To wind-up or enter administration? Federal and State Court attitudes diverge.

26 February 2013

In this issue:

• Administration may be preferable to liquidation
• Judicial attitudes to adjourning winding up applications can vary
• It pays to know what to expect

Background
Directors faced with a winding up application often cause their company to enter into administration under Part 5.3A, Corporations Act. The courts have recognised that this is not necessarily indicative of an improper purpose. For instance, in St Leonards Property Pty Ltd v Ambridge Investments Pty Ltd the court recognised:

“……..in many cases that will be the proper and responsible thing for directors to do. In some cases, the demands of a creditor and the indication that the creditor will pursue a winding up application will so focus the minds of directors that they become able to take stock of the company’s position more critically and, realising that the company is insolvent or likely to become insolvent, to see resort to the Part 5.3A procedure as the appropriate course. In those cases, such action is entirely responsible and proper.”

In these cases the question of immediate concern is whether or not, having regard to section 440A(2), Corporations Act, 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. If the court is so satisfied then the effect of this section is that the court is obliged to adjourn the winding up proceedings.

The onus of establishing the court’s satisfaction lies on the company and the appointed administrator. Usually this will involve a review of the present financial position of the company as revealed by material before the court, as well as evidence of a deed of company arrangement advanced by the company’s directors.

Recent cases

Two recent cases involving applications under section 440A(2) provide guidelines from the courts that may be usefully followed when dealing with applications of this kind in the future.

In the first case, Deputy Commissioner of Taxation v Helico Pty Ltd (administrator appointed) the deputy commissioner had filed an application for the winding up of Helico on the 16th of August 2012. The company then entered into administration on the 14th of September 2012. The second meeting of creditors pursuant to section 439A, Corporations Act was convened for the 22nd of October 2012. At the hearing of the winding up application a week before the holding of the second meeting of creditors, the deputy commissioner sought an order that the company be wound up. The company in turn sought an order that the winding up application be adjourned for one week to allow the creditors to attend their second meeting and to vote on the deed of company arrangement proposed by the director at that meeting.

After reviewing the respective submissions of the administrator and the deputy commissioner the court was persuaded to adjourn the winding up application. In arriving at its decision the court was influenced by the following considerations:

• The proposed deed of company arrangement would result in a return of four cents in the dollar while liquidation would be unlikely to result in a return to creditors.
• The second meeting of creditors had been convened and creditors notified. Cancellation of the meeting would result in wasted costs to all concerned.
• A short adjournment of one week was involved, with the matter returning to the court following the holding of the second creditors meeting.
• Although several important aspects of the proposed deed of company arrangement gave concern to the court, the creditors should be given the opportunity to assess those matters which were also susceptible to questioning by the creditors at their meeting.

The second case, In the Matter of Offshore & Ocean Engineering Pty Ltd, saw the NSW Supreme Court in its consideration of an application under section 440A(2) refuse to adjourn the winding up proceedings. In doing so the court adopted the position that it required a substantial degree of persuasion that administration rather than liquidation was required. In this respect the court insisted that it needed to be satisfied that it is in the interests of creditors to continue administration and not merely that it may be so.

On this basis the court concluded that the proposed deed, which involved realisation of assets by the administrator, offered a mere possibility of a better outcome, and that in any event a liquidation scenario should offer practically the same benefits. As a consequence the court refused to adjourn the winding up application.

Following this decision an application by the company seeking leave to appeal was dismissed by the NSW Court of Appeal.

What can be gained from these cases?

It is apparent that different approaches have been adopted in these two cases. The Federal Court in Helico was clearly persuaded by an approach that extended to creditors the opportunity to assess the merit of proposals before them, even where the court recognised that a number of the proposals, particularly those concerning funding of the proposal, lacked certainty.

By way of contrast, the NSW Supreme Court adopted an approach that placed a heavier onus on the company and the administrator to persuade the court that the proposal before creditors would produce a larger dividend, or at least an accelerated dividend, and not offer a mere possibility of a better outcome. With a mere possibility of a better outcome than winding up, the NSW Supreme Court considered that a short adjournment to allow creditors to form a view for themselves was inappropriate and did not properly give effect to the terms of section 440A(2).

Concluding comments

In cases involving applications under section 440A(2) Corporations Act the parties involved can reasonably expect that the insolvency professionals involved, whether acting as liquidator or administrator, will be in a position to inform them and their advisors of the judicial attitudes arising from cases in this area, and to fairly assess their client’s circumstances in light of those court determinations.