The recent Supreme Court of New South Wales decision of In the matter of Octaviar Administration Pty Limited (in liquidation)  NSWSC 786 confirms that liquidators must notify all interested parties prior to seeking an extension for the period in which to bring preference actions. For the first time, the Court has confirmed that the directors of the insolvent company are “interested persons” in cases where a liquidator intends to pursue the Australian Taxation Office (ATO) over potential preferential payments based solely on the potential for the ATO to seek indemnity from the directors under s588FGA of the Corporations Act 2001 (Cth).
Octaviar Administration Pty Limited (Octaviar) (in liquidation) (Octaviar) was placed into liquidation in 2008. In late 2011 and with the end of the relation back period fast approaching, the liquidators of Octaviar applied for an extension to the time in which to bring any preference claims. The liquidators sought what is commonly referred to as a “shelf order” (i.e. an order extending the time generally, rather than linked to applications involving specific persons) and the application was made on an ex-parte basis.
On 19 September 2011, her Honour Justice Ward granted the shelf order and extended the time in which the liquidators of Octaviar could bring preference claims to 3 April 2012 (Extension Order).
On 2 April 2012, the liquidators commenced proceedings against the Commissioner of Taxation, seeking the recovery of approximately $4 million as an unfair preference. The Commissioner applied for an indemnity against the directors of Octaviar pursuant to s588FGA of the Corporations Act.
In order to avoid any potential liability under the s588FGA indemnity, the directors of Octaviar sought to set aside the Extension Order on the basis that the shelf order should never have been made. Principally, the directors argued that at the time of seeking the shelf order, the liquidators knew or should have known that the ATO was a potential target of any preference proceeding. Accordingly, they submitted that:
- they had been denied procedural fairness in not having been given notice of the extension application; and
- the shelf order should be set aside as the liquidators failed to satisfy the duty of candour to the Court in seeking the extension.
In seeking the shelf order, the liquidators relied on evidence demonstrating the complexity of the affairs of the Octaviar group, and issues encountered in the liquidation generally. They did not appraise the Court of the fact that they were considering recovering preferences from the ATO.
The Court held that the liquidators did not satisfy their duty of candour in seeking the shelf order. The evidence showed that at the time the shelf order was sought, the liquidators had already reached a “strong provisional view” that they would target the ATO. While it was no doubt proper for the liquidators to disclose in detail the history of liquidation, by failing to lead evidence of the potential ATO preference action, Young AJ held that the liquidators had misdirected Ward J from the true practical effect of the consequences of making the shelf order.
Young AJ also held that the directors were persons directly affected by the shelf order and should have been notified prior to the application being heard. Given the likelihood that the ATO would exercise its statutory indemnity, Young AJ was satisfied that the directors were directly affected by any proposed preference recovery against the ATO and had been denied procedural fairness in this instance by virtue of the fact that no notice had been given.
This case demonstrates the reasons why liquidators must approach “shelf orders” with caution. When a shelf order is sought, liquidators would be well advised to take a cautious approach in order to ensure that:
- all persons that may be affected by the order are notified that such an order is sought; and
- all relevant facts are disclosed to the Court, including the status of their investigations with respect to specific potential preference claims.
Wherever possible, liquidators should assess and commence preference claims as soon as practicable and within the statutory time period. It is generally accepted that it is not in the public interest to extend the time period other than in exceptional circumstances.