Among the first of many: the new definition of the "relation-back day" and the assignment of a liquidator's rights

13 April 2017

On 1 March 2017, the first of many new changes to insolvency and bankruptcy legislation came into effect. A host of further amendments will come into effect in September 2017.

Some of the changes which commenced in March include:

  • The repeal of the term ‘official liquidator’ (section 9 of the Corporations Act 2001 (Cth) (Act));
  • The replacement of CALDB by a committee review panel to oversee the disciplinary processes applicable to registered liquidators (Subdivision E, Division 40, Schedule 2, Insolvency Practice Schedule (Corporations) (IPSC));
  • Updates to the performance standards applicable to bankruptcy trustees (Division 42, Part 2, Insolvency Practice Rules (Bankruptcy) 2016);
  • New reporting obligations associated with DIRRIs (sections 436DA & 449CA);
  • Introduction of assignment powers with the effect that any right to sue conferred on a liquidator can now be assigned to third parties (Division 100, IPSC); and
  • Revisions to the definition of the ‘relation-back day’ (RBD) (sections 9 & 91 of the Act).

Many of the recently commenced changes relate to practice management and are therefore the subject of regulatory oversight. Accordingly, ASIC, AFSA and ARITA have published a range of detailed reports on these topics.

The focus of this article and those that will follow in the coming months are the amendments that affect legal rights or require some element of interpretation. Below is an outline of the changes that have been made to the definition of the RDB.

Reasons for the amendment to the definition of relation-back day

Effective on 1 March 2017, the definition of the RBD has been significantly amended to address “[a] number of difficulties with the definition…”.1

One such ‘difficulty’ with the former definition was the possibility that the RBD can be manipulated in circumstances where a winding-up application has been made, but not heard and determined, prior to the company entering into a voluntary administration (VA).

Under the former RBD definition, in such circumstances the RBD would be the date that the VA commenced – not the date of the liquidation (taken to be the time at which the winding-up application was filed).

An often cited example is Rafferty’s Case2, where a winding up application was made on 20 September 2007 but was not heard and determined for more than five months. One month prior to the winding up order being made, the company’s directors put it into VA.

The effect of the VA in Rafferty’s Case was to make the RBD the VA commencement date (per sections 513A & s513C of the Act). This meant that in the intervening four month period between the filing of the winding-up application and the VA, the company traded and entered into transactions which would otherwise have been voidable had the RBD been the date of the winding-up application.

At the time, the liquidators in Rafferty’s Case tried and failed to have the RBD amended under section 447A of the Act.

The new definition 

In an attempt to cover all bases, the new RDB definition at section 91 of the Act is more expansive than was previously the case. The definition is comprised of 15 separate scenarios which must be considered in the context of each case to determine the best fit and accordingly, when the RBD is taken to have occurred.

The variables used in the scenarios take into consideration the possible existence and timing of factors such as whether:

  • The company was subject to VA before a winding-up application was made or if it only became subject to VA after the winding-up application had been commenced;
  • The The liquidation of the company is the result of court-order or a voluntary resolution;
  • The The company has been, or is, subject to a DOCA.

The new definition will apply to all external administrations that begin on or after 1 March 2017 (s1635(4), CA).

Based on the new definition, if a situation similar to Rafferty’s Case arises after 1 March 2017, the RBD will likely be the date of the winding up application (see Item 2, section 91 of the Act) and not the subsequent VA.

This article was written by Grant Whatley, Partner and Claire Warfe, Senior Associate. 

1Paragraph 7.30 of the Explanatory Memorandum for the Insolvency Law Reform Bill 2015.

2Chief Commissioner of State Revenue v Rafferty’s Resort Management Pty Ltd (in liq) [2008] NSWSC 452.

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