CHISWELL FURNITURE PTY LIMITED (IN LIQUIDATION)

1 HIS HONOUR: By summons filed on 22 April 1999, the plaintiff Mr Martin Green, the liquidator of the defendant company, sought an extension of time under s 588FF(3) of the Corporations Law within which to bring any application under s 588FF(1) in relation to any voidable transactions by the defendant within the meaning of s 588FE. The application for an extension of time was urgent because the three year limitation period expired, for reasons which appear below, on 1 May 1999. I therefore heard the application, ex parte, on 27 April 1999 and on the same day I made an order extending time under s 588FF(3) to 1 May 2000, on the basis that I would deliver my reasons for judgment later. I now do so. 2 The other relief sought in the Summons, namely that the company be wound up by order of the Court (ie converting the present creditors voluntary winding up into a Court winding up) could not be dealt with until after the relevant advertising requirements under the Supreme Court Rules had been complied with, and so on 27 April 1999 I stood the proceedings over for further hearing.

Facts 3 On 1 May 1996 the plaintiff was appointed administrator of the defendant company. On 28 May 1996 the second meeting of creditors of the company in administration resolved that the company execute a Deed of Company Arrangement ('DCA'). The DCA was executed by the company on 4 June 1996. Chiswell Holdings Pty Ltd and Chiswell Properties Pty Ltd, two related creditors, were excluded from participating as creditors under the DCA: see definitions of 'Deed Creditor' and 'Directors Interests' cl 1, DCA. 4 On 16 October 1998 the plaintiff issued a Report to Creditors as administrator under the DCA, and convened a meeting of creditors on 13 November 1998 to consider, amongst other things, a resolution pursuant to s 445C(b) that the DCA be terminated and that the company be wound up. The meeting of creditors was adjourned to 30 November 1998. On 30 November 1998 the adjourned meeting of creditors resolved to terminate the DCA. The meeting considered a resolution that the company be wound up but that resolution was not carried because of the votes of the related creditors, Chiswell Properties Pty Limited ($1,900,000) and Chiswell Holdings Pty Limited ($175,000), against the resolution. On 1 December 1998 a secured creditor (Howard Finance Ltd) appointed Mr Prentice and Mr Barilla, as receivers and managers of the company. Then on 3 December 1998 a summons was filed by the Deputy Commissioner of Taxation, a creditor of the company, in proceedings 4894 of 1998, seeking an order that the company be wound up and an interim order for the appointment of a provisional liquidator. On 4 December 1998 I made an order appointing Mr Green provisional liquidator of the company. 5 On 17 December 1998 Windeyer J made orders in proceedings 4894 of 1998 for reconvening of the meeting of creditors to re-consider the winding up resolution, and (as I shall note below) granted consequential relief under s 447A. The reconvened meeting of creditors was held on 21 January 1999 and resolved that the company be wound up. Subsequently on 8 February 1999 Windeyer J dismissed the winding up summons in proceedings 4894 of 1998. Then the present proceedings commenced on 22 April 1999.

Limitation period - the law 6 Any application by the liquidator for relief under s 588FF(1) in respect of voidable transactions by the company under s 588FE must be made within 3 years after the 'relation-back day', or such longer period as the Court orders on an application by the liquidator within that three year period. 7 The expression 'relation-back day' is defined in s.9. Its meaning depends upon when the winding up of a company is 'taken to have begun' because of Division 1A of Part 5.6. In the present case, being a creditors voluntary winding up, sub-paragraph (b) of the definition in s 9 applies, so that the 'relation-back day' is the day on which the winding up is 'taken to have begun' because of Division 1A of Part 5.6, the relevant provisions of which are s 513B and s 513C. 8 A voluntary winding up is 'taken to have begun', in the ordinary case, on the day on which the special resolution is passed: s 513B(e). Where however the special resolution is preceded by some other form of administration (eg voluntary administration, or a deed of company arrangement) then the winding up is taken to have begun at an earlier date, being usually the date upon which the voluntary administration commenced. For example, s 513B(d) provides that where the special resolution that the company be wound up voluntarily is taken to have been passed because, at a meeting convened under s 445F, the company's creditors:

(i) passed a resolution terminating a deed of company arrangement executed by the company; and (ii) also resolved under s 445E that the company be wound up,

then the winding up is taken to have begun on the s 513C day in relation to the administration that ended when the deed was executed.

9 In the present case, the meeting of creditors of the company convened under s 445F (and initially adjourned to 30 November 1998), passed a resolution terminating the deed of company arrangement, but the further resolution (namely that the company be wound up) was not carried at that meeting, because of the votes of certain 'related creditors' against the resolution. However, pursuant to the orders by Windeyer J on 17 December 1998 in proceedings 4894 of 1998, the meeting of creditors was reconvened to consider a winding up resolution, the related creditors were precluded from voting, and consequential relief was granted under s 447A to the effect that the meeting of creditors held on 30 November 1998 be treated for all purposes as having being adjourned to the time and place as subsequently notified to creditors in accordance with the Court orders (namely the meeting reconvened on 21 January 1999).

10 The adjourned meeting of creditors on 21 January 1999 passed the resolution that the company be wound up, and hence the requirements of s 513B(d) were then satisfied. That is, at a meeting convened under s 445F (initially convened on 13 November 1998, then adjourned by resolution of the meeting to 30 November 1998, and further adjourned pursuant to Court order on 17 December 1998 to 21 January 1999), the company's creditors: (i) passed (on 30 November 1998) a resolution terminating the DCA; and (ii) (at the adjourned meeting on 21 January 1999) also resolved under s 445E that the company be wound up.

11 It is therefore necessary under s 513B(d) to identify the 'section 513C day'. The administration that ended under s 435(2)(a) when the deed was executed on 4 June 1996 was that which commenced with Mr Green's appointment on 1 May 1996. Sub-paragraph (a) of the definition in s.513C is inapplicable, because when the administration began (i.e. on 1 May 1996) a winding up of the company was not then 'in progress'. Hence, under s 513C(b) the 's 513C day in relation to the administration' is the day on which that administration began, namely 1 May 1996 (see s 435C(1)(a)).

12 It follows that the voluntary winding up of the company is 'taken to have begun' on 1 May 1996, and that this is also the 'relation-back day' for the purposes of voidable transactions under s 588FE(1). Principles governing extension of time application under s 588FF(3)

13 Section 588FF(3) does not specify any criteria which the Court should consider in deciding whether to exercise its discretion to grant an extension of time. However, the purpose of the recovery provisions with which s 588FF(1) is concerned (namely to prevent depletion of a company's assets prior to insolvency to the detriment of unsecured creditors) indicates the type of matters which should be considered. The question is whether it is reasonable to allow the liquidator to commence proceedings in a period longer than three years after the 'relation-back day'. The principal consideration would appear to be the reason why proceedings have not been commenced within the three year period - that is, the explanation for the delay in commencing proceedings. 14 The three year limitation period (with the proviso for an extension of time) was first introduced by the Corporate Law Reform Act 1992, effective 23 June 1993, following the recommendation of the Harmer Report (see Australian Law Reform Commission, Report of the General Solvency Inquiry (Report No.45), para 688). It is apparent from the Harmer Report that the purpose of shortening the limitation period (which previously was six years) was to place liquidators under more rigorous time limitations for taking action to recover in respect of voidable transactions. The justification for the amendment appears to have been complaints concerning inordinate delays in commencing proceedings in respect of voidable transactions, and judicial observations critical of general delays associated with winding up of insolvent companies (see AR Keay, Avoidance Provisions in Insolvency Law (1997) at 286, and the authorities referred to in note 127). 15 Considerations relevant to the exercise of the Court's discretion under s 588FF(3) were stated by 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 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 from 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.

In the present case there is no evidence of any prejudice which would flow from granting an extension and so that is not an issue.

16 In my opinion, there is a risk that in some cases a preliminary inquiry into the merits may impose an unnecessary burden on both the liquidator and the Court, especially in a case where the circumstances appear to give rise to complex or disputed questions of fact and law and the evidence before the Court is manifestly incomplete.

17 It is significant that s 588FF(3) requires that the application for an extension of time be made prior to expiry of the limitation period, in circumstances where it is unlikely that the Court, if it grants the application, will be able to proceed immediately to a hearing of the permitted proceedings on the merits. This suggests that a preliminary inquiry into the merits may often be of limited utility.

18 In this case, I have formed the view that the plaintiff's affidavit evidence establishes a proper and sufficient explanation for the delay in bringing proceedings. The intervention of the voluntary administration and the subsequent deed of company arrangement prior to the appointment of the liquidator at the adjourned creditors meeting held on 21 January 1999, has had the effect that instead of the normal three year period after his appointment as liquidator, the plaintiff had just over three months after becoming liquidator, to commence proceedings or apply to the Court for an extension. In addition, the plaintiff has been hampered in carrying out his investigations by the circumstance that the affairs of the company have been in the hands of the receivers since December 1998. 19 The purpose of the extension of time in the present case is to enable the liquidator to conduct appropriate enquiries and investigations and obtain necessary legal advice to decide whether or not to bring proceedings. That process will most likely involve the need to convene a meeting of creditors to consider proposals for funding arrangements in respect of any prospective litigation. That being so, I regard it as unnecessary and premature to embark upon any preliminary inquiry into the merits of any possible or prospective proceedings by the liquidator under s 588FF(1). 20 I was persuaded by these considerations at the hearing on 27 April 1999 that this was an appropriate case to order an extension of time of one year to 1 May 2000, under s 588FF(3), and I made an order accordingly. * * * * * * * * * *

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