Australia: Lesson for administrators: plan ahead for the first creditors meeting

Many administrators might expect a first creditors' meeting to be relatively formulaic and uneventful, addressing little more than the appointment of a committee of creditors. In fact, section 436E of the Corporations Act 2001 (Cth) (the Act) prescribes that the very purpose of the first creditors' meeting is to determine whether to appoint a committee of creditors, and if so, who the committee's members should be.

However, administrators should be aware that these first meetings can potentially involve more substantive action.

The Federal Court recently considered a circumstance in which a first meeting of creditors involved the passing of a resolution to extend the period of time for convening the second creditors' meeting, with the Court noting that this was a 'significant' factor favouring the grant of the extension. ¹

Background

Geoffrey Trent Hancock was appointed voluntary administrator of Tarleton & Peters Pty Limited (the Company), which operated a chain of 28 butcher shops knowns as "Peters Meats". The Company had one secured creditor (who was previously the major shareholder) for approximately $13 million. Trade creditors were owed approximately $4 million and contingent creditors were owed another $3 million.

Mr Hancock had been trading on the business of the Company with a view to selling the business, or alternatively selling off each retail operation individually if necessary. He had already closed down a number of unprofitable stores.

A possible Deed of Company Arrangement was also being considered and, between that and the time required to sell the business, Mr Hancock required a further six weeks within which to convene the second meeting of creditors.

Mr Hancock sought orders from the Federal Court under section 439A(6) of the Act for an extension of the convening period. While there is nothing unusual about these types of applications, there was one aspect of this particular application that the Court noted with interest. This was the fact that by the time the application was made, the creditors had already voted to accept the six week extension of the convening period. The obvious question is: "when and how could they have done this?" The answer is that it seems Mr Hancock had raised the possible delay in selling the business at a very early stage, being the first creditors' meeting, and it was the secured creditor who actually proposed the extension of the convening period.

The Court stated (at [10]):

Practical lesson to learn

Despite the fact that section 436E of the Act prescribes that the purpose of the first meeting of creditors is to appoint and identify a committee of creditors, the creditors are not limited to passing just those mandatory resolutions. If an administrator has been appointed to a company that the administrator proposes to trade-on, and ultimately sell, it may be worthwhile for the administrator to propose a resolution at the first meeting of creditors that, if it becomes necessary, the administrator is permitted to make an application to the Court for an extension of the convening period in order to effect any sale of the business of the Company. The recent decision involving the Peters Meats business suggests that Courts should consider such action by the creditors as 'significant' when eventually determining the application.

Obviously, with the limited knowledge available to both the administrator and the creditors at the first meeting, the creditors may not be minded to pass such a resolution. However larger businesses, and particularly those in depressed markets like retail, usually take longer to sell. In those circumstances, there does not appear to be any downside in asking the creditors to pass such a resolution at their first meeting.

Insolvency practitioners should also give very early consideration to whether an administration will produce the best outcome for creditors. In the case of Peters Meats, the secured creditor appeared very much 'on side', which would have eased the minds of both the administrator as well as the unsecured creditors, fearing a receivership appointment over all the assets. Businesses like these often benefit from an informal restructuring (like a pre-pack for instance) which requires buy-in from all relevant stakeholders to be successful. That takes a great deal more planning than a formal administration appointment, and often directors are not inclined to continue to trade on during a reconstruction in circumstances where the company may otherwise be insolvent. These issues have been considered by the Productivity Commission in the preparation of its final report on Business Set-up, Transfer and Closure, currently with Treasury and due to be released to the public in November 2015. A future update on restructuring versus formal administration appointments awaits the outcome of the Commission's final report to government.

Footnotes

¹Hancock, in the matter of Tarleton & Peters Pty Limited (Administrator Appointed) [2015] FCA 1058 (24 September 2015).

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories