Last minute Voluntary Administration – getting an adjournment of the winding-up hearing

Last minute Voluntary Administration – getting an adjournment of the winding-up hearing

In light of the recent case law on so called ‘last minute’ voluntary administration appointments, the corporate world is now concerned that voluntary administrators appointed just before a winding up hearing may be refused an adjournment of the hearing due to the timing of the appointment.

Indeed, in Re Polar Agencies Pty Ltd; Lovelltex Pty Ltd v Polar Agencies Pty Ltd [2019] VSC 41 the Court held that the appointment of the Administrators on the day before the winding up hearing was an abuse of process; as a result, the adjournment sought by the Administrators was not granted and the company was wound up.

As recently held in one of the cases JHK Legal has been involved in (Re Chemical Systems Australia Pty Ltd; Deputy Commissioner of Taxation v Chemical Systems Australia Pty Ltd (2019) FCA) we note that while the timing of the appointment does factor into the Court’s decision, due to the complexities and variables in insolvency law, each case is ultimately determined upon considering the circumstances and facts surrounding the appointment. Essentially, it is best represented by the common law dictum ‘each case turns on its own facts’.

As a result of the relevant facts and a consideration of all of the circumstances of the case, in Re Chemical Systems Australia the adjournment sought by the administrators was granted, despite the timing of their appointment.

Similarities and Differences between the two cases.

Re Polar

In this case, the first winding up hearing was adjourned to allow the Defendant to file Affidavit material or a notice of opposition. The Defendant failed to do so, and one day before the second return date, voluntary administrators were appointed over the Defendant.

On the morning of the winding-up hearing, a Notice of Appearance and an affidavit sworn by the solicitors of the Administrators were filed.

At the hearing, the Administrators sought a further adjournment pursuant to s 440A(2) of the Corporations Act 2001 (Cth) (“the Act”) on the basis, inter alia, that:

  1. the directors had proposed a Deed of Company Arrangement (“DOCA”) to the Administrators, which set out that the directors would procure funds and half of those funds would be paid to the Administrators’ trust account and the defendant would continue to trade at a profit during the administration period. The DOCA proposed by the directors also suggested the directors would procure the support of the secured creditor on the basis that it received 50% of the total DOCA fund dividends with the remaining 50% being paid to unsecured creditors;
  2. the Administrators needed time to investigate the company’s affairs, consider the DOCA proposal and prepare the second report to creditors.

In deciding the matter, the Court applied the relevant legal test from Gorst Rural Supplies Pty Ltd v Glenroy (Lake Bolac) Pty Ltd [2012] VSC 60 and stated that the onus was on the defendant to ‘provide persuasive evidence’ indicating that ‘it is in the best interests of the defendant’s creditors that the defendant continue under administration’. In Re Polar, Santow J also added to the test that there must be ‘sufficient possibility’ as opposed to a ‘mere speculative possibility’’ and that the Gorst test requires a ‘real prospect’ of return for creditors.[1]

In applying the Gorst principle as extended above, the Court found that:

  1. the Affidavit filed and relied on by the Administrators in seeking the adjournment did not contain ‘persuasive evidence’ that it was in the interests of the defendant’s creditors that the defendant continued under administration rather than be wound up.
  2. the assertions in the Affidavit and the directors’ proposed DOCA were ‘optimistic speculation’.
  3. there was no evidence as to the financial capacity of the directors to make this payment, that is, no indication of if they had the funds or how they would procure the funds.
  4. there was no evidence if the directors of the Defendant could procure the secured creditor’s support.
  5. the lack of realisable assets, lack of explanation for insolvency in the first place, and lack of evidence that the defendant could trade profitably for 3 years under the directors’ proposed DOCA resulted in the Court classifying the material supporting the adjournment as speculation and was the main factor by which the Court disallowed the adjournment.

In relation to the appointment at the last minute, the Court simply affirmed earlier judgments[2] and held that ‘manifestly’ insolvent companies appointing voluntary administrators after resistance to a statutory demand and winding-up proceedings should be approached with ‘a degree of scepticism whether the appointment is not an attempt as a last resort to avoid the consequences of liquidation’.

It was also noted that the affidavit in support of the request for adjournment was not sworn by the Administrators or the directors of the defendant, but the Administrators’ solicitors. The Court therefore gave the Affidavit little weight and did not find it persuasive, due to the lack of explanation for why the Administrators or the directors of the Defendant did not swear the Affidavit themselves.

Finally, the lack of evidence explaining the “last minute” nature of the Administrators’ appointment was also considered by the Court in favour of winding the company up.

Re Chemical Systems Australia

In this matter run by JHK Legal, the circumstances by which the Court allowed an adjournment of the winding up hearing are similar to those in Polar, in particular:

  1. the proceedings had been adjourned on the first occasion to allow the Defendant to file any Affidavit material or notice of opposition, and the Defendant failed to do so;
  2. the Administrators were appointed two days before the second return date.

Unlike in Re Polar:

  1. There was not yet a DOCA proposal from the director, but a letter of intention to propose a DOCA sent by the director to the Administrator;
  2. The Administrator sworn an affidavit in support of the request for adjournment made pursuant to section 440A and/or 467 of the Act.
  3. The Affidavit contained substantive evidence that:

a. the Company had recently obtained licences that would significantly increase the business’ profits;
b. a related entity of the Company would agree to fund the company’s litigation to recover an outstanding debt (but only in an administration scenario), whilst there was no evidence a liquidator would pursue that claim;
c. the related entity would make a contribution towards DOCA funds which would ultimately provide a return over a 12-month period to unsecured creditors.

It was submitted by on behalf of the Administrators by JHK Legal that the adjournment ought to be granted on the basis that:

  1. The Administration was only in its infancy;
  2. The Administrators had the opportunity to undertake preliminary investigations into the Company’s affairs, including by holding meetings and discussions with the Company’s director:

a. to ascertain the financial position and trading status of the Company’s business;
b. to discuss generally what deed of company arrangement proposal was being contemplated by the Director;
c. to specify those records of most relevance and urgency, and discuss how and when they can be obtained; and
d. to understand the Company’s history, reasons for its financial position and pertinent matters that required the Administrator’s urgent attention.

  1. It could not be expected that in less than a 48 hour period, the Administrator had gained an in-depth appreciation of the Company’s affairs nor formed a full and proper view as to its financial health.
  2. The Director had advised the Administrator that there was no realisable asset in the liquidation.
  3. The Plaintiff constituted only 1 of many creditors of the Defendant.
  4. There was no evidence at hand to demonstrate that the majority of creditors of the Company opposed the adjournment regarding the matter.
  5. No further creditors had filed a notice of appearance in the proceeding.
  6. There was no prejudice to the Plaintiff from the granting of a short adjournment to allow the Administrator to perform its statutory obligations and provide an opinion to creditors as to the appropriate course for the Company.

Although no explanation was given for the last minute appointment of the Administrator, given the other evidence supporting an adjournment, the Court granted the adjournment pursuant to section 467 of the Act.

The Re Polar case decided in February 2019 has given professionals a clear indication about the tendency of the Court to look with scepticism at ‘last minute’ voluntary administrations.

However, as demonstrated by Registrar Wall’s decision in Re Chemical Systems Australia, whether the Court will grant an adjournment at a winding up hearing, in circumstances where the administrators are appointed just days before the hearing, is dependent upon the facts of each case.

Senior Associate, Chiara Becattini

DOWNLOAD THIS ARTICLE

[1] In adding to the test in tis way, Santow J referred to the following cases: (Waste Recycling and Processing Services of New South Wales v Local Government Recycling Cooperative [1999] NSWSC 507; Re First Net Com Pty Ltd: Deputy Commissioner of Taxation v First Net Com Pty Ltd (2000) 35 ACSR 614).

[2] In particular, the judgment from the judgment from Re Offshore & Ocean Engineering Pty Ltd [2012] NSWSC 1296. Re Offshore & Ocean Engineering Pty Ltd

 

 

Insolvency

Insolvency

Worried you might lose your business, your livelihood or your home?

If you are the owner or director of a company that cannot meet its financial obligations you might be trading insolvent and you are right to be very concerned.

Read More
What Is Insolvency?

What Is Insolvency?

Insolvency is a term that applies to both companies and to individuals who can no longer meet their financial obligations, however personal insolvency (also known as bankruptcy) only applies to individuals.

Read More
The 7 mistakes people make when they hire an insolvency lawyer

The 7 mistakes people make when they hire an insolvency lawyer

If you’re not sure whether you need to hire an insolvency lawyer or not…it probably means you do.

Read More