In the matter of Fat 4 Pty Limited (In Liquidation)

A recent case in the Supreme Court of Victoria has provided some relief for liquidators seeking to add a defendant to a voidable transaction claim after the expiry of the limitation period in circumstances where the wrong defendant was sued by mistake. In such circumstances, liquidators can substitute the incorrect party for the desired defendant without being time barred by s 588FF(3) of the Corporations Act, irrespective of whether the liquidator’s mistake as to the correct party was reasonable.

Introduction and Executive Summary

On 2 June 2016, the Supreme Court of Victoria in Fat 4 Pty Limited (In Liquidation) & Anor v Feber Distribution Pty Ltd [2016] VSC 304 granted an application to amend the name of a defendant pursuant to r 36.01 of the Supreme Court (General Civil Procedure) Rules 2015. The liquidators of Fat 4 Pty Limited (in liquidation) (“the company”) brought a voidable transaction claim against Feber Distribution Pty Ltd (“Feber”) under Part 5.7B of the Corporations Act.

By way of summary, Associate Justice Gardiner found that:

  • the test under r 36.01 as set out in the leading authority of Bridge Shipping1 had been established by the liquidators, namely, there was a mistake, in the name of the party and there was no prejudice of the relevant type which would be suffered by another party in granting the application;
  • the plaintiffs’ intention was to sue the creditor who had been paid the funds in respect of an unsecured debt that the company owed to that creditor and therefore the intended defendant was able to be identified and substituted by virtue of that description; and
  • had the liquidators thoroughly investigated the claim initially, they would have identified the proper defendant. However, the reasonableness of the plaintiff’s mistake was not relevant to granting leave under r 36.01.

In light of these findings, the liquidators’ application to replace Feber with another party, Some Agency Pty Ltd (“Some Agency”) was granted.

Material Facts

The liquidators commenced the voidable transaction claim on behalf of the company against Feber alleging that payments totalling $109,439.34 were received by Feber from the company during the six months prior to the winding up of the company (28 August 2012) and were unfair preferences and insolvent transactions pursuant to Part 5.7B of the Corporations Act.

By virtue of s 588FF(3) of the Corporations Act, the limitation period for the liquidators’ claim expired on 28 August 2015, three days after the liquidators commenced proceedings against Feber. Initially, Feber confirmed that it was a party to the impugned transactions in its defence, however following a request for further and better particulars, Feber’s solicitors notified the liquidators that the impugned payments were in fact made to Feber by mistake and ultimately were passed on to Some Agency at the end of the month in which they were paid. Further, it was Some Agency and not Feber who was responsible for supplying the relevant goods to the company.

Evidence in the liquidators’ possession prior to commencing proceedings indicated that sometime in 2011, the company had been notified that invoices were to be paid to Some Agency instead of Feber. Following this change, several emails were sent to the company requesting invoices to be paid to Some Agency after the company erroneously continued to pay Feber. There were also multiple references to Some Agency on relevant correspondence and invoices in respect of the impugned transactions.

Relevant Law

Under the Supreme Court Rules a party can amend any document in a proceeding for the purpose of determining the real question in controversy between the parties, correcting any defect or error and avoiding multiplicity of proceedings. In particular, under sub-rules 36.01(4) to 36.01(7), a document in a proceeding (including an originating process or pleading) can be amended in the following way:

  1. to correct a mistake in the name of the party by substituting another person as a party ;
  2. the proceeding will still be taken to have commenced, with respect to the person substituted as a party, on the day the proceedings did commence;
  3. the substitution of another person as a party may still occur after the expiry of any relevant limitation period where the court is satisfied that any other party (including the substituted party) would not be prejudiced in the conduct of the party’s claim or defence in a way that could not be remedied by adjournment or costs orders.

The liquidators also initially brought their application pursuant to r 9.06 – which allows substitution of a person who ought to have been joined as a party for a person who was not a proper party – however this aspect was ultimately not pressed. His Honour indicated that r 9.11(3)(a) operated so that, in respect of the substituted party under r 9.06, the proceeding would be deemed to be statute barred.

It was common ground that the leading authority in respect of the operation of 36.01 and in particular 36.01(4) was the High Court’s decision in Bridge Shipping Pty Ltd v Grand Shipping SA (1991) 173 CLR 23. In that case, McHugh J stated that r 36.01 imposes three limitations on a person’s right to amend, namely:

  1. there must be a mistake;
  2. the mistake must be in the name of the party; and
  3. a court can only make the order sought where it is satisfied that no other party to the proceeding would be prejudiced in the conduct of its claim.

Justice McHugh held that the pleadings indicated Bridge intended to sue the owner of a vessel which had failed to safely carry goods. Bridge had sued Grand Shipping as the owner of the vessel however it was in fact Rainbow Line which had chartered the vessel and was responsible for carriage of the goods. The High Court held that it could not be said that Bridge’s mistake was “in the name of the party”, as Rainbow Line was not the owner of the vessel and therefore, on the pleadings, Grand Shipping could not be substituted with Rainbow Line. For there to be a mistake that satisfies the second limitation set by r 36.01, the substituted party would need to fit the description of the party it is intended to replace.

Decision

Gardiner AsJ stated that had the liquidators thoroughly investigated and considered the position they would have identified the correct defendant at the outset. However, his Honour noted that the reasonableness of the plaintiffs’ error was not relevant to the grant of leave.2 Instead, his Honour found that the liquidators satisfied the test under r 36.01 in light of the decision in Bridge Shipping because it was clear from the statement of claim that the liquidators intended to sue the creditor who had been paid the funds in respect of an unsecured debt that the company owed to that creditor. Consequently, the intended defendant (Some Agency) was able to be identified and substituted by virtue of this description.3

In granting the leave sought, Gardiner AsJ further noted (citing Bridge Shipping) that r 36.01(4) is a remedial rule and should be given a beneficial interpretation. It can be used in cases where the plaintiff, intending to sue a person he or she identifies by a particular description, is mistaken as to the name of the person who answers that description.4

Conclusion

Liquidators are invariably delayed in commencing voidable transaction proceedings by a multitude of factors, including attempting to source litigation funding and awaiting the completion of a receivership. The Fat 4 decision therefore may give liquidators some respite from the consequences of impending expiry of the limitation period in s 588FF(3) of the Corporations Act in circumstances where initial investigations into a claim have been insufficient. However, we would emphasise the importance of liquidators ensuring that their initial investigations are as thorough as possible so as to avoid incurring additional costs in bringing an application to rectify a mistake as to the name of the intended defendant. Alternatively, a prudent and proactive liquidator may be well served by adding as many defendants that correspond with the liquidator’s intended defendant and plead an alternative claim where the correct defendant cannot clearly be identified.