Back to Insolvency Basics: When you can’t bring a voidable transaction claim

Back to Insolvency Basics: When you can’t bring a voidable transaction claim By Amy Hall & Paris George | February 2009 Area of Expertise | Commercial Disputes & Insolvency

Summary The recent decision of Kassem v Zhang [2008] NSWSC 1287 conﬁrms the strict limitation periods in the Corporations Act 2001 for bringing voidable transaction proceedings by liquidators. It also highlights the critical importance of the relation-back day in determining the limitation period in actions under s 588FF.

Who Does This Impact? Insolvency practitioners and their advisors; persons defending voidable transaction claims.

What Action Should Be Taken? Liquidators must promptly identify any voidable transactions and institute proceedings within the prescribed time frame.

The Facts Delta Mortgage Finance Pty Ltd (‘Delta’) was wound up by order of the Supreme Court of NSW on 17 June 2005 and Messrs Kassem and Juratowich (‘the liquidators’) were appointed ofﬁcial liquidators of Delta. The application for the winding up of Delta was ﬁled on 2 May 2005. The liquidators commenced proceedings in the Supreme Court on 17 June 2008 seeking an order pursuant to s 588FF(1) of the Corporations Act 2001 (Cth) (‘the Act’) that the defendant, a director of Delta, Mr Zhang, pay to the company the sum of $113,508.13. The liquidators asserted that Delta had entered into a transaction in favour of Mr Zhang that fell within one of the categories of voidable transaction under s 588FE.1 Mr Zhang, by interlocutory process, sought that the proceedings commenced by liquidators be dismissed. The defendant did so on grounds that the liquidators’ application was bought outside the limitation period of 3 years prescribed in s 588FF(3). The liquidators subsequently sought leave to amend their originating process under ss 64 and 65 of the Civil Procedure Act 2005 (NSW)(‘CPA’) to include a cause of action founded on a breach by the defendant of his duties as a director of Delta.

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The Relation-Back Day and Section 588FF Section 588FF of the Act relevantly provides: ‘(1) Where, on the application of a company’s liquidator liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, E the court may make one or more of the following orders: E, (a) an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction’ ‘(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; company whichever is the later; or (b) within such longer period as the Court orders on an application under this paragraph made by the liquidator during the paragraph (a) period’ The relation-back day is determined by the combined effect of ss 9 and 513 of the Act and in this case the relation-back day was the day on which the winding up application was filed, namely, 2 May 2005. The plaintiffs were required by the Act to commence proceedings by 2 May 2008 or to apply to the Court to extend the time to bring the proceedings. The plaintiffs failed to do either.

The Liquidators’ Amendment Pursuant to ss 64 and 65 of the CPA, the plaintiffs sought to amend their original claim against the defendant to encompass a claim by Delta against the defendant for breach of his duties as a director. The plaintiffs relied on the facts giving raise to the s 588FF claim in respect of the proposed amendment they sought to make. However, the cause of action based on a breach of directors duties was available only to Delta, not to its liquidators. The liquidators alone were the plaintiffs in the proceedings, not Delta.

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The cause of action they sought to amend the originating process to include was not available to them. Justice Barrett commented: The purpose of s 64 and s 65 is to ensure that the dispute brought before the court by the plaintiff is framed in such a way and against such persons as will ensure that its true scope is properly delineated. If that plaintiff is not a party to the dispute and cannot assert any right relevant to it, he or she cannot, under the guise of amendment, discontinue the proceedings that have been commenced against the defendant and inject some new plaintiff who wishes to agitate some different claim against the same defendant, even if that different claim is based on the same facts.2

Reasons for Decision Both the originating and interlocutory process of the plaintiffs were dismissed. The proceedings that were commenced were clearly out of time and an understanding of the straight forward operation of s 588FF and the relation-back day would have avoided what Justice Barrett called a ‘blunder’.3 The relevant sections of the Act were not complicated in their operation and application and a lack of understanding of them led to the proceedings being dismissed. The amendment sought in the interlocutory process was to encompass a cause of action that was not available to the plaintiffs. Justice Barrett said of the liquidators’ application to amend: Even recognising the most comprehensive operation of those provisions, this case is not one in which amendment can or should be allowed.4

The liquidators were also ordered to pay the costs of the proceedings, and with the exception of the costs associated with the application to amend, those costs had to be paid by the liquidators without resort to Delta’s assets under s 556 as those costs were not properly incurred. The Court found that the plaintiffs had engaged in conduct that showed a lack of a reasonable amount of skill and such amounted to a blunder which disentitled them from accessing the assets of Delta for indemnity.

In Summary This decision highlights the importance of liquidators and their advisers being aware and paying due regard to the strict time limits that apply in commencing proceedings under s 588FF. In order to do that, a proper understanding of how the relation-back day is identiﬁed is essential. For insolvency practitioners, the decision highlights the need to promptly identify voidable transactions in the conduct of a liquidation and having done so, seek legal advice and if necessary, commence proceedings in respect of those transactions.

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Endnotes 1

It is not revealed in the decision the nature of the transaction or what particular category of s 588FE(2) or (2A) it fell into.

2

At paragraph [18]

3

At paragraph [28]

4

At paragraph [15]

For more information, please contact:

Amy Hall Senior Associate T: 02 8257 5716 amy.hall@turkslegal.com.au

Paris George Lawyer T: 02 8257 5717 paris.george@turkslegal.com.au

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