When voluntary administrators are appointed to companies with complex corporate structures or business operations, the time afforded to them by section 439A(2) of the Corporations Act 2001 (Cth.) (the Act) to prepare their report to creditors (439A Report) and to convene a meeting to decide the company’s future (439A Meeting) is often insufficient.  In such cases, a Court ordered extension is required.

Section 439A(2) of the Act prescribes that an administrator must convene the 439A Meeting within five business days before or five business days after the end of the convening period prescribed by section 439A(5) (usually 20 business days following the administrator’s appointment) (the Convening Period).

In Parbery, in the matter of NewSat Limited (Administrators Appointed) (Receivers and Managers Appointed) [2015] FCA 435 (NewSat), The Federal Court of Australia has affirmed that when considering the appropriateness of extending the Convening Period of a company in administration, the Court must take a commercial approach which fairly balances the need for administration to be “a relatively speedy and summary affair” with the equally important objective of maximising the return to creditors in the administration.

The Background

NewSat Limited (and its related entities) (the Companies) operated a longstanding multimedia and communications business which, among other things, offered clients access to third party communications satellites.  In the time leading up to its financial difficulties and the ultimate appointment of administrators, it had begun a project involving the construction and launch of its own satellite, the Jabiru-1.  It had entered contracts with a large US based manufacturer and a French commercial launch service provider (the Key Contracts) to build and launch Jabiru-1 at a cost of some $382.1 million.

On the same date as the administrators’ appointment, the Companies’ financiers appointed Receivers, who took control of the Companies’ assets, including the bulk of the books and records, making the administrators’ early investigations all the more difficult.

Shortly following their appointment, the administrators successfully obtained orders in the United States Bankruptcy Court (District of Delaware) restraining the manufacturer and commercial launch service provider from terminating the Key Contracts.  Although the action took up most of the administrators time for the first few weeks of their appointment, it was nevertheless critical, because the Companies had entered pre-launch contracts with their clients worth a staggering $644 million, all of which would be lost if the Key Contracts were terminated.

Having had limited access to the Companies’ books and records and with international restraining orders to obtain in the weeks following their appointment, the administrators were not in any position to complete their 439A Report to creditors and to convene the 439A Meeting required by section 439A(2) of the Act within the time allowed.

As a consequence of the complexity of the administration, the standard 20 business day Convening Period was far too short for the administrators to even conduct a proper investigation of the Companies’ books and records let alone try and facilitate a restructure of the Companies’ finances with a view to salvaging the Jabiru-1 project and the $644 million in pre-launch contracts!

Consequently, the administrators applied to the Court under section 439A(6) of the Act for an order extending the Convening Period for a further three months to give them time to complete their investigations and to see if there was any real prospect of salvaging the pre-launch contracts for the benefit of the Companies’ creditors and other stakeholders.

The Law

In his judgment, His Honour Beach J summarised the relevant principles to be considered when determining whether the Court should extend a convening period, restating that the objects of Part 5.3A of the Act were to maximise the chance of a company’s business continuing in existence and if that was not possible, achieving a better return for creditors than would be achieved by an immediate winding up.

In that regard, where an administration is particularly complex, unless the Convening Period is extended, an administrator may have insufficient to time form a reasoned commercial opinion about whether the creditors ought to resolve, either: –

1. that the company should execute a deed of company arrangement; or
2. that the company to be wound up.

Creditors have a right to make an informed choice about their alternatives and they cannot do that if an administrator has not been able to provide a reasoned opinion in the 439A Report to creditors prescribed by section 439A(4) of the Act.  The 439A Report is of course distributed to creditors along with notice of the 439A Meeting.

His Honour went on to summarise the factors which which would ordinarily justify the extension of the Convening Period, which he said at [63] “…include:

• whether there is a lack of any or timely access to financial or other business records;
• the level of co‑operation of the company’s officers or employees in providing useful and timely information to the administrator to facilitate his investigations;
• the size and scope of the business of the company or the group (as the case may be);
• whether there are substantial international activities;
• whether there are a large number of employees with complex statutory and other entitlements relating to rights of redundancy payments, annual leave, long service leave and the like;
• whether one is dealing with a complex group structure including significant inter‑company loans;
• whether there have been complex transactions entered into by the company or the group;
• the time needed to effect an orderly process for the disposal of assets in a manner sufficient to maximise the return to creditors;
• the time needed for a thorough assessment of a proposal for a deed of company arrangement to enable the company to trade out or to restructure its affairs;
• whether any extension would maximise the chances of the sale of the relevant business as a going concern;
• the number in quantity, value and type (secured and unsecured) of the creditors and the level of complexity in any securitisation or sub‑ordination arrangements;
• if receivers have been or may be appointed, any additional complexity involved in the timing and relationship of such receivers’ activities as it affects the administration and the options available to the company under administration;
• if a group is involved, the investigation of the desirability or appropriateness of “pooling” assets and creditors’ claims;
• if a group is involved, the investigation of the desirability or appropriateness of one or more deeds of company arrangement;
• whether there are any unusual substantial transactions that warrant further investigation in order for the administrator to properly advise creditors concerning potential recovery or other action; and
• more generally, whether additional time is likely to enhance the return for creditors.”

Ultimately, His Honour found that where a “substantial issue” in connection with any of those factors was present, it was appropriate to extend the Convening Period.

In the case of NewSat, several of the factors which would justify the extension of the Convening Period had clearly arisen.  Beach J found that extending the convening period would give the Jabiru-1 project the best chance of being completed and in turn, give creditors the best chance of a worthwhile return.  For those and other reasons, Beach J had no hesitation in granting the administrators the additional time they had sought.

What to take away

NewSat serves as a helpful summary of the factors which the Court will consider relevant when considering an application to extend the Convening Period of a company in administration.  It is both relevant for insolvency practitioners who may be encountering difficulties of the nature described in one of their appointments and for their legal advisers, who will be charged with assisting them to bring the relevant application under section 439A(6) of the Act, to give them the time they need to overcome them.

For more information please contact ERA Legal.