Supreme Court New South Wales Medium Neutral Citation: In the matter of Franklyn Scholar (Australia) Pty Ltd; In the matter of Performance Development Group Pty Ltd [2020] NSWSC 1902 Hearing dates: 5 November 2020 Date of orders: 5 November 2020 Decision date: 05 November 2020 Jurisdiction: Equity - Corporations List Before: Black J Decision: Period during which the Plaintiffs may make any application pursuant to s 588FF of the Corporations Act 2001 (Cth) be extended to 5 February 2021. Catchwords: CORPORATIONS – Application for leave pursuant to s 588FF(3)(b) of the Corporations Act 2001 (Cth) extending time to bring voidable transactions claims – Where delay sought to first pursue claims through proof of debt process. Legislation Cited: - Conveyancing Act 1919 (NSW), s 37A - Corporations Act 2001 (Cth), ss 588FB, 588FC, 588FE, 588FF Cases Cited: - BP Australia Ltd v Brown (2003) 58 NSWLR 322; (2003) 46 ACSR 677; [2003] NSWCA 216 - Fortress Credit Corporation (Australia) II Pty Limited v Fletcher (2015) 254 CLR 489; [2015] HCA 10 - New Cap Reinsurance Corp Ltd (in liq) v Reaseguros Alianza SA (2004) 186 FLR 175; [2004] NSWSC 787 - [2011] NSWSC 857 - Re Clarecastle Pty Ltd (in liq) (2011) 85 ACSR 260; [2011] NSWSC 857 - Re Plutus Payroll Australia Pty Limited (in liq) [2020] NSWSC 1438 - Re Octaviar Ltd Pty Limited (recs and mgrs apptd) (in liq) (2012) 271 FLR 413; [2012] NSWSC 1460 Category: Principal judgment Parties: Proceedings 2020/297706 Michael James Billingsley and Neil Robert Cussen in their capacity as liquidators of Franklyn Scholar (Australia) Pty Ltd (in liquidation) (First Plaintiff) Franklyn Scholar (Australia) Pty Ltd (in liquidation) (Second Plaintiff) Proceedings 2020/297715 Michael James Billingsley and Neil Robert Cussen in their capacity as liquidators of Performance Development Group Pty Ltd (in liquidation) (First Plaintiff) Performance Development Group Pty Ltd (in liquidation) (Second Plaintiff) Representation: Counsel: Mr D Edney (Plaintiffs) Solicitors: Watson Mangioni Lawyers) File Number(s): 2020/297706; 2020/297715 Judgment – ex tempore (rEVISED 6 nOVEMBER 2020) Background and affidavit evidence 1. By Originating Processes filed on 16 October 2020 in two proceedings, Messrs Billingsley and Cussen in their capacity as liquidators of Performance Development Group Pty Ltd (in liq) ("Performance Development Group") and Franklyn Scholar (Australia) Pty Ltd (in liq) ("Franklyn Scholar") seek an order, in each proceeding, that the period in which the liquidators and each company may make any application under s588FF of the Corporations Act 2001 (Cth) be extended to 20 October 2023 or such other date as the Court sees fit. The application raises what appear to be novel issues, and neither counsel nor the Court have been able to identify a previous case which involves a similar issue, or although there are many cases which involve applications for extensions of time under this section. 2. By way of background, s 588FF provides that where, on the application of a company's liquidator, a Court is satisfied that the transaction of a company is voidable because of s588FE, then the Court may make one of specified orders. Section 588FE in turn sets out a series of voidable transactions, by reference to Part 5.7B of the Corporations Act. Section 588FF(3) provides that an application under s588FF(1) may only be made during the period commencing on the relation back day and ending three years after the relation back day, or 12 months after a liquidator's appointment, whichever is the later; or within such longer period as the Court orders in an application made by the liquidator during that period. These applications were brought shortly before the expiry of that period. 3. I should first set out the applicable evidence, before turning to the submissions put by Mr Edney on the liquidators' behalf, and reaching a conclusion. By an affidavit dated 16 October 2020, Mr Billingsley, who is one of the liquidators of each of the companies, refers to the identity of parties against whom the liquidators or the companies may bring proceedings under s588FF of the Act, including three companies (two of which are in liquidation and one of which is deregistered) and an individual (who is in bankruptcy), while recognising the possibility that proceedings might also be brought against other persons. Mr Billingsley refers to the circumstances which might support those claims, arising from events prior to the liquidators' appointment. Mr Billingsley sets out the relevant corporate structure, and identifies the nature of companies' business, which involved the provision of vocational educational services, for which they were funded by the Commonwealth of Australia (Department of Education and Training) and the fact that, prior to the companies' liquidation, significant overpayments to the companies were identified by the Department, which sought to reclaim those overpayments. 4. Mr Billingsley identifies the prospect that the matters to which he refers may have involved uncommercial transactions, within the meaning of s588FB of the Corporations Act, insolvent transactions within the meaning of s588FC of the Act, or transactions which included the purpose or purposes of defeating, delaying or interfering with creditors' rights for the purposes of s588FE(5) of the Act, and expresses the view that the companies have viable claims under s588FF of the Act in respect of the relevant transactions. Mr Billingsley also refers to the fact that informal proofs of debt were lodged by the liquidator in the voluntary administrations of two of the companies against which proceedings might be brought, which are now in liquidation, and were rejected at this point, and refers to further communications with the voluntary administrators of those companies. He also refers to potential claims which may be brought by the liquidators of those companies, which may achieve recoveries which would in turn be potentially available to meet any claims by Performance Development Group or Franklyn Scholar against those companies. Mr Billingsley notes that formal proofs of debts have not yet been lodged in the liquidations of those companies, or against the bankrupt estate of the individual who might also be a potential defendant, and indicates that the liquidators wish to deter the lodgement of such proofs of debt. The liquidators also wish to extend the time to bring actions under the Act as sought in the proceedings, against the contingency (which the liquidators do not accept) that their ability to lodge proofs of debt may be impeded if the limitation period under s 588FF has expired. 5. By a further affidavit dated 30 October 2020, Mr Billingsley provides updates as to the progress of the liquidations of two potential corporate defendants, and as to the bankruptcy of the third potential individual defendant. By two affidavits dated 30 October 2020 and 4 November 2020, Mr Willson, a solicitor acting for the liquidators in respect of the applications, refers to notice of the application to interested parties. The insolvency practitioner with control of the two potential corporate defendants, by their solicitors, have responded to the application, indicating that they do not propose to appear in the application, and no other parties have opposed the application. Submissions 1. By way of submissions, Mr Edney summarises the factual background in respect of the companies' affairs, by reference to the evidence to which I have referred above, and identifies potential proceedings arising from transactions prior to the liquidators' appointment, consistent with that evidence. Mr Edney then identifies reasons for the delay in the prosecution of the liquidators' voidable transaction claims, as being that the relevant defendants are either insolvent, or, in one case, deregistered and the individual defendant is bankrupt and that the liquidators have sought to defer lodging formal proofs of debt because, if those proofs of debt were rejected, they would then be required to commence proceedings to appeal those rejections, which would involve a waste of costs if there would ultimately be no dividend in the liquidations of the potential defendants or the bankrupt individual. 2. Mr Edney in turn refers to matters which will be relevant to an application under s 588FF(3), including the explanation of the delay, the strength and quantum of the proposed claim, and the potential prejudice to the defendants, so far as they are relevant to the question whether it is "just and fair" that an extension be granted. I will refer to the relevant authorities below. Mr Edney submits that the delay has been explained and it is reasonable for the liquidators to seek to avoid litigation unless it is known whether there are any funds to potentially be recovered by way of the litigation. I accept that proposition, with some qualifications that will emerge from the views which I expressed below, and I also accept that it is reasonable for the liquidators to seek to preserve their ability to lodge proofs of debt in respect of the insolvencies of the potential defendants, until it is clear whether there will be utility in their doing so by reason of any prospect of a distribution. 3. Mr Edney submits, and I accept, that the evidence is sufficient to give rise to a strong claim of significant value, at least if the defendants had any capacity to meet a judgment against them. Mr Edney submits that there would be little potential prejudice to the potential defendants arising from delay, on the basis that they are in insolvency administration and would expect any claims to proceed by proofs of debt in those insolvency administrations, while reserving the question whether any limitation period applying to s 588FF of the Act might affect such a proof of debt. Mr Edney also points to the fact that the two prospective corporate defendants, who have responded to the application by their solicitors, have indicated that they do not oppose the relief sought. Mr Edney fairly recognises that, if the liquidators could not bring voidable transaction claims under the Act, they may have other causes of action available to them with longer limitation periods, including potential claims under s 37A of the Conveyancing Act 1919 (NSW) and potentially a claim for breach of fiduciary duty by the individual prospective defendant. Mr Edney points to the fact that the liquidators seek a "shelf" order for voidable transactions, by way of an extension of time, to 20 August 2023, although he fairly recognises that here they are able to identify the persons who are likely to be prospective defendants, while wishing to reserve the flexibility of claims against other parties if a basis for them emerges. Determination 1. I have been assisted by Mr Edney's careful and thoughtful submissions in respect of these issues and, with that background to the evidence and the submissions to which I have referred, I should now point to the applicable principles and the novelty of the application. 2. The relevant principles applicable to an order for extension of time under s 588FF(3)(b) of the Corporations Act are well established. In BP Australia Ltd v Brown (2003) 58 NSWLR 322 at 356–358; (2003) 46 ACSR 677; [2003] NSWCA 216, the Court of Appeal identified the question namely whether it is "fair and just in all of the circumstances" to grant the relevant extension, having regard to, on the one hand, the liquidator's explanation for delay and, on the other, the prejudice the defendant would suffer as a result of the extension. In New Cap Reinsurance Corp Ltd (in liq) v Reaseguros Alianza SA (2004) 186 FLR 175; [2004] NSWSC 787 at [52], White J observed that the matters raised in such an application would ordinarily include any explanation for the delay in bringing the proceedings; a preliminary review of the merits of the foreshadowed proceedings, directed to whether they were so devoid of prospects that it would be unfair, by granting an extension, to expose the other party to the continuing prospect of suit; and whether the likely or actual prejudice resulting from the grant of the extension was sufficient substantially to outweigh the case for granting an extension. The relevant factors were summarised, in similar terms, by Ward J in Re Clarecastle Pty Ltd (in liq) (2011) 85 ACSR 260; [2011] NSWSC 857 at [22]. 3. In my judgment in Re Octaviar Ltd Pty Limited (recs and mgrs apptd) (in liq) (2012) 271 FLR 413; [2012] NSWSC 1460 at [64], I observed that the time limitations in the section reflect a recognition that the quality of justice may deteriorate where there is delay and there will be a need that potential defendants be made aware of claims against them within a reasonable time and the loss of the ability to make a relevant claim can be justified as providing certainty to persons who had had dealings with the company. At the same time, I there noted cases where extensions of time had been granted and observed that: "The Court should consider whether the liquidators have diligently pursued the object of disposing of the proceedings in a timely way; used, or could reasonably have used, available opportunities under the rules or otherwise to avoid delay; and reasonably implemented the practice and procedure of the Court with the object of eliminating any lapse of time between the commencement of proceedings and their final determination...the liquidators bear the onus of demonstrating why it is just and fair that the time limit prescribed by s 588FF(3) of the Corporations Act should not apply." 1. I also recognised that there are a number of cases where, for example, orders extending time without identifying a particular transaction, or a particular defendant, have been made, at least where it is not possible for a liquidator to identify the relevant transactions or the relevant defendants with certainty at the time of making the application: for example, Fortress Credit Corporation (Australia) II Pty Limited v Fletcher (2015) 254 CLR 489 at [24]; [2015] HCA 10. The case law supports Mr Edney's summary of the applicable factors to the exercise of the Court's discretion as including the extent of delay and the explanation for it, the merits of the proposed proceedings, and the prejudice arising from the grant of the extension: Re Plutus Payroll Australia Pty Limited (in liq) [2020] NSWSC 1438 at [13]. 2. There is force in the liquidator's submission that it is commercially undesirable that they be required to take steps at this point to lodge a proof of debt, and deal with a potential appeal against a refusal of that proof of debt, or to commence proceedings and incur the costs of doing so, where the extent of returns available from the prospective defendants, so far as they are in insolvency administration or, in one case, deregistered, is uncertain. I also recognise that, as Mr Edney points out, the claims involved are substantial in their nominal value, and that the liquidators may rightly feel that they are obliged to take steps to preserve those claims, at least where there is a possibility that the liquidators of the prospective defendants might obtain recoveries, which would allow a return on a proof of debt lodged by Franklyn Scholar or Performance Development Group in their liquidations. 3. I have ultimately concluded, with hesitation and recognising that this is a question of impression, as to which others might form different views, that the extension of time which is sought is not properly granted under s 588FF(3) of the Act. It seems to me that that section exists within the wider context of the time limit imposed on claims of voidable transactions under s 588FF, and the recognition in the case law of the adverse effect of delay upon the quality of justice, and the risk to defendants of claims brought against them at later dates, and in circumstances where they may not have had notice of those claims, and where the persistence of potential claims will undermine commercial certainty for them. 4. The position which the liquidators put here, not unreasonably from their perspective or the perspective of creditors of Franklyn Scholar and Performance Development Group, is that an extension of time should be granted because it is not convenient, or at least cost effective, for them to commence proceedings within the 3-year period, where it is uncertain whether those proceedings will bring a substantive return. I do not doubt the commercial logic of that analysis. However, it does not seem to me that it would be consistent with the policy underpinning s 588FF of the Act, of seeking to promote the timely resolution of voidable transaction claims and allow certainty for defendants, that claims which could be brought within the 3 year period are deferred, because it is not convenient to the liquidators to bring them, however well-advised the liquidators may be in forming that view. 5. I also bear in mind that there are alternative, and possibly more orthodox, ways of achieving the objective which the liquidators seek to achieve. In some courts, it is possible to file a proceeding, but not serve it for a period. In the Corporations List, where matters are case managed, it would be possible to file and serve a proceeding so as to preserve a statute of limitation, and to frankly explain to the judge managing the List that the proceedings have been filed for that purpose, and the practical reasons why the liquidator may wish to defer their progress, including because matters may potentially be dealt with by a proof of debt, or because the proceedings may ultimately lack practical utility if the defendants do not have available assets. A judge dealing with a matter of that kind will approach each case on its merits, but it may well be possible to adjourn the proceedings in an appropriate case, where there is a lack of utility in incurring costs in immediately progressing them. There is also nothing illegitimate about the commencement of proceedings, which would put defendants on notice of a claim in order to preserve a limitation period. 6. A liquidator who takes that approach might also explain to the defendants, or their representatives, why the liquidator has done so, in order to preserve the limitation period, and seek their agreement to deferring the active progress of the proceedings. I also recognise that, as Mr Edney pointed out in submissions, a defendant may resist that approach, In that case, the Court will reach a merits judgment as to whether a plaintiff should be required to progress, and incur the costs of progressing, a matter where there are reasons of the kind identified in this case that that adjournment may deliver commercial advantages for the parties. It seems to me that I can more readily reach the view that the wider structure of s 588FF of the Act should not be compromised, by extending time to commence proceedings which could be commenced within time, where alternative mechanisms are available to address the practical reasons that a liquidator may wish to defer progressing them. 7. For these reasons, I am not persuaded that I should grant the extension of time for the longer period that is sought by the liquidators in this case. I am persuaded that I should grant an extension of time, as Mr Edney submitted in an alternative submission, for a period of 3 months, to allow the liquidators to consider the steps which are best taken to preserve claims against the prospective defendants, which may include the commencement of proceedings, so as to preserve relevant limitation periods, in the manner I have referred. I am also satisfied that this is a case, although the application has been unsuccessful, where the liquidators should plainly have their costs of the application as costs in the liquidation of the relevant companies. It seems to me that the application was properly brought, and raised a very significant issue, although I have not ultimately been persuaded that the relief sought should be granted for the reasons that I have noted above. 8. For these reasons, I make the following orders in each proceeding: 1. Order that the period during which the Plaintiffs may make any application pursuant to s 588FF of the Corporations Act 2001 (Cth) be extended to 5 February 2021. 2. Order that the costs of this application be costs in the liquidation of the Plaintiff. 3. The exhibits be returned. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 29 December 2020