Applications to adjourn winding up proceedings pending outcome of an administration: recent guidance from In the Matter of Edifice Australia Pty Ltd [2019] NSWSC 1215.
KEY TAKE OUTS:
- Administrators should be appointed much earlier than the night before a winding up hearing is scheduled to take place, to enable the requisite evidence in support of a successful application for an adjournment to be effectively marshalled.
- It is important that there is “persuasive evidence” demonstrating that if a deed of company arrangement is to be accepted, the return to creditors is likely to be better than on a winding up scenario – this requires something much more than “optimistic speculation”.
- Ideally, direct probative evidence should be given by both the directors of the company in question as well as the administrator in support of the application.
Sometimes, after winding up proceedings are commenced against a company by a creditor, the company moves to appoint an administrator in a “last ditch” attempt to avoid going into liquidation, and an application is made to adjourn the winding up proceedings. A recent decision of Rees J highlights where and when such applications are likely to be unsuccessful.
Section 440A(2) of the Corporations Act provides (emphasis underlined):
The Court is to adjourn the hearing of an application for an order to wind up a company if the company is under administration and the Court 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.
The authors of Ford, Austin & Ramsay’s Principles of Corporations Law at [26.081] have said of this section:
“Properly construed, s 440A(2) is a direction to the court about how a particular power (that is, the power conferred on the court by s 467(1)(b) to adjourn the hearing of an application for a winding up order) is to be exercised; it is not itself a power of adjournment: Cory v Registrar of the Federal Court of Australia (2010) 80 ACSR 369; [2010] FCA 1215.”
In Creevey v DCT (1996) 19 ACSR 456 at 457 Pincus, Davies and McPherson JJA held:
“The question of whether an administration should continue, rather than that there be a winding up, is obviously closely related to the further question of whether the creditors could hope to get more by way of payment of their debts from one form of process or administration than from the other.
In order to satisfy the court … one would expect that there would have to be some persuasive evidence to enable it to be seen that there were assets which, if realised under one form of administration rather than the other, would produce a larger dividend, or at least an accelerated dividend for the creditors.”
Facts in question in the matter of Edifice Australia Pty Limited [2019] NSWSC 1215
In Edifice, the company in question had been involved in property development at Guildford. It had two judgments obtained against it in the Local Court in July 2018. These judgments later became the basis for a statutory demand. Shortly thereafter the company ceased operations.
The company then filed an application to set aside the statutory demand, but that application was dismissed on 5 November 2018 by consent. The time for compliance with the statutory demand expired therefore on 12 November 2018.
The company applied for an instalment order to enable it to pay the judgment debts by instalments of $5,000 in each Local Court proceeding, and the first of these instalments were made in November 2018.
On 14 November 2018 the project manager for the Guildford job [Devlan] issued a certificate of practical completion, together with a Superintendent’s Payment Certificate which referred to contract sums owed to the company, less cash retentions and “less Principal Payments TBA on accounts pending finalisation”, leading to a balance of “Total claim due negative Contractor to Principal”, of – $491,790.77.”[1]
Her honour noted critically that:
“It may be that, if cash retentions are paid by Devlan to Edifice at some point in the future, the amount which Edifice owes Devlan may be reduced or Devlan may owe money to Edifice. But there is no evidence which would clarify the position, either filed in the substantive proceedings or in support of the application for an adjournment.”[2]
However, in December 2018, the company failed to make the further instalments, and the instalment orders were revoked by consent.
On 12 February 2019 the winding up proceedings were commenced seeking appointment of a liquidator on the basis of the presumed insolvency of the company by reason of its failure to comply with the statutory demand.
On 17 June 2019, the winding up proceedings were set down for hearing on 9 August 2019.
The night before the hearing, the company appointed an administrator.
Her honour characterised the most important document annexed to the administrator’s affidavit as a document described as an “Outline of proposed deed of company arrangement” signed by the director of the company. That director did not provide an affidavit in support of the application for an adjournment, or in support of the opposition by the company to the winding up proceedings.
There was said to be an asset of the company in relation to retention monies held by a head contractor.
An interlocutory process was filed online seeking the adjournment of the winding up hearing. The only evidence in support was that of the administrator. He was concerned that, as his experience was that head contractors frequently withheld retention sums when companies went into liquidation, and became reluctant to pay outstanding building works, he wished to adjourn the winding up proceedings to enable a deed of company arrangement to be properly considered.
The draft proposal for a deed did not clearly show how it would be in the interests of creditors.
The only evidence filed by the defendant in the substantive proceedings was a solvency report of Mr Hoare which refers to creditors totalling $249,500. Mr Hoare expressed the view that Edifice was solvent on the basis that:
- it would be paid retention money of $387,816 on 14 November 2019 (but it was not apparent that this retention amount was in fact owing having regard to the Superintendent’s Payment Certificate of 14 November 2018); and
- that the director had agreed to financially support the company (although there was no evidence of the director’s ability to provide such support).
The conclusions of the author of the solvency report relied were criticised because: [3]
“…the financial report is not supported by any accounting records of Edifice, nor any lay affidavit evidence. Mr Hoare makes plain that, in preparing this report, he relied upon information provided to him, including “assertions made by the current company office holders”. There is no evidence as to what those assertions were. Mr Hoare does not express any opinion as to the accuracy or otherwise of the special purpose financial report.”
Rees J reminded herself of the principles she had outlined in a decision earlier this year:[4]
“There must be a sufficient possibility, as distinct from a mere optimistic speculation, that the interests of the company’s creditors will be accommodated to a greater degree in an administration than in a winding up. The onus is on the administrator to show, by persuasive evidence, that it is in the interests of the company’s creditors that the administration continue rather than liquidation ensue. The question of whether an administration should continue is closely related to whether the creditors can hope to get more by way of payment of their debts by administration than from liquidation. Where there is a realistic possibility that a DOCA may be proposed, it will generally be in the interests of creditors for the administration to continue in order to ascertain whether it will be “beneficial for creditors overall”, especially where the adjournment is sought for a short period early in the administration.”
Her honour also noted that applications brought at the last minute should be treated with some scepticism[5] but on the other hand, it may be easier for an administrator to obtain an adjournment where the administrator had only very recently been appointed and only a short adjournment was sought.[6]
Her honour also referred to a very similar case,[7] where, an administrator had only been appointed the day before the hearing, and had very little direct knowledge of the company’s affairs and relied on what he had been told by the director of the company. In that case, the court found that the administrator’s affidavit did not contain persuasive evidence that it was in the interests of the company’s creditors that the company should continue under administration, characterising the views of the administrator as being “optimistic speculation” that at some time in the future such evidence may possibly be obtained. In that case there was also an absence of explanation as to why the administrator had only been appointed the day before the hearing.
Rees J held at [37]:
“It is apparent from the evidence that Edifice is insolvent and has been insolvent for some time. I am not satisfied that the short adjournment sought is warranted as the evidence in support of the application for an adjournment does not contain persuasive evidence that it is in the interests of the company’s creditors that the company continue under administration rather than be wound up. The assertions made in Mr Moss’ affidavit but, more importantly, in the “Outline of proposed Deed of Company Arrangement” amount to, in part, ‘optimistic speculation’ that such evidence may be obtained but, perhaps more importantly, heighten my concern as to whether the interests of creditors will be better served in an administration rather than liquidation. In these circumstances I am not satisfied that it is in the interests of creditors for the company to continue under administration rather than be wound up. Nor are there any additional factors which might otherwise make it appropriate to adjoin the winding up proceedings. The application for an adjournment is refused.”
Takeaways from this case:
- Administrators should be appointed much earlier than the night before a winding up hearing is scheduled to take place, to enable the requisite evidence in support of a successful application for an adjournment to be effectively marshalled.
- Ideally, direct probative evidence should be given by both the directors of the company in question as well as the administrator.
- It is important that there is “persuasive evidence” demonstrating that if a deed of company arrangement is to be accepted, the return to creditors is likely to be better than on a winding up scenario – this is something much more than “optimistic speculation”.
- For example, where contributions to a deed fund are to be made by related parties which would not be available if the company entered into liquidation, or where the timeframe for a return to creditors under one form of administration is quicker than under another.
[1] [9].
[2] [9].
[3] [4].
[4] In the matter of Cresco Opus Fund No 4 Pty Ltd (administrator appointed) [2019] NSWSC 941 at [23].
[5] [28], citing In the matter of Offshore & Ocean Engineering Pty Ltd [2012] NSWSC 1296 at [15] per Brereton J.
[6] [28], citing In the matter of Bobos Engineering Australia Pty Ltd [2015] NSWSC 2012 at [5], Brereton J noted, relying upon the decision of Campbell J in Deputy Commissioner of Taxation v Bradley Keeling Management Pty Ltd (2003) 44 ACSR 377; [2003] NSWSC 47.
[7] [30], citing Gorst Rural Supplies Pty Ltd v Glenroy (Lake Bolac Pty Ltd)[2012] VSC 60
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