The importance of notifications to potential defendants and directors of the insolvent company

The decision in Re Octaviar Administration Pty Ltd (in liq) [2013] NSWSC 786 highlights two key issues for insolvency practitioners:

  • The importance of notifying potential defendants of any applications under s.588FF(3)(b) of the Corporations Act to extend the time in which voidable transactions claims can be commenced.
  • Where the Commissioner for Taxation is a potential defendant, the need to notify not only the Commissioner of any application for an extension, but also the director(s) of the subject company, who may be required to indemnify the Commissioner for any amounts recovered from the Commissioner as unfair preferences.

Octaviar Administration Pty Ltd (in liq) (OA) was placed into liquidation in late 2008.  In September 2011, the Court made orders under section 588FF(3)(b) of the Corporations Act, extending the time in which OA's liquidators could commence actions in respect of alleged unfair preferences in the winding up of OA.  Those orders were made ex parte.

The Liquidators subsequently commenced recovery proceedings against the Commissioner, seeking recovery of approximately $4 million as an unfair preference.  Subsequently, pursuant to section 588FGA, the Commissioner filed an application for an indemnity from OA's directors in respect of the Liquidators' claim.

The directors sought to set aside the time extension order on a number of bases, including that the Liquidators had, at the time of their application, already decided to sue the Commissioner and that, as ex parte applicants owing a duty of candour to the Court, it was incumbent on the Liquidators to disclose this view.

An employee of the Commissioner had, in his capacity as a member of the committee of inspection formed in relation to OA's winding up, received a letter that informed the committee members of the Liquidators' proposed application, but no written notice of the application for the time extension was given to the Commissioner.  The directors were also not notified of the application for a time extension.

The Court focussed on the Liquidators' approach to notifying parties affected by the time extension application, and their approach to disclosing to the Court the identities of those parties, when the time extension order was first made.  Significantly, the Court found that, when the application was made,  the Liquidators had already formed the "strong provisional view that they would be targeting" the Commissioner and that the Liquidators should have notified the Commissioner of the application (which they had failed to do).  The Court went on to determine that the Liquidators had failed in their duties of candour with the Court, on an ex parte application.

The Court then found that the likely corollary of the Commissioner being pursued for an unfair preference was that the Commissioner would take steps to call on the indemnity under s. 588FGA: it followed that, when the Liquidators were considering action against the Commissioner, the directors were persons "directly affected by that proposed action".

This conclusion meant that, because the Commissioner and the directors were "in the same plight", the directors should also have been given notice of the Liquidators' application.

Accordingly, the Court concluded that the time extension order should be set aside, both as against the Commissioner and as against the directors. 

The decision highlights the importance for Liquidators of notifying persons who may be affected by an extension of time under s.588FF(3)(b), and the critical importance for Liquidators, on such an application made ex parte, to fully disclose their approach to identifying and notifying potentially affected parties.  Further, in the special context of voidable transaction actions involving the Commissioner, the decision makes plain the need to notify not only the Commissioner of any application for a time extension, but also the directors of the company in liquidation.