Section 440A - the changing landscape of what is considered a “creditor’s best interest”
Posted on September 07, 2018
Section 440A of the Corporations Act 2001 (Act) empowers the Court to exercise its discretion to adjourn a winding up application, if it is satisfied that continuing the administration of the company would provide a better outcome to creditors than if it were to be wound up. It is often the case that where a company appoints an Administrator after the commencement of a winding up application, it does so, because the Directors wish to be afforded the opportunity to propose a Deed of Company Arrangement (DOCA) to its creditors.
Administrators are finding it increasingly difficult to succeed with adjournment applications (especially when those applications are opposed by the petitioning creditor) pursuant to section 440A as was the case in the recent matter of SFL/Piletech (EA) Pty Ltd [2018] NSWSC 637. In this case, His Honour Judge Brereton, dismissed the Administrators’ application for an adjournment pursuant to s 440A of the Act and instead made orders winding up the company. His Honour’s reasons, which have been the subject of much discussion amongst insolvency practitioners, indicate that the hurdle that must be overcome to be successful in persuading the Court that the adjournment is in creditors best interests is much higher than it was previously.
The facts of the Piletech Case were as follows:
- Winding up proceedings were issued against SFL/Piletech (EA) Pty Ltd (SFL EA).
- SFL EA was one of nine companies within the SFL Group.
- Eight of the nine companies within the SFL Group appointed Administrators immediately prior to the first hearing date of the winding up proceedings (including SFL EA).
- A common Administrator was appointed to each company.
- SFL/Piletech MA Pty Ltd (SFL MA) was the sole company within the SFL Group that did not appoint an Administrator.
- The SFL Group’s affairs were intertwined and complicated and each of the companies within the SFL group were debtors and creditors of each other.
At the first hearing of the wind up proceedings, the solicitors acting for the Administrators sought an adjournment of the proceedings to enable a DOCA to be finalised and tabled at the second meeting of creditors. The petitioning creditor vehemently opposed the adjournment. The proposed terms of the DOCA were as follows:
- the assets of the eight companies in administration within the SFL Group be pooled;
- there be an extinguishment of all intercompany loans;
- there be a deferral of any claim SFL MA may hold against the companies in administration; and
- all companies be returned to the control of their directors.
His Honour, in reaching his decision, applied the established “Sufficient Possibility Test” as follows:
- are there realisable assets?
- will the administration produce a larger or accelerated dividend to creditors over liquidation? and
- is the prospect of a dividend a real and not a remote possibility?
Despite the Administrators’ opinion that the DOCA was likely to result in a better return to creditors than in liquidation scenario, after applying the test, His Honour was of the view that it was not appropriate to grant the adjournment and dismissed the Administrators’ application for, amongst other reasons, the following:
- if SFL EA were placed into liquidation, then it would no doubt bring about a winding up of each of the SFL Group entities;
- the mass liquidation would lead to the pooling of assets under s 571 of the Act; and
- if s 571 were to be enlivened, then the division of assets would be equal to that in a DOCA and the liquidators would benefit from various voidable transaction recoveries!
Accordingly, before deciding if an application to adjourn wind up proceedings is likely to succeed, it is imperative that you carefully consider the criteria that must be satisfied and ensure that there is detailed and clear evidence before the Court to support your submissions and the position that the adjournment is in a creditor’s best interest.
Lynch Meyer Lawyers is experienced in these types of applications and welcomes any enquiries. For more information, please contact James Neate on 08 8236 7621 or Alice Carter on 08 8236 7626.
