Michael.1
Insolvency and related law and policy, and more

Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related issues, in Australia and internationally. He has a strong law and policy background, is independent of any connections, and his views are his own. He gives no legal advice. 

Australia’s “practical insolvency regime … sometimes more of a rough and ready process and not an exact science … a trade-off …”

The Federal Court has dismissed a challenge to deeds of company arrangement of two property development companies and not put them into liquidation to allow investigations into what their creditor builder – Decon – claimed were “dubious” transactions leading up to the companies’ insolvency.

The investigations and report to creditors of the joint administrators were properly done and were not open to challenge.

Justice McKerracher noted that while the complexity of the companies’ transactions was “mysterious”, the administrators properly based their recommendation on the prospects of a better return for creditors through administration rather than liquidation, based partly upon their assessment of the prospects of litigation recovery by any liquidator whom Decon was willing to fund.

Background

TFM and KRI were single purpose companies whose principal activity was the development of a 99 residential apartment complex at Epping, NSW.  They engaged Decon to design and build the complex which was completed in September 2018. Payment was disputed and Decon then obtained a $6.3m judgment against the companies which TFM and KRI both disputed and raised cross-claims against Decon – see TFM Epping v Decon Australia [2020] NSWCA 118.

According to the administrators, both companies were insolvent by July 2019, if not earlier.

The insolvency

On 22 June 2020, Decon applied for orders winding up TFM and KRI. Eight days later, on 30 June, the companies’ common sole director put them into voluntary administration under Part 5.3A of the Corporations Act.

Decon then unsuccessfully sought to restrain the second meetings of creditors and the deeds of company arrangement (DOCAs) recommended by the administrators which would have not only extinguished its judgment debt but also provided funding for litigation by the companies of their alleged claims against Decon. That was heard and dismissed on the morning of 28 July 2020 with the second meetings proceeding later that day: Decon Australia Pty Ltd v TFM Epping Land Pty Ltd (No 1) [2020] FCA 1085. A DOCA was accepted. But leave was given for Decon’s principal claim under s 440D to be continued, and the matter was heard on 7 and 8 September 2020.

The decision

As the Judge said “the parties have not sought to provide the ultimate detail in relation to many of these transactions”, but “Decon suggests that they are so obviously suspicious that greater exploration and explanation of them is necessary”.

As to the extent and quality of the administrator’s investigations and recommendations, the onus of proof was on Decon; “it is not incumbent on an administrator to prove the sufficiency of their report …”. The administrators did not “purport to have exhaustively analysed all elements of each transaction, nor do they have the statutory power to do so”.

The administrators’ decision

One of the joint administrators, Mr John Melluish, gave evidence.

“ …Mr Melluish was asked a series of questions about what matters he had examined and why he hadn’t examined others. These inquiries were entirely appropriate but it was not squarely put to him, nor is it Decon’s case, that he acted negligently or in breach of the statutory duty. It is certainly not a finding I would make on the evidence. At a general level, I consider that Mr Melluish, an independent and experienced insolvency professional, gave evidence frankly as to decisions taken, errors or omissions made, and matters not pursued, explaining in each instance why that was so and as to his evaluative approach”.

“As the authorities make a clear, there is a wide range of evaluative, discretionary decisions that administrators are required to make with the benefit of appropriate expertise about what information should be verified and what can be followed up in the constraints of the limited time and resources available” and that “what has to be done is to be carried out within a three week period as determined by statute”, bearing in mind throughout the “need for administrators to provide a timely and practical service”.

No extension of time sought

Although it is open to administrators to apply to the Court for an extension of time, that is a matter for their judgement. It was not a pertinent factor in this case.  “The statute does not contemplate that an administrator will be able to conduct a speedier, but just as effective, version of a liquidator’s investigation”.

The fundamental issue was the likely comparative return to creditors 

The administrators had estimated that unsecured creditors of TFM would receive “a more expeditious and higher dividend” under the DOCA of between 2.78-5 cents, compared with between 0.02-1.41 cents in a liquidation; and for KRI, the estimated return to creditors under a DOCA was between 1.08-2.27 cents, compared to no return on a winding up.

“119 At all times for these single purpose companies, the fundamental issue for the Administrators was the likely comparative return to creditors by entry into the DOCA on the one hand or liquidation on the other. There was no prospect of a return to trade. In my assessment, the Administrators have conducted that exercise sensibly and have applied their skill and expertise to the evaluation of the comparative prospects of recovery by creditors in the two situations”.

“This comparison requires analysis of the position of the company as at the time of the making of the application”.  No contrary analysis was given.  “However valid its suspicions as to transactions may be, it is most important to also consider the likely benefits of liquidation to creditors”.

The Judge also considered, hypothetically, that if voting had come down to a casting vote, it would have been appropriate for the administrators to support the DOCAs on the basis of the comparisons.

Part 5.3A “is intended to be a practical insolvency regime”

“121 This is intended to be a practical insolvency regime. It is often of course disappointing to creditors as is the case in the present circumstances. That is more to do with an absence of available funds for creditors, rather than who should get them. But the statutory object is to achieve the formation of a relatively prompt independent expert view as to what course to recommend to the creditors in all the circumstances. Sometimes this is more of a rough and ready process as the authorities acknowledge and not an exact science, but of course qualified administrators are suitably trained to perform that task. The availability of an administration as an insolvency tool is to provide a trade-off for what would otherwise be a far more time-consuming and usually expensive process in liquidation”.

In summary

“ … there is no injustice caused by creditors voting in favour of the TFM DOCA and the KRI DOCA instead of electing to further investigate and potentially pursue speculative causes of action which face uncertainties and difficulties in terms of their funding, prospects of success, and prospects of enforcement and recovery. … None of these matters was hidden or concealed from the creditors of either TFM or KRI and, indeed, formed the basis of the Administrators’ recommendations expressed in the Creditors’ Reports in the first instance.

See Decon Australia Pty Ltd v TFM Epping Land Pty Ltd (No 2) [2021] FCA 32.

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