Administrators often find themselves in a position where they need or desire further time to convene a second creditors’ meeting.
The recent Federal Court case of Farnsworth v About Life Pty Limited (Administrator Appointed), in the matter of About Life Pty Limited (Administrator Appointed)  FCA 11, provides a useful summary of the matters taken into account when deciding applications for extensions of time to convene creditors’ meetings.
The plaintiff in Farnsworth was appointed administrator on 17 December 2018 and was due to hold the second creditors’ meeting by 1 February 2019. The Court granted an extension until 8 March 2019.
General principles of section 439A(6)
The Court has the power to grant an extension where doing so is appropriate in the circumstances to advance the purposes of the administration. The Court must balance the legislative expectation that an administration will be quick and efficient with the need to ensure that the administration is not concluded without exploring options which may provide better returns for creditors.
The prospects of a more favourable outcome for creditors, through a longer period of administration, may therefore outweigh the need for a prompt resolution of the administration itself.
Applications under s 439A(6) are assessed by reference to whether an extension is necessary to enable the administrator to prepare their report and statements, in order that creditors will be in a better position to decide whether to terminate the administration, execute a deed of company arrangement or place the company in liquidation.
Examples of cases where an extension of time has been granted under section 439A(6)
The Court has recognised a number of categories in which it may be appropriate to grant an extension, including where:
- there are a large number of employees with complex entitlements;
- access to corporate financial records is lacking;
- the company has a complex structure or has entered into complex transactions;
- time is needed to thoroughly assess a proposal for a deed of company arrangement; and
- the extension will allow the sale of the business as a going concern.
Where the evidentiary case for an extension has been properly prepared, there has been no evidence of material prejudice to creditors, and the administrator’s estimate of time has had a reasonable basis, the Court has tended to grant extensions.
Reasons for the grant of an extension in Farnsworth
The extension in Farnsworth was granted in part because About Life Pty Ltd is involved in complex litigation in the Supreme Court of New South Wales. The company’s claims in that matter are substantial, although at the time of the application the proceedings were stayed pending the company complying with a security for costs order.
The Court also noted that:
- certain creditors desired that insolvent trading investigations be carried out;
- the administrator wished to explore a potential DOCA proposal from directors; and
- the administrator had so far acted without delay and taken appropriate steps to obtain information and advice.
Lessons from Farnsworth
The statutory scheme governing external administration prioritises speed, however not at the expense of exploring sensible and constructive options in the interests of creditors.
Where an administrator requires more time before a creditors’ meeting to consider options that may provide better returns for creditors, or to enable the company to return to trading in the interests of creditors and shareholders alike, an application can be made to the Court.
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.