Will a Court appoint a liquidator over the top of an 11th hour voluntary administrator?

Summary

  • Company directors are sometimes persuaded to appoint voluntary administrators while there is a winding up petition before the Court to wind up their company
  • The voluntary administrator/s will need to appear in Court and convince the Judge it is in the best interests of creditors to allow the voluntary administration to continue (rather than immediately wind up)
  • The key issue for directors is that it is not a relevant consideration for a Court to value saving owner’s equity (they have an uphill battle because the court will be sceptical)

Why appoint a voluntary administrator?

The appointment of a voluntary administrator is usually initiated by director seeking to save their company. It provides a moratorium from creditor action which allows the company to restructure without creditor interference (other than via a winding up application). The optional outcome for directors is a compromise through a deed of company arrangement (DOCA) that reduces the company’s debts. If the voluntary administration leads to the successful outcome of a DOCA, the directors will be given back their powers and allowed time to try and bring the company back to long term profitability and sustainability.

Why appoint a voluntary administrator at the 11th hour?

The 11th hour for a company is the time immediately before a Court date is listed for a compulsory winding up. The creditors (such as the ATO) have lost patience with directors and believe their interests are best protected by winding up, rather than waiting for the directors to straighten things out through a voluntary administration. This is a scenario where the creditors oppose an adjournment of the winding up process.

Appointing a voluntary administrator at the 11th hour is more than likely a last-ditch attempt by directors to delay a liquidation which would result in the death of their business. While a liquidation spells the end of a company, a successful DOCA arising from a voluntary administration will allow directors to return to trade.

How does court liquidation occur?

An application for an order to wind up a company can be taken to court (Federal or Supreme) to be heard by a Judge or Registrar.  If the application is granted, the order for liquidation will be made and the Court will appoint a liquidator selected by the applicant creditor.To find out more about creditor initiated winding up, read our articles:

The legislation guiding a court’s decision

The legislation that a Court will use to consider whether to wind up is set out in the Corporations Act. Section 440A(2) of the Corporations Act 2001 (Cth) provides that a Court must adjourn a hearing of an application for an order to wind up a company where that 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 with administration rather than be wound up.

This means that wherever there is an application to wind up a company (i.e. have it put in liquidation) and the company is currently undergoing voluntary administration, the Court must decide whether voluntary administration or liquidation would better serve the interests of the creditors – not the directors, or the business itself – in determining whether to wind up immediately.

The consequence of this legislation is that in any application for an order to wind up a company, if the application is made by or on behalf of creditors who are primarily in support of the order, the directors and administrators must convince the Court that it is in the interests of creditors that the company not be wound up.

Application in case law

Recent case law applying s 440A of the Corporations Act 2001 (Cth) has supported a common sense interpretation of the section in the following ways:

  • For the Court to be required to grant an adjournment, it must be satisfied that it is in the creditors’ interests to continue the administration in all the circumstances, which involves there being a sufficient possibility – as distinct from mere optimistic speculation – that creditors’ interests will be accommodated to a greater degree in an administration than in a winding up (Weriton Finance Pty Ltd v PNR Pty Ltd [2012] NSWSC 1402 at [16] to [21])
  • The defendant company (i.e. the voluntary administrator’s lawyers) bears the legal burden of satisfying the Court that an adjournment should be granted (Re Laguna Australia Airport Pty Ltd [2013] FCA 1271 at [11])
  • A substantial degree of persuasion that administration rather than liquidation is in the best interests of the company’s creditors is necessary. This means proof is actually required (Re Offshore & Ocean Engineering Pty Ltd [2012] NSWSC 1296 at [6])

And, most relevantly:

  • The Court will view with skepticism the appointment of administrators at the last minute in the face of winding up proceedings (Re Offshore & Ocean Engineering Pty Ltd (supra) at [16])

In weighing the issue of how and who can determine whether administration or liquidation best serves the interests of creditors:

  • Particularly in the case where commercial judgments may differ, there is force in the view that creditors are the best judges of their own best interests… But while I regard the opinion of an insolvency practitioner in this respect as relevant, ultimately it is for the judgment of the Court whether the continuation of the administration as opposed to an immediate winding up is in the interests of creditors. (Re Offshore & Ocean Engineering Pty Ltd)
  • It may be said, why should this decision not be left to the creditors?… the overwhelming majority of whom have indicated a disposition in favour of adjourning the application to permit them to consider the DOCA. However, they have not been presented… with the fundamental truth… Ultimately the Court has to be satisfied that it is in the best interests of creditors. (Re Offshore & Ocean Engineering Pty Ltd)

In summary:

  • For an application to be rejected, there must be a sufficient possibility that administration will accommodate the creditor’s interest to a greater degree than liquidation
  • The defendant company (being the directors and administrators) bears to burden of proof for establishing why an application should be granted
  • There must be substantially persuasive evidence that administration would be better than liquidation for the administration to be allowed to continue
  • The Court will likely look at an 11th hour appointment of a voluntary administrator as a negative reflection on the efficacy and value of administration over liquidation
  • Ultimately, while the opinions of creditors and insolvency practitioners will be considered, the determination of what is in the creditors ‘best interests’ and how those interests will best be served is left to the discretion of the judge

Further examples

This case concerned an application for an adjournment of proceedings to wind up a company which had (very recently) been put into voluntary administration. The judge allowed the application in part, deciding that the appointment of the provisional liquidator would be preferable to salvage as much of the company as possible (and more could be salvaged through liquidation than through voluntary administration).

On the evidence there was no prospect that a proposal might emerge for a deed of company arrangement that would produce a larger or accelerated dividend for the creditors than in a winding up. The evidence to the contrary was no more than optimistic speculation. For the same reasons CA s 440A(3) did not preclude the appointment of a provisional liquidator.”

Section 440D of the Corporations Act 2001 (Cth) states that during the administration of a company, a proceeding against the company cannot be begun or proceeded with except with the administrator’s written consent, or the leave of the court.

This case shows that provisional liquidators can and will be appointed by the court over the top of an 11th hour voluntary administrator.

This case concerned winding up proceedings before the court. Immediately prior to the commencement proceedings (at quite literally the 11th hour), voluntary administrators were appointed. Here, Greenwood J held the following:

Accordingly, what I propose to do this. I will grant the adjournment of the application for the winding up order for, in effect, a period of eight days by which time the voluntary administrators will have had an opportunity to determine whether the amount of $100,000 is paid tomorrow and, secondly, whether, based upon their expertise and experience generally, the responses that they obtain from St George and/or Downer EDI leads them to believe that there is any prospect of a Deed of Company Arrangement emerging which would result in a dividend to creditors greater than a dividend upon liquidation or whether there is a prospect of a sale of the business either at an amount which would discharge the creditors in total as is suggested or at some lesser amount which would result in a calculation of a dividend which might be favourably compared with that obtaining in a liquidation.”

This decision shows that while the court is, in favourable circumstances, willing to maintain last minute voluntary administration appointments, they will still be treated with a degree of scepticism, and (as was the case here) liquidation will not be entirely ruled out, but rather put aside for a second return date.

Key takeaways

  • Voluntary administration will always lead to either a deed of company arrangement or a liquidation anyway
  • Australia exhibits a general culture of intolerance and judgment towards the process of voluntary administration, and as a result, goodwill value and reputation are often lost, contributing to poor rates of success (for more information, read our article on the success rates of voluntary administration)
  • It is not the priority of the Court to ‘save’ a business (only to protect creditors)
  • Courts will likely make a prima facie judgment (or a ‘smell’ test) of whether the voluntary administration seems beneficial or not very quickly
  • Overall, it matters less when and in what circumstances the voluntary administrator was appointed, and more whether the creditors are better served by the administration or by a liquidation; this is what will affect the judge’s decision to grant a winding up application

To find out more about voluntary administration and liquidation, read our articles:

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