Australia: Administrator appointment overrides an application to appoint a liquidator

Pragmatism rules the day

The recent decision of The Minister for the Environment – v – Eclipse Resources Pty ltd (administrator appointed) handed down in the Supreme Court of Western Australia, is a fine display of pragmatism and a reminder of the voluntary administration regime's effectiveness.

Background

The Minister claimed that Eclipse Resources failed to pay a waste disposal levy over a six-year period. Eclipse's business was mining land (it owned or leased) to recover and sell limestone and virgin soil. It accepted a fee for "waste" soils from parties such as land developers seeking to dispose of unwanted or excess soils. Some of these soils were blended with other soils to create water retentive soils, which it then resold to land developers for large scale landscaping projects. Whatever soils were not blended and resold were buried in the void created from the original mining activities. Ultimately, over many decades, Eclipse intended to fill the void and develop the land into residential or industrial lots. Eclipse argued that the waste levy did not apply to its operations as the soils received for deposit was not "waste". However, the Court held Eclipse liable to pay the waste levy as the materials deposited by the third parties, while not "waste" in Eclipse's possession, was in fact "waste" of the third parties depositing it on the Eclipse sites. Accordingly, Eclipse became liable to pay a waste levy and penalties of some $21 million.

The judgment

Following the primary judgment, the Minister moved to wind up Eclipse on insolvency grounds with the intention that a liquidator would investigate Eclipse's transfer of large parcels of land to group companies for no consideration (after the litigation between Eclipse and the Minister had commenced). In turn, Eclipse sought a stay on the wind-up application while it appealed (unsuccessfully) to the Appeals Court and High Court.

Following the High Court's decision not to grant Eclipse leave to appeal, the directors appointed Worrells Partner, Mervyn Kitay, as voluntary administrator.

Worrells'challenge

This created a situation where a wind-up application was on foot (seeking the appointment of a liquidator) and an administrator having been already appointed.

The petitioning creditor (Minister of the Environment) refused to adjourn the wind-up application, stating that it wanted a liquidator appointed to investigate a series of transactions (including the land transfers) that it considered 'voidable transactions' under section 588FE (6) of the Corporations Act 2001. Consequently, the administrator applied to the Supreme Court for an order to adjourn the wind-up application to allow the company affairs to be investigated by himself with a view to Eclipse's parent company proposing a Deed of Company Arrangement (DOCA). The intended purpose of the DOCA was to achieve a better outcome for all creditors (primarily the Minister of the Environment and group-related entities) once the administrator investigated the land transfers and the admissibility of large related company debts against Eclipse, and would be able to consider the DOCA in the context of the likely recoveries in the event a liquidator was appointed. In this way, the DOCA proponent being Eclipse's parent company, hoped to effectively deal with/compromise the levy debt owing to the Minister without having to resort to further lengthy and expensive litigation that would likely result in Eclipse's liquidation.

The administrator's application was successful.

The Court held that the wind-up application be adjourned until the second meeting of creditors considered a DOCA, on the basis that:

  • It was satisfied that the DOCA proponent had the financial resources to fund the DOCA of the magnitude that the DOCA could involve.
  • If Eclipse were to go straight into liquidation, the likely, subsequent litigation could drag on for years to creditor's disadvantage.
  • If litigation (over disputed land transfers) occurred, a liquidator would likely require litigation funding, and those funds will unnecessarily reduce the return to creditors.
  • Litigation itself is not without its difficulties.
  • A return under a DOCA would be timely.

The Minister's objection to the administrator's application said that adjourning the winding up application until Eclipse's right of appeal was exhausted, reduced the time to take action on alleged director's duties breaches, which would expire in March 2018. The Minister was concerned that the VA would consume this period and prejudice a liquidator's rights to take action. Accordingly, it was necessary for the administrator to agree to extending the limitation period in the event of creditors not accepting the DOCA and the company being liquidated.

The Court emphasized that:

  • creditors must approve the DOCA itself or determine if the company is to be placed into liquidation. The Court has no role in that decision.
  • contextually, everything points to the legislature being of the view that the parties should try and work out the company's affairs in such a way that satisfies their needs.

In drawing a distinction where the petitioning creditor is the Australian Taxation Office, the Court said:

Sometimes it is in the interests of a creditor the company be would up even where an administrator has been appointed. For instance, the Deputy Commissioner of Taxation who upon a company becoming insolvent has certain rights against the directors may have no interest in an administration. But those interest aside, allowing the parties the opportunity to attempt to reach a compromise must generally be in the best interests of creditors."

Outcome for insolvency approaches

This case is helpful in understanding the Court's approach to allowing the voluntary administration process to continue even where an administrator is appointed after a wind-up application is made. It reinforces the voluntary administration regime's primary objectives:

  • Maximise the company's chances, or as much as possible of its business, to continue to exist; or
  • If it is not possible for the company or its business to continue to exist—results in a better return for the company's creditors and members, than would result from the company being immediately wound up.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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