14 October 2021
Voluntary Administration and the Court’s Involvement
With a view to limit the Court’s involvement and allow for a speedy and flexible system involved in the administration of companies, the Court has evolved to partake in merely a supervisory role proving to serve as an improvement to the effectiveness of Part 5.3A of the Corporations Act 2001 (Cth) (“the Act”).
What is Part 5.3A?
In order to contextualise the essence of Part 5.3A of the Act and its effectiveness, one must first examine the way in which it came about. In 1993, the voluntary administration regime was instigated pursuant to the Corporate Law Reform Act 1992 (Cth). Voluntary administration is intended to provide a company ‘breathing space’ from its usual operations by the appointment of an independent administrator to assess the company’s assets and liabilities when it is not in a position to pay its debts. The purpose is for the company to avoid insolvency, examine how to restructure the company to enhance its performance, and if approved by creditors, enter into a deed of company arrangement (“DOCA”) with its creditors to agree upon how the company’s affairs will be managed.
Powers of the Court
The General Insolvency Inquiry (“the Harmer Report”) put forward a number of recommendations where one of the focuses was to put an end to what was seemingly the unnecessary involvement of the Court in the official management of voluntary administrations. At present, there are many instances where voluntary administration is able to progress with minimal need for the Court’s involvement and focus its attention to ‘speed, flexibility and informality’.[1] Notwithstanding the fact there has been a shift in the mechanism of Part 5.3A away from the reliance on the Courts, the part provides the Court with a great number of powers in relation to voluntary administration and thus, the Court’s powers may be inevitably invoked.
Section 447A provides the Court with a discretionary power enabling it to “… make such order as it thinks appropriate about how this Part is to operate in relation to a particular company’.[2] In Australasian Memory Pty Ltd v Brien[3], the High Court’s decision set precedence for the scope and extent to which the Courts can exercise their powers under s 447A. The High Court held that s 447A is a fundamental feature of Part 5.3A and noted that, ‘the powers under section 447A are wide but [not necessarily] entirely without limit’.[4] In contrast, there are controversial viewpoints contending that, ‘the wording of s 447A is extremely broad and provides scope for the provision to be used at any stage in a voluntary administration’.[5] Arguably, the Harmer Report fails to wholly clarify the purpose of s 447A, its limitations and the aspects the Court should consider when exercising its discretion.[6] It was merely suggested in the Harmer Report that the ‘Court be given a broad power’ not to enliven further ambiguities.[7] Some have argued that the explanatory memorandum to the Corporate Law Reform Bill was absent in explaining the objectives of s 447A and simply reiterated s 447A(1).[8] The Court’s role in s 447A is clearly depicted in Cawthorn v Keira Constructions Pty Ltd[9], where Young J said, ‘…whilst the Court is to keep on the sideline as much as possible, it is to be involved in a supervisory capacity’.[10] The Court’s position was clarified and it is apparent that the Court was not intended to hold the capacity of being on the frontline, but rather it is to oversee in a way that will safeguard secured creditors and ensure they are not prejudiced.
Innovation of Holding a DOCA vs Court-based approach
The formation of Part 5.3A was enacted as a ‘flexible mechanism’ replacing the Court’s role and in turn positioning a registered administrator to manage the voluntary administration of a company. Commentators have conceded that the short timeframe imposed by s 439A(5) for an administrator to convene a meeting and inform creditors presents a limitation. In this respect, the only way for an extension of time to be granted is by applying to the Court pursuant to s 439A(6) and thus the Court’s involvement is yet again invoked. With a view to circumvent the Court’s involvement, in practice insolvency practitioners have been implementing a ‘holding DOCA’ mechanism as an unconventional means which allows an administrator to extend the convening period to maintain the status quo, and continue their examinations to restructure the company through a future variation to the deed. Upon execution of a DOCA, the voluntary administration of the company effectively shifts from ‘Administrators Appointed’ to ‘Subject to Deed of Company Arrangement’ and the deed administrator is responsible for administering the DOCA.
The objectives of Part 5.3A are to expediate the administrator’s meetings with creditors. Importantly, this has been achieved where proceedings against the company cannot be initiated by third parties unless ‘with leave of the Court’ and ‘in accordance with such terms (if any) as the Court imposes’.[11] It is evident Part 5.3A functions to encourage the Court’s involvement to predominately be of a supervisory nature.
Jurisdictional comparative analysis
Part 5.3A forms a stark contrast to the legislation in the United States under Chapter 11 of the Bankruptcy Code where the Courts in America play a superior role in the voluntary administration process. Some critics of Australia’s insolvency law system have advocated for further enquiries in determining whether certain features of Chapter 11 should be implemented in the Australian legislation. By way of comparison, Chapter 11 comprises of ‘direct Court supervision’ which is the very reason that Part 5.3A opted for a supervisory capacity to avoid protracted decision making during proceedings and the significant costs invariably involved. It must however be borne in mind that Chapter 11 and the voluntary administration system in Australia were designed to achieve differing purposes.
Chapter 11 requires the greater involvement of American Courts whereas the objective of Part 5.3A, was to ensure Australian Courts would only play a supervisory role. Anderson and Morrison acknowledge that, ‘in Australia a sense of independence is sacrificed for expediency’.[12]
Chapter 11 requires the greater involvement of American Courts whereas the objective of Part 5.3A, was to ensure Australian Courts would only play a supervisory role. Anderson and Morrison acknowledge that, ‘in Australia a sense of independence is sacrificed for expediency’.
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If you are seeking advice in relation to insolvency, please reach out to the JHK Legal team.
Written by Shayla Chedid, Lawyer
[1] Jenny Fu and Roman Tomasic, ‘Voluntary administration, professional innovation and dissenting creditors — Mighty River International in the High Court of Australia’ (2019) 34 Australian Journal of Corporate Law 230.
[2] Corporations Act 2001 (Cth) s 447A.
[3] [2000] HCA 30; (2000) 200 CLR 270.
[4] Australasian Memory Pty Ltd v Brien [2000] HCA 30; (2000) 200 CLR 270 [20].
[5] Jason Harris, ‘The constitutional basis of s 447A: Is it a power without limit?’ (2006) 14 Insolvency Law Journal 135, 136.
[6] Ibid.
[7] Australian Law Reform Commission, General Insolvency Inquiry, Report No 4 (AGPS, 1988) Ch 3 [62].
[8] Corporate Law Reform Bill 1992 (Explanatory Memorandum) (Cth) [620].
[9] (1994) 33 NSWLR 607; 13 ACSR 337.
[10] Cawthorn v Keira Constructions Pty Ltd (1994) 33 NSWLR 607; 13 ACSR 337 [341].
[11] Corporations Act 2001 (Cth) s 440D; s 440F.
[12] Dr Colin Anderson and Dr David Morrison, ‘The impact of changes to the Australian corporate rescue regime’ (2007) 15 Insolvency Law Journal 243, 246.