Company fails to avoid liquidation by appointing last minute administrators

Key Points:

  • Winding up activity is expected to increase throughout 2021.
  • Once a winding up application is lodged, a company cannot appoint its own liquidator, but it can still appoint voluntary administrators in an attempt to avoid a winding up.
  • Two recent decisions of the Supreme Court of NSW discuss under what circumstances the Court will adjourn a winding up application to allow the administrators to investigate the affairs of the company.

During 2020, the Commonwealth Government introduced restrictions on the issuing of creditor’s statutory demands for payment of debt to debtor companies, increasing the threshold for debts from $2,000 to $20,000 and the time for compliance from 21 days to 6 months.

Not surprisingly, this had a significant impact on the amount of demands being issued and the number of winding up application made.

Now that those restrictions have been lifted, it is expected that there will be an increase in winding up applications throughout 2021.

If a company cannot reach agreement with the creditor that issued the demand, or cannot have the demand set aside, one option available to the directors is to appoint their choice of liquidator or voluntary administrator over the company.

There is often the perceived benefit of having the choice of appointee, although all liquidators and administrators are independent and have obligations to creditors as a whole, not the directors, and so this benefit may be questionable.

Appointing a voluntary administrator may also avoid a liquidation where the directors intend to propose a deed of company arrangement.

However, once a winding up application is made, it is no longer possible for a company to appoint its own liquidator. Further, although a company may still appoint a voluntary administrator, this does not prevent the winding up application from proceeding and a liquidator can still be appointed. Whether or not this occurs is at the discretion of the Court.

Two recent cases from the Supreme Court of New South Wales highlight the risks in seeking to avoid the making of a winding up order by the last-minute appointment of administrators.

These cases are In the matter of Australian Tailings Group Pty Ltd [2020] NSWSC 1543 and In the matter of Integrated Green Energy Solutions Ltd [2021] NSWSC 620.

In both cases, voluntary administrators were appointed over the companies very shortly before the hearing of an application to wind them up and the Court had to consider whether the winding up applications should be adjourned to allow the appointees to investigate the affairs of the companies.

Both matters considered the application of s.440A(2) Corporations Act 2001 which requires the Court to adjourn a winding up application if it is satisfied that it would be in the best interest of creditors for the company to continue under administration rather than be wound up.

From those cases, the following principles can be identified:

  • There must be a sufficient possibility, not mere speculation, that creditors’ interests will be advantaged by the adjournment;
  • The lateness of any application is a relevant consideration to the Court exercising its discretion;
  • ​In that regard, the Court should treat applications for adjournments of a winding up where an administrator is appointed on the eve of a hearing with scepticism;
  • There is no general predisposition of the Court to grant an adjournment merely where an administrator is appointed;
  • The prospects of an adjournment are not improved if an administrator simply leads evidence of information provided to him or her which itself is not established by evidence;
  •  If an administrator is appointed so late that he or she has no real understanding of the affairs of the company, an adjournment is less likely; and
  • There may be some value in the adjournment of a winding up application to allow the administrator to complete investigations, but that will turn on there being sufficient evidence for a Court to conclude that the completion of the administrators’ investigations is in the creditors’ best interests.

In both cases, the Court concluded that the evidence relied on was not sufficient to establish that an adjournment was in the best interests of creditors, and the companies were wound up and liquidators appointed.

Lessons

When a winding up application has already been made, simply appointing administrators is not a get out of gaol free card, particularly if the appointment is made very soon before the hearing. The Court still has the power to refuse to adjourn a winding up application and appoint liquidators rather than allowing the administration to continue.

In order to maximise the chances of an adjournment being allowed, an administrator should be appointed without delay. This will assist the Court in concluding that the appointment is not simply a last attempt to avoid a winding up, but also to allow the administrator to properly investigate the affairs of the company and put forward detailed evidence of the company’s affairs, and a proper analysis of any deed of company arrangement proposed.

Hicksons’ insolvency team are experts in their field, and recognised in Best Lawyers Australia. We can assist creditors, debtors and insolvency practitioners in this complex and technical area of the law.

Post by Hicksons Partner, Lachlan Wilson

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