The Victorian Supreme Court has recently determined that the appointment of an administrator the day before a winding up hearing amounted to an abuse of the voluntary administration process, largely due to the inability of the administrator to satisfy the court that the administration would be in creditors’ best interests.

In Gorst Rural Supplies Pty. Limited v. Glenroy (Lake Bolac) Pty. Limited [2012] VSC 60  the facts were briefly as follows: –

1. On 28 October 2011, following the Defendant’s failure to comply with a statutory demand, the Plaintiff commenced proceedings to wind the Defendant up. The matter was listed for first directions on 30 November 2011, at which time the Defendant asserted that it was solvent and had a solvency hearing set down for 14 February 2012. Directions were made for the service of evidence.
2. No solvency evidence was served. Instead, on the day of the hearing, the Defendant announced that it had reached agreement to pay the Plaintiff out within seven days. An adjournment was granted to enable this to occur.
3. Perhaps unsurprisingly, the debt was not paid. Instead, the Defendant appointed an administrator the day before the adjourned hearing. The administrator hastily swore an Affidavit (largely based on information received from the director) and sought an adjournment. The Plaintiff opposed the adjournment and sought to appoint a liquidator.

The Court conducted a brief analysis of the cases and concluded that the relevant law was as follows: –

1. Where winding up proceedings are on foot when an administrator is appointed, section 440A(2) of the Corporations Act 2001 (Cth.) requires the administrator to satisfy the court that it is in creditors’ best interests that the administration continue.
2. The onus is on the administrator to demonstrate this matter by “persuasive evidence”. This means: –
   1. There must be a “sufficient possibility”, as distinct from “mere optimistic speculation”, that an adjournment is in the interests of creditors.
   2. There must be “a real prospect” as opposed to a “mere speculative possibility” of a higher return to creditors through administration.

Having regard to the facts of the matter, the court found: –

1. that the statement in the administrator’s Affidavit that the directors would put an offer “for a possible deed of arrangement” did not persuade the court that there was a “real prospect” that administration would yield a better result; and
2. that the fact that the application had been on foot for three and a half months but, when push finally came to shove (“on the eve of the final hearing”) the Defendant belatedly appointed an administrator, told against an adjournment.

In conclusion, the court said: –

While the interests of creditors are of course the paramount consideration in determining whether the administration should continue, I also take the view that, in addition to the absence of persuasive evidence that the administration should continue because it would be in the interests of creditors, the appointment of the administrator yesterday amounts to an abuse of the processes of Part 5.3A of the Corporations Act 2001. In this regard, I point to the chronicle of events which have occurred since this matter first came on for hearing and the absence of any explanation as to why [the administrator] was only appointed yesterday.

The administration was consequently brought to an abrupt end, and the liquidators nominated by the Plaintiff were appointed to wind the company up.

At first glance, this seems fairly unremarkable. The principle cited by the court (that the onus is on the administrator to satisfy the court that an adjournment will be in creditors’ best interests) is well settled, and has been for many years.

What is surprising, however, is the raft of relevant authorities and principles that were not mentioned by the court. Practitioners familiar with the field will be aware that successive cases have said that, where the administrator has only just been appointed, he or she should not have to address the “best interests” test in order to get an adjournment.

For those who are interested, a short Schedule summarising the authorities is set out at the foot of this email. There are a series of cases stretching back to at least 2003 to this effect.

It is not immediately clear why the court was not referred to any of those cases. Perhaps the solicitor for the administrator – who was seemingly given very little time to prepare – was unfamiliar with the field and simply did not know the authorities. Possibly the result might have been entirely different had the court’s attention been drawn to them.

Whatever the reason, condemning the appointment of an administrator as an “abuse of the processes of Part 5.3A the Act” – even in the circumstances described – is a disappointing development. The evidentiary bar should never be raised so high when an administrator has only been installed for a matter of days (in this case, one day). It is simply unrealistic to expect that, in such circumstances, an administrator will be able to report comprehensively on the company’s affairs and financial circumstances. A well advised administrator will give it his or her best shot based on the information available, but the decision in Gorst seems to require much more than that.

The impact of the decision, if any, is not clear. We certainly do not suggest that administrators should never accept appointments the day before winding up hearings. We continue regularly to seek and obtain adjournments in precisely those circumstances – frequently over the ardent and vocal opposition of furious petitioning creditors.

It will be interesting to see what such creditors make (or try to make) of the decision in Gorst. We expect that an attempt will be made to cite the decision as authority for a new general principle that all appointments made shortly before a winding up hearing are an abuse of process and are therefore ipso facto liable to be terminated on that basis alone.

The counter argument is, of course, that the Gorst case was a unique decision that turned on its own special facts in circumstances where it is far from clear that the court had regard to all of the relevant authorities.

Consequently, one would contend that it should not influence the determination of subsequent cases, which should be dealt with on their own merits having regard to the principles set out below:

Whether an adjournment should be granted where an administrator has only recently been appointed – summary of authorities

If the court is not satisfied that an adjournment is in creditors’ best interests in terms of section 440A(2) of the Corporations Act 2001 (Cth.), it does not follow that the defendant company must therefore be wound up. The court retains a residual discretion to adjourn the proceedings.

The source of this discretion is section 467(1) of the Act, which confers power on the court: –

1. to dismiss the proceedings “even if a ground has been proved on which the Court may order the company to be wound up”; or
2. to “adjourn the hearing conditionally or unconditionally”.In DCT v. Bradley Keeling Management Pty. Limited [2003] NSWSC 47, the court noted:

The logical structure of [‍section 440A(2) of the Act] is that there is a positive duty on the Court to adjourn the hearing of the application if the company is under administration and the Court is satisfied it is in the interests of the company’s creditors for the company to continue under administration rather than be wound up, but the subsection says nothing about whether the Court should, or should not, adjourn the hearing of the application if the two criteria set out in subs (2) do not apply.

In DCT v. WPS Motorsport Pty. Limited [2009] FCA 476, the court similarly reasoned: –

If I am satisfied that it is in the interests of the company’s creditors for the company to continue under administration then I am obliged, as I have said, by s 440A(2) to adjourn the winding up application. The converse does not automatically follow. By that I mean even if I were not satisfied as to it being in the interests of the company’s creditors for the company to continue under administration I would, nonetheless, possess a discretion to adjourn the winding up application.

In Deputy Commissioner of Taxation v Polcarp Pty. Limited [2011] FCA 1142, the court said (at greater length and using more impressive words but generally to similar effect): –

…s 440A(2) has attached to it a precondition which, in the event that it is met, requires the Court without any further exercise of discretion simply to adjourn the proceedings. By contrast and in contradistinction the power conferred by s 467(1)(b) is not mandatory in terms and may be exercised as the discretion needs to be…. the positive duty of the Court under s 440A(2) does not deny and does not denude the continuing existence of the discretionary power otherwise to adjourn the proceedings. Put another way, perhaps more shortly, the mere fact that the requirements of s 440A(2) are not satisfied does not deprive the Court more generally of its jurisdiction to adjourn the proceeding if it be thought necessary in any event.

Courts have successively held that this residual discretion (to adjourn the proceedings even though the best interests test has not been met) will be used where an administrator has only recently been appointed and seeks a short adjournment in order to flesh out a DOCA proposal and more fully investigate the company’s affairs.

In such circumstances, the administrator has never needed to satisfy the court that it is in creditors’ best interest that the matter be adjourned. The standard of evidence the administrator is expected to provide is also lower.

This has been the case since at least 2003, when, in DCT v. Bradley Keeling Management Pty. Limited [2003] NSWSC 47, the court said (emphasis added): –

It is common enough, in applications under s 440A, for an administrator to need to seek an adjournment very soon after his or her appointment, at a time when he or she knows very little about the affairs of the company. In that sort of situation, comparatively little material might be needed to justify a short adjournment.

A couple of years later in 2005, in the matter of DCT v. KJ Consulting Pty. Limited [2005] FCA 1827, the court, although not satisfied as to the best interests test, adjourned the proceedings “to enable… evidence to be obtained and to enable more considered argument to be addressed on both sides” (at paragraph 2 per Gyles J.).

As recently as last year, in Australian Executor Trustees Limited v. Australian Cinemas Pty. Limited [2011] FCA 1267, an adjournment was granted in similar circumstances, even though, “[‍q]uite what return there would be to creditors… is as yet unclear”. In that case the matter was adjourned simply because the circumstances of the company disclosed “something which might conceivably commend itself to [‍potential DOCA proponents] in the context of an administration”.