Liquidators’ Duty of Candour

25 July 2013

The liquidators of Octaviar Administration Pty Ltd (in Liquidation) were criticised by the New South Wales Supreme Court for their lack of candour in their application to extend time under section 588FF(3)(b) of the Corporations Act to make a voidable transaction claim.  The Court set aside the previous order to extend time in which to issue proceedings, raising a question mark over the future of a $4million preference claim against the ATO.

This case is a salutary warning to liquidators and their lawyers on their duty to the Court when making an ex parte application to extend time.

In September 2011 the Court made orders pursuant to section 588FF(3)(b) of the Corporations Act extending time for the liquidators to commence unfair preference actions.  The order obtained was a "shelf" order, which meant that it was not limited to any particular unfair preference and the Court was told that the complexity of the liquidation was the reason for the need to extend time.  The application did not inform the Court that the liquidators had virtually made up their mind to make a claim against the ATO.  A week prior to the application a director of the firm of the liquidators told an ATO representative that a proceeding would be issued against the ATO in respect of an unfair preference, and that the vast majority of it related to PAYG tax.  Despite this, the ATO was not joined as a defendant to the application, nor were the directors of the company in liquidation who were very likely to be called on by the ATO to indemnify the ATO in respect of the PAYG claim pursuant to section 588FGA. 

The Court found that the liquidators had a duty to disclose that they had already determined to proceed against the ATO for the unfair preference.  Further, the directors were clearly affected by the order as the liquidators would have known that the ATO would seek an indemnity from the directors. As such, the directors were persons entitled to be notified of the application to extend time. These failings meant that the liquidators did not discharge their duty of candour to the judge hearing the extension application.  The Court further found that the wording of section 588FF(3) means that extensions of the period should not be made except for good reasons and that applications in the past have failed where the Court has determined that the liquidator either has sufficient information to determine whether to commence proceedings or could have obtained such information.

The clear message the Court is sending here is that liquidators need to have made full disclosure and be scrupulously frank with the Court when making an application for an extension of time. If they have formed a view, or could reasonably have formed a view about a relevant target of a proceeding, then that target needs to be a party to the application, along with any consequential parties such as in this case, the directors of the company in liquidation.  The failure to do this in this case has meant that the future of a $4 million preference claim is in doubt and cost orders were made against the liquidator.

If you require any further information about this case or related matters please call Hugh Maclaren on (03) 9510 0366 or email