Last minute attempts to avoid a business being liquidated

When directors appoint a voluntary administrator the day before their company is before the court on a creditor’s winding up application, a certain scepticism exists that they are merely seeking to stall for time and delaying the inevitable. At the same time, the focus of a pending court winding up order is a real prompt for any business, given the drastic consequences that liquidation will have.

A court refused the company’s request for an adjournment, supported by its newly appointed voluntary administrators, who wanted time to allow a deed of company arrangement (DOCA) to be put to creditors, under Part 5.3A of the Corporations Act 2001: In the matter of Polar Agencies Pty Ltd [2019] VSC 43.

The sequence was:

  • 16 November 2018 – winding up application filed by creditor
  • 5 February 2019 – administrators appointed
  • 6 February 2019 – court winding up hearing

The Court ordered that the company be wound up, under a new practitioner as liquidator, and that the voluntary administration (VA) be terminated.

Why an adjournment was refused

Among various issues as to why the VA should not proceed were that the company was, proverbially, “hopelessly insolvent”, the ‘proposed DOCA was nothing more than optimistic speculation’; the return to creditors of 36c/$ under the DOCA depended on the company’s profitable trading for 3 years, which was not supported by its historical performance, nor by evidence that its customers would continue to trade with it. Also, there were potential claims against the directors, ‘who apparently [owned] three properties’.

A little oddly however, in ending the VA, the Court relied upon s 447A(2) which provides that the Court may order that a VA should end if it is satisfied that provisions of Part 5.3A are ‘being abused’. The Court was so satisfied, although discussion of the nature of the abuse appears nowhere in the judgment.

VA or liquidation?

As to this scenario generally, the Court quoted Brereton J[1] that:

‘… when a manifestly insolvent company appoints voluntary administrators following resistance to a creditor’s statutory demand and the initiating of winding-up proceedings, the Court approaches with a degree of scepticism whether the appointment is not an attempt as a last resort to avoid the consequences of liquidation’.

But there is another side to this scenario, as explained in Keays’ Insolvency at [19.255] which quotes, for example, the Court in St Leonards Property v Ambridge Investments[2] that:

“… it is not, of itself, reflective of improper purpose for directors faced with a winding up application to cause the company go to into Part 5.3A administration. Indeed, in many cases that will be the proper and responsible thing for directors to do. In some cases, the demands of a creditor and the indication that the creditor will pursue a winding up application will so focus the minds of directors that they become able to take stock of the company’s position more critically and, realising that the company is insolvent or likely to become insolvent, to see resort to the Part 5.3A procedure as the appropriate course. In those cases, such action is entirely responsible and proper”.

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[1] In the Matter of Offshore & Ocean Engineering Pty Ltd [2012] NSWSC 1296

[2] [2004] NSWSC 851

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