The Relation Back Day can be manipulated by a prior VA appointment – Reform still required

Liquidators, creditors and directors are very conscious of  the “Relation Back Day” in liquidation.   It is the day on which the six month “preference period” for the recovery of preferences from creditors ends.  It is also the day on which certain longer periods for undoing certain related party transactions involving directors and their associates ends.

The relation back day for any Court ordered winding up is governed by section 513A of the Corporations Act 2001 (Act).   In a case where the Court orders that a company be wound up, and immediately before the making of the order the company was in voluntary administration, the relation back day is taken to be the section 513C day that applies to that administration.  See section 513A(b) of the Act.

Section 513A(a) does not apply, as until a court makes an order to wind up the company, there is no “winding up in progress”:  this  subsection applies to administrations commenced by a liquidator appointing a VA under s436B.

The section allows a director or chargeholder of a company to move the relation back day forward in time by the simple expedient of appointing a voluntary administrator AFTER a winding up application has been filed by a creditor, but before a winding up order is made.  That may allow a preference payment or other vulnerable transaction to avoid attack by the liquidator if it occurred at the very early end of the relevant time period.

This effect has been judicially noted.  For example, in Commissioner of State Revenue v Rafferty’s Resort Management Pty Ltd  (2008) 66 ACSR 199  at [33], [39]-[40] (Austlii link), Austin J considered that he had no power under s447A or otherwise to order that the s 513C day be the date of the commencement of a creditor’s winding up application (which was filed before the commencement of the Part 5.3A administration), notwithstanding the possibility that directors might manipulate the provisions by putting an insolvent company into administration after the commencement of a winding up proceeding.

Austin J said he was reluctant to reach this conclusion given it prevented a number of recoveries that were otherwise available to the liquidators (including against related entities) and because the evidence supported an inference that the directors had deliberately appointed a VA to defer the relation back period.   His Honour’s view was that there was a clear need for law reform especially given the varying and inconsistent consequences regarding unfair preferences and void dispositions of property (under s468 of the Act) depending on which subsection of s513A applies.

There have been calls for reform over the issue – a notable article at the time was published by Middletons (Stephen Hume) (link).  None has yet been forthcoming.

Some judges have attempted to circumvent this result by making an order to terminate an administration, and then delaying the making of the winding up order by some interval.  This approach was employed in St Leonards Property Pty Limited v Ambridge Investments Pty Limited [2004] NSWSC 851.  The winding up order was made one day after terminating the VA, which the Court in that case appeared to think was sufficient.

Regards

Mark

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