Australia: To adjourn or not adjourn (winding up proceedings), a review of section 440A(2)

In proceedings before the Federal Court of Australia and the state Supreme Courts where an application is made pursuant to sections 459P and 459Q of the Corporations Act (Cth) ("Act") for orders winding up a company, the appointment of an Administrator often results in the Administrator seeking an adjournment of winding up proceedings.

The purpose of such an adjournment is to enable the Administrator time to further investigate a company's financial circumstances before the company is wound up in insolvency.

The Court is compelled to consider the test under section 440A(2) of the Act in determining whether to allow the administration to continue, and can also use its discretionary powers to adjourn winding up proceedings pursuant to section 467(1) of the Act.

The Court will only grant an adjournment of winding up proceedings pursuant to section 440A(2) if it is satisfied that 'it is in the interests of the company's creditors for the company to continue under administration rather than be wound up'.

If the application is refused, the Court will determine the winding up application.

Application of Section 440A(2)

When a statutory presumption of insolvency has been established pursuant to section 459C(2)(a) following a defendant company's failure to comply with a statutory demand, the Courts are hesitant to allow delays to the determination of winding up proceedings.

An Administrator seeking the adjournment will often seek an adjournment to allow further assessments of the company's finances to be undertaken and a Deed of Company Arrangement ("DOCA") to be presented to creditors. An Administrator will likely submit that a DOCA would be of greater benefit to the creditors than the company entering liquidation.

Evidentiary Basis

Evidence to support these matters is required. The Court when considering whether it is "in the interests of creditors" will only consider the evidence adduced on the application; the Court does not consider what evidence might emerge in a subsequent report to creditors that is not currently before the Court, per Brereton J in Reed Constructions Australia Pty Ltd [2012] NSWSC 1045.

McPherson JA, in Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456, held that to persuade a Court that section 440A(2) has been satisfied,

'one would expect that there would have to be some persuasive evidence'.

Recent cases proffer that the degree of persuasion must be substantial. In Offshore & Ocean Engineering Pty Ltd [2012] NSWSC 1296, Brereton J held it must be,

in the interest of the company's creditors for the company to continue under administration, rather than be wound-up, as distinct from satisfaction that it may be so' (our emphasis added).

Persuasive evidence will be in the form of detailed affidavits and evidence based on financial forecasts.

Gardiner JA in Gorst Rural Supplies Pty Ltd v Glenroy (Lake Bolac) Pty Ltd [2012] VSC 60, found that the evidence contained in the affidavit of the Administrator, based primarily on information provided to him by the defendant, was 'optimistic speculation' as opposed to positive proof.

A similar test had been accepted as "sound" by Nicholas J in DCT v LDT Corp Pty Limited (Administrator Appointed) [2011] FCA 420, following Santow J in Waste Recycling and Processing Services of NSW v Local Government Recycling Co-operative Ltd [1999] NSWSC 507 where his Honour had said:

"To grant such an adjournment there must be a sufficient possibility, as distinct from mere optimistic speculation, that such a deferment for the envisaged time is in the interests of creditors".

This can be contrasted with evidence adduced before Brereton J in Media Options Group Pty Ltd [2-13] NSWSC 1746 where an adjournment was granted due to the strength of the evidence which included a,

'real, tangible and detailed proposal for a Deed of Company Arrangement ... which more than arguably offers the potential for a better result for creditors than a liquidation.'

Timing

When an Administrator is appointed after winding up proceedings have been commenced, Courts will be wary of the intentions of the defendant. Brereton J stated in Offshore & Ocean Engineering Pty Ltd [2012] NSWSC 1296 that,

'the court approaches with a degree of scepticism whether the appointment is not an attempt as a last resort to avoid the consequences of liquidation'.

In some instances, the Court may find that a last-minute appointment of an Administrator constitutes an abuse of process. This is demonstrated by the findings of Gardiner JA in Gorst Rural Supplies Pty Ltd v Glenroy (Lake Bolac) Pty Ltd [2012] VSC 60 where,

'the appointment of the Administrator the day before the hearing amounts to an abuse of the process of Part 5.3A of the Act.'

Considerations

In considering whether to adjourn winding up proceedings pursuant to section 440A(2), the Court will carefully examine:

  • when the Administrator was appointed;
  • whether formal investigations of a company's finances have occurred in an expedient manner;
  • the amount of evidence the Administrator has produced;
  • the possibility of additional funds from third parties; and
  • any previous adjournments granted for investigations by the Administrator.

Brereton J in Reed Constructions Australia Pty Ltd [2012] NSWSC 1045 highlights that the Court will also consider liquidation as a vessel for recovery,

'liquidation will have an advantage for creditors triggering the availability of the provisions that enable recovery of the proceedings of uncommercial transactions, and remedies for insolvent trading, and in this matter the court found 'apparent scope for insolvent trading claims.'

Conclusions

The case law establishes the following:

  • the Court will not allow defendants to use a last-minute appointment of an Administrator as a final effort to avoid winding up proceedings;
  • any foreseeable benefits to creditors must be evidence based;
  • the Court will not allow winding up proceedings to linger simply because there is scope for further examination by an Administrator;
  • an argument that creditors should be able to vote on a DOCA at a second creditor's meeting is not a relevant consideration under section 440A;
  • the Court takes a sceptical view when an Administrator is appointed just prior to a hearing date of winding up proceedings;
  • and the view of the creditors, particularly the major creditor is a relevant consideration, as is the opinion of the Administrator, but ultimately it is a matter for the Court to determine (see DCT v LDT Corp Pty Limited (Administrator appointed) supra).

If an initial adjournment of the winding up proceedings is granted and further adjournments are sought by an Administrator, then, as discussed in DCT v Bradley Keeling Management Pty Ltd [2003] NSWSC 47,

'as time goes on, and the occasion that there has been for collecting of evidence increases, so the amount of material which might need to be put before the court before it is persuaded, will increase'.

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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