Introduction
The voluntary administration regime was introduced into the Corporations Law by the Corporate Law Reform Act 1992 (Cth) with effect from 23June 1993. It replaced 'official management'. The voluntary administration scheme is now found in Pt5.3A
(ss435A-451D) of the Corporations Act 2001 ('the Act').
The object of Pt5.3A, and therefore of voluntary administration, is stated in s435A, the first section in Pt5.3A:
'The object of this Part is to provide for the business, property and affairs of an insolvent company to be administered in a way
that:
(a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or
(b) if it is not possible for the company or its business to continue in existence - results in a better return for the company's
creditors and members than would result from an immediate winding up of the company.'
It is convenient to think of voluntary administration as affording a 'breathing space' in which an insolvent company is given a
temporary respite or moratorium from the usual remedies available to its individual creditors, so that the creditors generally
may seize the opportunity, if they think it is available, of achieving a better outcome for themselves than they would get from
a compulsory liquidation. The price of the temporary respite is that the directors appoint an independent 'administrator' of
the company to make enquiries and report to the creditors, with the potential result of the execution of a deed of company arrangement
(DCA), which is again implemented by an independent administrator.
Powers of the Court
When voluntary administration was introduced upon a recommendation made in the 1988 Report of the Australian Law Reform Commission,
General Insolvency Inquiry (ALRC 45 - 'the Harmer Report', named after the Commissioner-in-Charge of the Insolvency Reference, MrRWHarmer), one objective
was to eliminate what was perceived to be unnecessary involvement of the Court in official management. In many cases today, voluntary
administrations proceed without any resort to the Court.
The facts are, however, that Pt5.3A gives the Court many powers of relevance to voluntary administration, and that those powers
are fairly frequently invoked.
The powers which Pt5.3A gives to the Court include the following:
s439A(6) The Court may extend the period within which the second meeting of creditors (the meeting convened to decide the company's future)
must be convened ('convening period'). The convening period is a period of 21days beginning on the day when the administration
began (it begins when the administrator is appointed: s435C(1)(a)), or, where that period includes Christmas or Easter, a period of 28days beginning on that day: s439A(5). The application for the extension must be made within that convening period of 21 or 28days.
s442C The Court may grant leave to an administrator of a company under administration or of a DCA, to dispose of property of the company
that is subject to a charge, or is used or occupied by, or is in the possession of the company, but of which someone else is
the owner or lessor, provided the Court is satisfied that arrangements have been made to protect adequately the interests of
the chargee, owner or lessor.
s447A The Court may 'make such order as it thinks appropriate about how [Pt5.3A] is to operate in relation to a particular company' (subs(1) - my emphasis). Subsection(2) gives as examples three situations in which the Court
may order under subs(1) that the administration is to end:
(a) where the company is solvent; or
(b) where the provisions of Pt5.3A are being abused; or
(c) some other reason exists.
Section 447A is one of the most commonly invoked of the Court's powers relating to voluntary administration. Its breadth was established by
the High Court in Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270. The High Court held that the section is an integral part of Pt5.3A and permits the making of orders departing from, or varying,
for the future, other provisions of Pt5.3A (at 279-281).
I relied on s447A in Re Daisytek Australia Pty Ltd (administrator appointed) (2003) 45 ASCR 446 to permit the second meeting of creditors to be held at any time within the period composed of the convening period as extended
by an order made by me under s439A(6), and the period of five business days thereafter. The order made under s447A(1) was distinct from that made under s439(A)(6) extending the convening period. Subsection 439A(2) provides:
'The meeting must be held within 5 business days after the end of the convening period.'
This provision does not permit the meeting to be held before the expiry of the convening period or extended convening period. The
administrators believed, and satisfied me, that a position might well develop in which it was in the interest of creditors for
the meeting to be held before that expiry. Why, in these circumstances, should the administrators have been required either to
sit on their hands or to make an application for an abridging order under s1322(4)(d) when the occasion arose? The orders which I made under ss439A(6) and 4447A(1) were:
(1) Pursuant to s439A(6) of the Corporations Act 2001 (Cth), the convening period for the meetings of creditors of Daisytek Australia Pty Ltd and Daisytek Australia (Queensland) Pty
Ltd be extended up to and including Friday 4 July 2003.
(2) Pursuant to s447A(1) of the Corporations Act 2001 (Cth), the meetings of creditors of Daisytek Australia Pty Ltd (admins apptd) and of Daisytek Australia (Queensland) Pty Ltd
(admins apptd) required by s439A of that Act may be held at any time during the period composed of the convening period as extended by order (1) above and the period of 5
business days thereafter, notwithstanding the provisions of s439A(2) of the Corporations Act.
GylesJ recently made generally similar orders under ss 439A(6) and 447A(1) in Re Can Can Lingerie Group Pty Ltd (administrators appointed) [2005] FCA 633. His Honours added orders granting (a) the administrators liberty to apply for any further extensions of the extended convening
period at any time prior to its expiry, and (b) any person who could demonstrate a sufficient interest, liberty to apply for
a modification or discharge of the orders on appropriate notice to the administrators.
In Gibbons v LibertyOne Ltd [2002] NSWSC 274; (2002) 167 FLR 310; 41 ACSR 442, AustinJ relied on s447A to modify the operation of s446A. At their second meeting, the creditors resolved that the company be wound up. The result was that the company was taken to have
passed a special resolution that the company be wound up voluntarily, the administrator became liquidator, and the winding up proceeded
as a creditors' voluntary winding up: s446A(1), (2). A further result was that if the winding up continued for more than one year, the liquidator was required to convene annual
general meetings of the company and of its creditors: s508(1)(b). In the circumstances of the case, his Honour thought that this
would distract the liquidator from his real tasks and that nothing would be achieved by the convening and holding of the meetings.
Having decided that s447A was wide enough to permit him to do so, his Honour, in effect dispensed with compliance by the liquidator with s508(1)(b) of
the Act.
In McGrath, in the matter of Henry Walker Eltin Group Limited (administrators appointed) [2005] FCA 1479 GylesJ ordered (on 14October 2005) pursuant to s447A(1), that Pt5.3A was to operate in relation to each of 26companies in the Henry Walker Eltin group of companies, such that its meeting
under s439A might be adjourned by the creditors to a date appointed by the administrators not more than 180days after 8July 2005.
Administrators were appointed on 31January 2005. The following day, 1February 2005, they resigned and the present administrators
were appointed in their place.
On 16February 2005, pursuant to s439A(6), HelyJ ordered that the convening period be extended to 23May 2005 ([2005] FCA 316). On 6May 2005, HelyJ ordered, pursuant to
s447A(1), that the convening period be further extended to 5July 2005 ([2005] FCA 984). In making the second order, his Honour held that
notwithstanding the limitation implicit in s439A (that the application for the extension must be made within the original convening period), s447A conferred the necessary power.
For reasons not presently relevant, GylesJ did not himself make an order adjourning the meeting of creditors to a date appointed
by the administrators not more than 180days after 8July 2005 (the order preferred by the administrators), but made the order
referred to earlier, in effect permitting the creditors to adjourn the meeting for that period.
In the course of his Honour's reasons, GylesJ raised a question as to whether it was appropriate for administrators to act as 'defacto
liquidators' by 'taking steps to dispose of assets in a complex situation prior to the meeting of creditors to decide the company's
future, particularly if substantial delay is involved' (at [7]).
In Pasdonnay Pty Ltd (administrators appointed) [2005] FCA 335; (2005) 53 ACSR 717, the plaintiffs, purported administrators, had not been validly appointed, but Gyles J made an order under s447A that Part 5.3A was to operate in relation to the company as if they had been.
The company had two directors, a husband and wife. The husband effectively controlled the company's activities. He was admitted
to hospital and on or about the same day signed minutes of a meeting of the company's directors resolving to appoint the plaintiffs
as administrators, and associated documents. The minutes and other documents were undated, but his intention was that they should
take effect only if certain settlement discussions in relation to a dispute to which the company was a party should fail. The
plaintiffs signed an undated consent to act as administrators.
The next event to happen was that the company repealed its constitution and adopted a new one in its place, and the wife resigned
as a director.
The husband died. The following day, one of the plaintiffs dated the documents the previous day, that is, the date of the director's
death.
GylesJ was not satisfied that the appointment was valid, and so declined to make a declaration of validity under s447C. In relation to s447A, the first question to arise was one as to the standing of the plaintiffs. They were not 'administrators', but were they within
the expression 'any other interested person'? His Honour held that they were, because there had been a purported appointment
and they had acted on the basis that it was valid. His Honour held that s447A gave the Court power, in substance, to validate the appointment, and, on the 'most difficult question' of discretion, decided that
the power should be exercised, notwithstanding that he described the circumstances as 'troubling'.
His Honour made the order because he was satisfied that it was in the interests of shareholders and creditors to do so. However,
he directed that a copy of his reasons for judgment be forwarded to ASIC and to the members of the committee of creditors. Moreover,
he did not make an order as to the costs of the proceeding, which the plaintiffs' conduct had made necessary, leaving the question
of costs to the creditors to decide.
s447B On the application of the Australian Securities and Investments Commission ('ASIC'), the Court may make such order as it thinks
necessary to protect the interests of a company's creditors, and on the application of a creditor, such order as it thinks necessary
to protect the interests of that creditor, in either case while the company is under administration.
s447C If there is doubt on a specific ground about whether the appointment of a person as administrator of a company or of a DCA is valid,
on application by the person, the company, or any of the company's creditors, the Court may make an order declaring whether or
not the purported appointment was valid on the ground specified or on some other ground.
s447D The Court may give directions about a matter arising in connection with performance or exercise of any of the administrator's functions
and powers, and, in the case of an application by the administrator of a DCA, in connection with the operation of, or giving
effect to, the deed.
s447E Upon the application of ASIC or of a creditor or member of a company under administration or the subject of a DCA, the Court may
make such order as it thinks fit in certain cases of conduct by the administrator prejudicial to the interests of the company's
creditors, or where there is a vacancy in the office of the administrator, or where no administrator is acting.
s449B Upon application by ASIC or of a creditor of the company, the Court may remove from office the administrator of a company under
administration or of a DCA, and appoint someone else as administrator.
s449D Where the administrator of a DCA dies or becomes prohibited from acting as administrator or resigns office, or where for some reason
no administrator of the deed is acting, the Court may appoint a person as administrator of the deed, on the application of ASIC
or of an officer, member or creditor of the company.
Relevant powers of the Court are not found only in Pt5.3A. Part 9.5 (ss1318-1327) ('Powers of Courts') of the Act must not be overlooked. For example, s1322 empowers the Court to make orders 'curing procedural irregularities', and s1321 provides that a person aggrieved by a decision
of, inter alia, an administrator of a company or of a DCA may appeal to the Court.
Motivation of directors in appointing an administrator
There seems to be a general view that voluntary administration works satisfactorily. Perhaps the complaint most commonly made is
that directors abuse the system by appointing a 'friendly' administrator, who acts in the interests of the directors rather than
in the interests of the creditors, when reporting his or her opinion under s439A(4)(b) as to the course of action that would be 'in the creditors' interests'. The Act's requirement that only registered liquidators
may be appointed as administrator (s448B), and that a person may not be appointed who is disqualified under s448C or if he or she is an insolvent under administration (s448D), go some way to ensuring that only appropriate persons are appointed.
They do not, however, guarantee that the directors will not appoint a person who is favourably disposed to them.
It is useful to consider the factors which might motivate directors to appoint an administrator. A director who is of the opinion
that the company is insolvent or is likely to become insolvent at some future time, may well be influenced, rightly or wrongly,
by the following considerations of self-interest, to conclude that an administrator should be appointed:
- his or her potential liability to a civil penalty and for company debts, if insolvent trading takes place: s588G of the Act. Section 588H provides for defences, one of which is that the person proves that he or she took all reasonable steps to prevent the company
from incurring the debt (s588H(5)). In determining whether that defence is proved, one matter to which regard is to be had is 'any action the person took with a
view to appointing an administrator of the company'.
- Section440J provides that during the administration, a guarantee of a liability of the company cannot be enforced as against a director
or a spouse, defacto spouse or relative of the director. A director may find this temporary stay on the enforcement of such a
guarantee a welcome relief.
- If the company has already engaged in insolvent trading, or property has already passed from the company under transactions that
are voidable under Pt5.7B of the Act (eg an uncommercial transaction or an unfair preference), an administrator does not have standing to recover money, property or
other benefits which may be recoverable by a liquidator under that Part (note, however, that the administrator's notice convening
the meeting of creditors under s439A must be accompanied by a statement specifying whether there are transactions that appear to the administrator to be voidable transactions
in respect of which money, property or other benefits may be recoverable by a liquidator under Pt5.7B: Corporations Regulation 5.3A.02).
- Division9 of PtVI of the Income Tax Assessment Act 1936 (Cth) provides for 'Penalties for directors of non-remitting companies' and imposes a duty on directors to ensure that a company
either meets its remitting obligations under Div1AAA, 3B, 4 or 8 of that Part, or under Subdiv 16-B in Schedule1 to the Taxation Administration Act 1953 (Cth), 'or goes promptly into voluntary administration under Part 5.A of the [Act] or into liquidation': s222ANA(1), (2); and see s222AOB of the same Act.
Relationship between voluntary administration and winding up
Adjournment of hearing of winding up application - the statutory duty to adjourn and the inherent or implied discretionary power
to adjourn
Corporate insolvency is likely to lead to a collision between one creditor's desire to see the company wound up, and the directors'
desire to pursue the course of voluntary administration, followed, they hope, by a DCA instead of a winding up. It is s440A which gives the Court the responsibility of resolving this conflict.
Subsection 440A(1) provides that a company under administration cannot be wound up voluntarily, except as provided by s446A. I will, however, be addressing only winding up by the Court.
Subsections 440A(2) and (3) provide:
'(2) The Court is to adjourn the hearing of an application for an order to wind up a company if the company is under administration
and the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration
rather than be wound up.
(3) The Court is not to appoint a provisional liquidator of a company if the company is under administration and the Court is satisfied
that it is in the interests of the company's creditors for the company to continue under administration rather than have a provisional
liquidator appointed.'
Under each subsection, the onus is on the administrator to satisfy the Court:
(1) that the administrator has been appointed as administrator of the company; and
(2) that it is preferable 'in the interest of creditors' (not of shareholders or of the directors or of the public (cf Deputy Commissioner of Taxation v Choice Design Homes Pty Ltd, unreported, Sup Ct of NSW, Young J, 3 June 1999)) that the company continue under administration.
If both conditions are met, the Court must adjourn the hearing of the winding up application, or must not appoint a provisional liquidator, as the case may be. It is, of course, condition (2) that has proved to be contentious. Therefore
from this point, I will address only subs440A(2), which is the provision of greater present interest.
It is understandable that a plaintiff who has taken the initiative and gone to the trouble and expense of applying for a winding
up will feel aggrieved if the directors resolve to appoint an administrator, perhaps only two or three days before the return
date of the originating process seeking the winding up order (as in TCS Management Pty Ltd v CTTI Solutions Pty Ltd [2001] NSWSC 830 ('TCS')) or even on the day before the day fixed for the hearing of the winding up application (as in Permanent Trustee Australia Ltd v Strata Builders Pty Ltd [2003] QSC 170 ('Strata Builders') and in Re Askernish Pty Ltd [2004] FCA 400).
It is important to note that:
- there is a general inherent or implied discretion in the Court, outside s440A(2), to adjourn the hearing of the winding up application (one need only contemplate the sudden illness of a witness); and
- subsection s440A(2) does not provide for the dismissal of the winding up application and provides only for its adjournment.
Often in the judgments one does not find explicit differentiation as to the source of the power being considered or exercised. Since
both powers are available, the distinction between them may not make for a different outcome, but questions as to the source
of a Court's power to do things always repay attention.
In Creevey v Deputy Commissioner of Taxation (1996) 19 ASCR 456 ('Creevey') in the Queensland Court of Appeal, McPhersonJA, with whom Pincus and Davies JJA agreed, said that in order to satisfy the Court
that it was preferable that the company continue under administration rather than be wound up:
'one would expect that there would have to be some persuasive evidence to enable it to be seen that there were assets which, if
realised under one form of administration rather than the other, would produce a larger dividend, or at least an accelerated
dividend, for the creditors.' (at 457)
The appeal was from the trial judge's refusal to grant an adjournment and his making of a winding up order. Accordingly, the appellant
bore the heavy onus of establishing that the trial judge had not been entitled to be 'not satisfied'. If s440A(2) were to be seen as addressing only the final choice between liquidation and voluntary administration, the scope for the availability
of the Court's discretionary power would be so much wider. In Creevey, the refusal of the adjournment had the effect of the making of a final choice - the company was wound up. That was also the case in Deputy Commissioner of Taxation; the matter of KJ Consulting Pty Ltd [2005] FCA 1826, in which an adjournment was refused even though the second meeting of creditors was to be held the very next day. Those two
cases do not show, however, that s440A(2) requires the Court to decide finally whether it is in the interests of creditors that the company be wound up or continue in
administration.
The fact is that an adjournment is only for a period, short or long, and the winding up application remains on foot. This suggests
that the question posed is whether it is in the interests of creditors that the company continue in administration for the time
being, that is, for the period of the adjournment sought.
In fact, this is the approach that is taken. The question posed by s440A(2) is whether it is in the interests of the creditors that the company continue under administration rather than be wound up for the particular period of adjournment being considered. In Waste Recycling and Processing Services of NSW (t/a 'Waste Service New South Wales') v Local Government Recycling Co-operative
Ltd [1999] NSWSC 507; (1999) 32 ACSR 194, for example, SantowJ granted an adjournment of four days, stating that 'the interests of creditors' must be assessed in the
light of the length of the adjournment sought and its purpose and likely consequences. In my respectful opinion, this approach
is correct: indeed, if the section were construed as raising for determination the ultimate question where the interests of creditors
lay, the Court would be invited to pre-empt the creditors' own decision. The (correct) pro tem approach 'enlarges' the scope of the mandatory adjournment under the section, and reduces the need to resort to the general discretionary
power.
It is not uncommon for the 'competition' between winding up and voluntary administration to come before the Court suddenly and in
circumstances in which the administrator seeks a short adjournment to enable him or her to investigate the position, and to gather
and present evidence with a view to discharging the s440A(2) onus. It is at least within the Court's discretionary power to grant such a short adjournment for that purpose: it would be unfortunate
that the creditors should miss out on a potentially beneficial voluntary administration for the sake of a pause of a few days.
But according to the approach that is taken, it may be 'in the interests of creditors' that even such a short adjournment for
such a purpose be granted. It is only where the administrator is truly not yet in a position to satisfy the Court that it is in
the interests of the company's creditors for the company to continue under administration even for such a short period, that
he or she is relegated to relying on the implied or inherent discretionary power.
In all cases, it will be important for the administrator to place before the Court such evidence as is available to him or her as
to whether the interests of creditors will be likely to be better served by a voluntary administration than by a winding up.
The plaintiff creditor is prima facie entitled to a hearing of the winding up application promptly. The Court will take into account, against the granting of an adjournment,
the fact that the administrator has available to him or her the directors' familiarity with the company's affairs and records.
The Court will look for some evidence as to the utility, in the interests of creditors, of even a short adjournment of a few days.
In Strata Builders, in which the administrator was appointed only the day before the hearing of the winding up application, the Court refused an
adjournment which was sought to allow enquiries to be made, because the Court considered that the administrator's enquiries could
not result in any larger dividend to creditors than they would receive if the same enquiries were made by a liquidator. The case
illustrates that from the outset, the Court will wish, to the extent possible, to address the question of which of the two regimes
(voluntary administration or winding up) will better serve the interests of creditors.
In Nortel Networks Australia Pty Ltd v Coretel Pty Ltd (Administrators appointed) [2002] NSWSC 799, the winding up application was fixed for hearing, and the second meeting of creditors was due to be held, on the same day. In
their circular to creditors under s439A the administrators had recommended that the meeting be adjourned for sixty days pursuant to s439B, in order to enable the administrators
to continue confidential negotiations with prospective purchasers of, or investors in, the company. Due to the sensitive nature
of negotiations and the industry concerned, the administrators did not lead evidence as to the identity of the prospective purchasers
or investors, or of the amounts which the administrators were seeking from them.
BarrettJ acknowledged that the evidence as to the likely outcome for creditors from a voluntary administration was 'not particularly
strong', but granted the sixty day adjournment of the hearing of the winding up application sought by the administrators. His
Honour's reason was that the unsecured creditors would receive virtually nothing from a winding up, but might possibly receive
something from a voluntary administration. His Honour described the 'possibility' of a positive outcome for creditors through a
voluntary administration as 'cogently stated' and 'real'. Accordingly, he thought that the hearing of the winding up application
should be adjourned to let creditors vote as to what was in their best interests.
BarrettJ noted (at [4]) that the mandatory nature of the adjournment for which s330A(2) provides, and that if the Court is not satisfied
in terms of s330A(2), 'the compulsion to adjourn does not apply and the ordinary discretion comes into play'. I respectfully
agree. His Honour was satisfied that 'at this stage at least', it was in the interests of creditors that the company continue
under administration rather than be wound up. His Honour may therefore be seen to have acted under s440A(2) rather than in exercise of the Court's discretionary power. He construed the provision in accordance with the approach outlined
earlier, of which the case affords a good illustration.
In Deputy Commissioner of Taxation v Managenet Pty Ltd [2005] FCA 1903, the adjournment was granted on 16 December 2005 to 10 February 2006, in circumstances in which the second meeting of creditors
was to be held on 21 December 2006. GylesJ said (at [64]):
'It seems to me that creditors, as a whole, are advantaged by being able to consider the benefits offered here, which are not otherwise
available, and to compare those benefits with the potential result of a liquidation. In my opinion, that is a matter for creditors
to consider and they should be permitted to exercise the power given to them by the Act to vote at the second creditors meeting.'
The case is another example of the Court not deciding that it was in the ultimate interests of creditors that the company remain
in voluntary administration, but deciding that it was in their interests that the winding up application be adjourned long enough
to permit them to meet and consider what was in their ultimate interests.
In Australian Prudential Regulation Authority v Rural & General Insurance Ltd [2004] FCA 185; (2004) 136 FCR 149, after a proceeding for the winding up of the company had been commenced, the company resolved to appoint an administrator. The
company submitted that s440D required that the Court's leave be granted for the winding up proceeding to continue in the absence
of written consent of the administrator. The plaintiff, Australian Prudential Regulation Authority ('APRA'), submitted that s440D
did not relate to a winding up proceeding, which was the subject of express provision in s440A.
GylesJ held that leave under s440D was not required. One matter to which his Honour referred was the distinction recognised in s440E
between 'an application for an order to wind up the company' and 'a proceeding against the company' (my emphasis). His Honour also referred to the place occupied by Div6 within Pt5.3A, and thought that s440A was
intended to address the interrelationship between the two forms of external administration in insolvency, winding up and Pt5.3A
administration.
Adjournment and Relation-back
Under Part 5.7B of the Act, a liquidator may (but an administrator may not) recover property or compensation for the benefit of creditors of the company
pursuant to voidable transactions of the various kinds described in that Part. The transaction must have been entered into during
the period of six months ending on the 'relation-back day' or after that day but on or before the day when the winding up began:
see ss588FE and 588FF of the Act. The 'relation-back day' is defined, in the case of a compulsory winding up, as a day that is ordinarily the date of the filing
of the originating process on which the winding up order was made. If, however, immediately before the winding up order was made,
the company was under administration, or a DCA had been executed by the company and had not been terminated, ordinarily the day
is the day on which the administration began: see ss513A(b), (c) (d); 513C.
Directors may choose to delay appointing an administrator until the last possible moment in the hope of postponing the relation-back
period. The point assumes importance only where the gap between the filing of the originating process and the appointment of
the administrator is substantial; cfOlsen v Nodcad Pty Ltd [1999] NSWSC 364; (1999) 150 FLR 174.
When the Court is called upon to deal with an application for an adjournment of a winding up application in respect of a company
under administration, the date of the filing of the winding up application and the date of the appointment of the administrator
will be already fixed, and no decision taken by the Court on the adjournment application will alter the relation-back period (ex hypothesi, a winding up order is eventually made, perhaps because the creditors so resolve or because a DCA 'collapses').
The existence of significant voidable transactions will itself, however, be a reason militating against the granting of an adjournment.
Remuneration of administrators
Subsections 449E(1) and (2) of the Act provide:
'(1) The administrator of a company under administration, or of a deed of company arrangement, is entitled to:
(a) such remuneration as is fixed by a resolution of the company's creditors passed at a meeting convened under section 439A, or under section 439A or 445F, as the case may be; or
(b) if no remuneration is so fixed—such remuneration as the Court fixes on the application of the administrator.
(2) Where remuneration is fixed under paragraph (1)(a), the Court may, on the application of the administrator or of an officer,
member or creditor of the company:
(a) review the remuneration; and
(b) confirm, increase or reduce it.'
Does the word 'fixed' (or 'fixes') permit the creditors (or the Court) to decide, in relation to services yet to be rendered by
the administrator, that the remuneration is to be at a certain hourly rate, subject to a limit, and that the administrator may
make periodic payments (to himself or herself) on account of the accruing remuneration?
Obviously, this is an important question. If the answer is 'no', apparently the administrator would need to convene a meeting of
the creditors to fix the amount after the event, that is, after the services have been rendered.
I am thankful to Justice Gyles for informing me that he is reserved on a test case on this question, in which the Australian Securities
and Investments Commission (ASIC) appears by leave, as amicus curia, in order to make submissions as a contradictor. The case is Re Gidley; in the matter of Alliance Motor Body Pty Ltd NSD 1552/2005 ('Gidley'). In the following discussion, I take care not to give the slightest hint of any opinion on the issue.
In Gidley an administrator of a DCA seeks a direction pursuant to s447D of the Act, that, in his capacity as administrator of the DCA, he is justified in acting on the basis that his remuneration as administrator
and as deed administrator was properly fixed by a resolution of the company's creditors passed at their s439A meeting held on 15 July 2005. In the alternative, he seeks a declaration pursuant to s21 of the Federal Court of Australia Act 1976 (Cth) that he is so entitled.
On 20 June 2005, the company's board of directors appointed Messrs Gidley and Free as administrators of the company under s436A of the Act. The first meeting of the company's creditors under s436E was held on 27 June 2005. At the second meeting held on 15 July 2005, the creditors resolved that the company execute a DCA and
that Mr Gidley be appointed deed administrator. The DCA was executed on 28 July 2005.
At the second meeting, the creditors also resolved:
- that the remuneration of Messrs Gidley and Free as joint and several administrators, for the (then past) period from 20 June 2005
to 15 July 2005 be approved 'on a time basis in accordance with Lawlers Partners Guide to Hourly Rates in the amount of $34,703.00
plus GST in the amount of $3,470.30'. The resolution said that disbursements were in addition. The controversy did not, however,
concern this first resolution which was for a fixed sum in respect of past services.
- The second resolution that was the remuneration of Messrs Gidley and Free for the (then future) period from 15 July 2005 to the
date the DCA was executed, be approved on the same basis, and that the administrators were authorised to make periodic payments
on account of such accruing remuneration to a limit of $5,000.00 plus GST of $500.00.
- The third resolution was that the remuneration of MrGidley as (future) DCA administrator be approved up to a limit of $30,000.00
plus GST of $3,000.00, on the same time basis, disbursements being in addition.
It is the second and third resolutions that were in dispute.
In Re Korda; in the matter of Stockford Ltd [2004] FCA 1682; (2004) 140 FCR 424, FinkelsteinJ had held that the stipulation of the hourly rates for future work in that case did not 'fix' remuneration within
s449E(1). MrGidley submits that that case is distinguishable from Gidley because the scale of rates in that case could differ as the hourly rates in respect of work performed by persons occupying the
same position. FinkelsteinJ said (at [24]) that remuneration will be 'fixed' if it is 'stated as a money sum, or is based on a
formula which is capable of being applied according to some objective standard so the sum “can be calculated or ascertained
definitely”' (referring to Fraser Henleins Pty Ltd v Cody [1945] HCA 49; (1945) 70 CLR 100 at 128).
In Gidley ASIC has submitted that:
'The chargeout rates cannot be applied until various issues involving a considerable degree of subjectivity, assessment, discretionary
allocation, or apportionment, have been determined.' (ASIC's submission par[22])
The general importance of the issue raised in Gidley is clear when we remember that the same issue arises in relation to the 'fixing' of remuneration of receivers (s425), of liquidators in creditors' voluntary windings up (ss495, 499), and of special managers (s484), and may have implications in relation to the 'determining' of the remuneration of provisional liquidators and court appointed
liquidators (ss473(2), (3)).
The issue would still arise if the creditors' resolution were to fix in advance a number of dollars to be used up and appropriated
by the administrator at an hourly rate.
There are three other cases on administrators' remuneration which I will discuss at the symposium: Re Bosnjak Holdings Pty Ltd (administrator appointed); Lombe [2005] FCA 275; (2005) 53 ACSR 8, decided on 21 March 2005; Re Carlovers Carwash Ltd [2005] NSWSC 879; (2005) 54 ACSR 696 decided on 2 September 2005; and Lombe; in the matter of Bosnjak Holdings Pty Ltd (subject to a deed of company arrangement) [2005] FCA 1366 decided on 20 September 2005.
Some other recent cases
(1) McGrath, in the matter of HWE Civil Pty Ltd (subject to a deed of company arrangement) [2005] FCA 1883
Administrators of a DCA applied under s447A for an order, the effect of which was to enable their remuneration to be fixed by a committee of creditors in the same way as
the remuneration of liquidators may be determined by a committee of inspection pursuant to s473 of the Act. The creditors had previously, at their second meeting (held under s439A), appointed a committee of creditors.
The power to make orders of the kind sought, and the circumstances in which it might be appropriate to make them, had been considered
by HelyJ in Re Motor Group Australia Pty Ltd (administrator appointed) (No3) [2005] FCA 1202; (2005) 55 ACSR 34. GylesJ modelled his orders on those made by HelyJ in that case, and noted that FinkelsteinJ had made similar orders in Re Ion Ltd (administrators appointed), unreported, 15February 2005 (VID 92 of 2005).
(2) Re Askernish Pty Ltd [2004] FCA 400
The administrator applied under s447A and/or s1322(4)(d) of the Act for an extension of the time within which he might convene the adjourned meeting of the company's creditors. On 26November 2003,
the day before a winding up application by the Deputy Commissioner of Taxation was due to be heard, the company appointed the
plaintiff as administrator.
At the first meeting of creditors held on 4December 2003, the affairs of the company were discussed but no committee of creditors
was appointed.
The following day, 5December 2003, two secured creditors appointed a receiver and manager who took possession of the company's books
and records and continued to operate its business.
Pursuant to s439A(1) and (5) of the Act, the administrator was required to convene, within the period of 21days of 26November 2003, the second meeting of creditors.
On 16December 2004, he sent out to creditors his report and a notice of a meeting of creditors to be held on 24December 2003. On
17December 2003, he advertised that meeting in the press.
Whether the meeting was convened within the time stipulated in s439A(3) or was held within the time stipulated in s439A(1), (2), and (5) was not the subject of submissions, and no order under s1322(4) was sought.
At their meting on 24December 2003, the creditors resolved that the meeting be adjourned 'for a period of up to 60days' (cf s439B(2)).
On the assumption that this period would expire on 22February 2004, the originating process came on for hearing exparte on 13February 2004. The administrator's supporting affidavit was to the effect that the administrator had had discussions with
a person who was considering putting before the creditors a proposal for a DCA.
Lee J referred to authorities to the effect that s447A empowers the Court to authorise adjournment of a meeting convened under s439A to a date beyond the 60-day period. (His Honour cited Re Regency South Steyne Investments Pty Ltd [2003] FCA 1546; Re Locm Pty Ltd (1997) 79 FCR 35; Re Double V Marketing Pty Ltd (in administration) [1995] FCA 1151; (1995) 16 ACSR 498); Re Old Papa's Holdings Ltd; Ex parte Wallman [2001] WASC 188; (2001) 24 WAR 229 and Cawthorn v Keira Constructions Pty Ltd (1994) 33 NSWLR 607.) In extending the time within which the administrator might reconvene the adjourned meeting, LeeJ said (at [20]-[21]):
'In considering whether the discretion should be exercised in favour of the administrator I note that the administrator did not
seek to be made an agent of a director, under s421(2) of the Act, to examine the financial records kept by the receiver and manager. Such a step may have overcome the delay the administrator
was experiencing in obtaining the information he had asked the receiver and manager to provide. Nevertheless, I am satisfied that
the period within which the adjourned meeting may be reconvened should be extended. It is apparent that further time is needed
to better enable the administrator to gather information, facilitate a proposal for deed of company arrangement and give a meaningful
account of his administration to creditors. There is a real prospect that, if a deed is proposed and accepted, the deed may provide
a better outcome for unsecured creditors, including trade creditors and employees of Askernish, than would be achieved by a winding-up.
That objective would meet the purpose of Part 5.3A of the Act. Furthermore, there is no suggestion in the material before the Court that any person would be prejudiced by such an extension.
I consider it appropriate, however, that leave be reserved to any person claiming to be interested
(including the Australian Securities Investment Commission, any creditor, or the receiver and manager) to vary these orders on
48 hours notice to the administrator.'
(3) Downey v Crawford [2004] FCA 1264; (2004) 51 ACSR 182
The liquidator of a company and the company in liquidation sued the company's two directors for damages, or, alternatively, for
statutory compensation. Their complaint was that the directors had caused the company to be put into voluntary liquidation when
it was not insolvent or likely to become insolvent. They claimed that, by reason of the directors' conduct, the company had suffered
loss and damage.
The facts were complex. The legal issues of interest concern the nature of a director's duty under s436A in relation to the formation of the opinion of insolvency. After reviewing the authorities, WeinbergJ said (at [189]):
'However, the question whether the company was insolvent as at 4August 1999 [the date of the directors' resolution to appoint an
administrator] in one sense presents a red herring. The real issue is whether the defendants, or either of them, acted in breach
of duty when they proceeded to put the company into administration. The answer to that question depends largely upon whether
they genuinely believed, on reasonable grounds, that the company was insolvent or likely to become so in the future, and not upon
whether that was the company's actual position. The reasonableness of any such belief in turn depends, at least in part, upon
the adequacy of the steps that they took to satisfy themselves that the preconditions for the appointment of an administrator
had been met.'
His Honour held that liability was not established against one director, but was established against the other (who had not given
evidence).
(4) Ansett Australia Ground Staff Superannuation Plan Pty Ltd (as Trustee of the Ansett Australia Ground Staff Superannuation Plan) v Ansett Australia Limited (Subject to Deed of Company Arrangement)
[2004] FCA 130; (2004) 49 ACSR 1
This case related to terms of settlement between deed administrators, the company as employer, and the trustee of the Ansett Australia
Ground Staff Superannuation Plan. It concerned ss447A and 447D of the Act, both referred to earlier. GoldbergJ made orders under both sections. The Court varied the DCA; approved of the terms of settlement;
and directed that the three parties might 'properly perform and give effect to the terms of settlement'.
Proposed reforms
On 12 October 2005 the Parliamentary Secretary to the Treasurer, the Hon Chris PearceMP, announced that the Government would be
proceeding with an integrated package of reforms to improve the operation of Australia's insolvency laws. The announcement had
been preceded by recommendations of several recent reviews in the corporate insolvency system:
- the 1997 Review of the Regulation of Corporate Insolvency Practitioners;
- the 1998 Corporations and Markets Advisory Committee (CAMAC) Report, Corporate Voluntary Administration;
- the CAMAC Report in 2000 on Corporate Groups;
- the 2004 CAMAC Report, Rehabilitation of Large and Complex Enterprises;
- the report in June 2004 of the Parliamentary Joint Committee on Corporations and Financial Services, Corporate Insolvency Laws: A Stocktake; and
- the 2004 Report of the James Hardie Special Commission of Inquiry.
The Parliamentary Secretary's announcement referred to four broad themes of the reforms, but I am concerned today only with the
fourth, which he described as a theme relating to 'fine-tuning voluntary administration [and] comprising a package of technical
amendments to enhance the efficiency and cost effectiveness of [the voluntary administration] process'.
The Parliamentary Secretary said that draft legislation would be prepared in consultation with industry groups, in anticipation
of a circulation of draft legislation for public comment in early 2006, and the introduction of a bill later in 2006.
1. Time limits governing meetings of creditors
Part 5.3A provides for first and second meetings of creditors. The first, held under Div2 (ss436A-436G), provides for the occasion on which the creditors must determine whether to appoint a committee of creditors, and, if so,
who are to be its members. There is a tight limit. The meeting must be held within five business days after the administration
begins (s436E(2)), and the administrator must convene the meeting by giving and publishing notice of it at least two business days in advance:
s436E(3).
The second meeting is provided for in s439A, and again there is a tight time limit. The 'convening period' is the period of 21 days beginning on the day on which the administration
begins, but if Christmas or Easter falls within that period, the convening period is a period of 28 days beginning on that day:
s439A(1).
Subsection 439A(6) provides that the Court may extend the convening period on application made within that period.
The meeting must be held within five business days after the end of the convening period: s439A(2).
Some respite is afforded by s439B(2) which provides that a meeting convened under s439A may be adjourned from time to time, but not to a day that is more than 60days after the first day on which the meeting was held,
even if no resolution under s439C has been passed at the meeting. The reference to a resolution under s439C is a reference to a resolution by the creditors:
'(a) that the company execute a deed of company arrangement specified in the resolution...; or
(b)that the administration should end; or
(c)that the company be wound up.' (s439C)
According to the Parliamentary Secretary's announcement, a slightly longer period of time will be provided for the holding of the
first and second meetings of creditors. The announcement states:
'Specifically, the period for holding the first meeting of creditors will be extended to eight business days after the beginning
of the administration, with a requirement for five business days' notice of the meeting to creditors. The period for holding the
second meeting of creditors will be extended to 25 business days with a new convening period of 20 business days.'
The proposed amendments reflect recommendations15 ([6.24]) and 16 ([6.37]) in the report of the Parliamentary Joint Committee on
Corporations and Financial Services, Corporate Insolvency Laws: a Stocktake (June 2004).
It seems clear that what is proposed in relation to the second meeting is:
convening period:20 business days ) after the beginning
holding of meeting:25 business days ) of the administration
notice period:5 business days
The substance of the change proposed is the change from 21 or 28 calendar days to a single period of 20 business days, as the convening
period. If the first day is a Friday, the period of 20 business days will include six weekend days, and in the absence of other
non-business days, the period will become one of 26 calendar days. If the first day is a Monday, on the same hypothesis the period
will become one of 28 calendar days. (Note also the proposed provision touching calculation of the convening period referred to
below.)
A literal reading of the Parliamentary Secretary's announcement suggests that the problem thrown up by the Daisytek case will be overcome, but this is not entirely clear and will depend on the drafting of the amendment.
The announcement states that additional reforms will introduce greater flexibility in relation to the timing of creditors' meetings,
and clarify certain requirements. For example:
- the Court will be granted power to extend the convening period on an application made after the convening period has ended. As noted earlier, existing s439A(6) requires an application for an extension to be made within the convening period.
- the convening period is to be calculated from the day after the administration begins, rather than the day on which it begins.
- administrators are to be given a greater discretion to communicate with creditors electronically.
2. Effect of appointment of administrator
Some 'technical issues' have been identified with the current provisions protecting a company's property during administration.
The law is to be 'clarified' in relation to:
- the rights of persons who hold property of a company under administration as security under a lien or pledge to retain possession
of that property, but not to exercise any rights under the lien or pledge to sell it while the company is under administration;
- the right of the administrator to sell property subject to liens, pledges and reservations of title; and
- the right of a creditor to recover its debt by selling property subject to a lien, pledge or reservation of title clause, with the
agreement of the administrator.
In addition, the general moratorium is to be amended to exempt bankers' liens and shares lodged as collateral security with any
recognised clearing house. The purpose of this exception is to recognise commercial practice with respect to the payment system
and trading on the derivatives market.
Finally, the Court's power to grant an injunction against the enforcement of a charge over a particular property is to be clarified
to make it clear that the power extends to the granting of an injunction where enforcement action has to date only been threatened.
In addition, a chargeholder's right to enforce its charge in certain circumstances during the administration period is to be
clarified to make it clear that the right extends to curial enforcement.
3. Deeds of company arrangement
Section 444A applies where, at a meeting of creditors convened under s439A, the creditors resolve that the company execute a DCA. The administrator of the company is to be the administrator of the deed,
unless the creditors, by resolution passed at the meeting, appoint someone else to be administrator of the deed: s444A(2). The administrator of the deed must prepare an instrument setting out the terms of the deed and specifying the matters listed in
s444A(4): s444A(3). Subsection 444A(5) provides that the instrument is taken to include the 'prescribed provisions', except so far as the instrument provides otherwise.
Corporation Regulation 5.3A.06 provides that for s444(5) of the Act, the prescribed provisions are those set out in Schedule8A to the Corporations Regulations. Schedule8A states, for example,the powers which an administration has for the purpose of administering the deed of company arrangement
(cl2).
According to the Parliamentary Secretary's announcement, the law will be 'clarified' to make it clear that:
- the Court's power to bind secured creditors (or owners or lessors of real or personal property) to the terms of a DCA is exercisable
only after the creditors have resolved that a DCA be executed;
- a company may apply to the Court for an order that it need not include the words 'subject to deed of company arrangement' on its
public documents; and
- a debt which is extinguished by the execution of a DCA is deemed not to have been extinguished for the purpose of enforcement of
a related guarantee or indemnity.
The circumstances in which a DCA can be terminated will be 'tightened' to prevent a relatively small group of creditors bringing
about a termination even when the company is complying with the terms of the DCA. What is proposed is that a DCA will terminate
only:
- upon the passing of a creditors' resolution following material breach of the DCA by the company which has not been rectified after
notice to rectify;
- in circumstances contemplated by the deed; or
- by Court order.
ASIC will be included as an entity which can apply for an order terminating a DCA.
Finally, a new provision will require a deed administrator to notify ASIC when the deed is wholly effectuated.
4. Powers and duties of administrators
The announcement states that the powers of administrators will be extended to include a power to consent to a transfer of shares
in the company, or an alteration in the status of the company's members, if this is in the best interests of creditors. This
will apparently enable administrators to reorganise the share capital base of a company in administration, in preference, say,
to selling its assets to a new company and having the company under administration put into liquidation. It will also align the
powers of the administrator with those of a liquidator in a voluntary winding up. The Court's existing power to consent to these
transactions will be retained, but will be limited to considering appeals against an administrator's decision not to consent.
Concern has been expressed that the administrator's existing right of indemnity may be limited in respect of some tortious liabilities.
According to the announcement, the right of indemnity will cover any personal liabilities incurred by an administrator in the
due performance of his or her duties, other than liabilities incurred in bad faith or negligently.
The law will make it clear that deed administrators may not sell shares in the company, except with the prior approval of the holder
of them or with the leave of the Court. Members, creditors and ASIC will have standing to oppose an application for leave.
Finally, the Act will be amended to require administrators and deed administrators to lodge with ASIC accounts of their receipts and payments in
line with the requirements applicable to other forms of administration in insolvency.
5. Winding up proceedings prior to an administration
Finally, it will be recalled that a company's power to appoint an administrator does not apply in the case of a company that has
already been wound up: s436A(2). The Act will provide that the power also does not apply once a provisional liquidator has been appointed. However, the power to appoint
an administrator that is available to the company notwithstanding that an originating process has been filed seeking an order
that the company be wound up, will continue to exist. The power of a chargee who is entitled to enforce a charge on the whole
or substantially the whole of a company's property, to appoint an administrator will similarly no longer be available once a
provisional liquidator has been appointed to the company.
6. Liquidation following an administration
According to the announcement, in order to address concerns about abuse, the exemption from the voidable transaction provisions
for transactions during an administration will be limited to transactions authorised by the administrator, or under a DCA. In
addition, the relation-back period will commence from the date of the initial winding up application, provided that that application
has not been dismissed.
In order to address situations where there is a long period between the making of the application for winding up and the termination
of a DCA, the period which a liquidator will have within which to undo voidable transactions will be extended to become either
three years from the date of the commencement of the relation-back period or one year from the termination of the DCA, whichever
is the later. The purpose is to allow the liquidator a reasonable period in which to launch a proceeding.
The administrator or DCA administrator will be required to lodge a copy of the s439A report, and a further report on any additional matters or material changes affecting the financial position of the company that
the administrator is aware of, with ASIC at the time when the company goes into liquidation.
Finally, the law will be 'clarified' to state specifically that a post-deed creditor has no priority, except where the administrator
is personally liable for the debt in question. Debts incurred by the administrator prior to execution of the DCA will retain
their priority. However, creditors voting at the meeting resulting in favour of a DCA will have the right to include in the DCA
any other form of priority for post-deed creditors. However, any proposal favouring of post-deed creditors will require approval
by three-quarters by value and a simple majority by number, of those pre-administration unsecured creditors who vote on the resolution.
7. Fund raising and administration
A provision will be introduced permitting offers or invitations to creditors to exchange debt for equity under a DCA. This will
apply only where the offer does not require accepting creditors to contribute any further money. An administrator making an equity-for-debt
offer will be required only to provide a statement setting out all relevant information that he or she knows or ought reasonably
to know (regardless of the size of the fair value of the debt involved). This should indicate that it is not a prospectus and therefore
may contain less information than a prospectus would contain. The proposed amendments will also make it clear that affected creditors
will be bound by an equity-for-debt swap in a deed.
Conclusion
The year 2006 will obviously see numerous changes to the voluntary administration regime. Those which have been announced are, as
the Parliamentary Secretary said, 'technical amendments'. Of equal or greater interest are a number of suggestions which have
not been taken up. For example, the idea has been mooted that instead of the litmus test of the directors' power to appoint an
administrator, if 'in the opinion of the directors voting for the resolution, the company... is likely to become insolvent at some
future time', the provision should be 'in the opinion of the directors voting for the resolution, the company... may become insolvent at some future time' (s436A(1)(a) - my emphasis) or that there is 'a reasonable prospect of insolvency'. The Australian Bankers' Association, in its submission
dated 20February 2004 in response to the CAMAC Discussion Paper, 'Rehabilitating Large and Complex Enterprises in Financial Difficulties'
of 2003, said of the latter expression that it would create the risk that companies could abuse the test and 'seek a debt holiday
where that is not warranted' (at p13). I have thought it best, however, to avoid such interesting issues in favour of what is
expected to happen in 2006.
Readers of this paper who are interested to pursue other current issues concerning voluntary administration may care to refer to
the works listed in the select bibliography attached. That so much should have been recently written about voluntary administration
is itself some indication of the important place which this form of external administration has come to occupy in corporate law
and practice.
SELECT BIBLIOGRAPHY OF RECENT WORKS
Anderson, Colin 'Miracle workers or ambulance chasers? The role of administrators in the Part5.3A process' (2004) 12 Insolv LJ 238
Anderson, C and Morrison, D 'Should directors be pursued for insolvent trading where a company has entered into a Deed of Company
Arrangement?' (2005) 13 Insolv LJ 163
Anderson, C and Morrison, D 'Voluntary Administrations and their Effect on the Use of Schemes of Arrangement' (1994) 2 Insol Law Jnl 195
Bennett, Keith 'Dealing with Winding Up Applications Following the Appointment of an Administrator' (2000) 18 CSLJ 41
Crutchfield, P Corporate Voluntary Administration Law (2nd ed 1997, Law Book Co Ltd, Sydney)
Fletcher, IF 'Administration Orders under the Insolvency Act 1986 (UK): Results, Reflections and the Prospect of Further Reform'
(1994) 2 Insol Law Jnl 110
Harris, J and Gordon, B 'Lost in transition: Section 447A and the question of members' rights when a company transitions from voluntary
administration to a creditors' voluntary liquidation' (2005) 13 Insolv LJ 96
Lightman, K 'Voluntary Administration the New Wave or the New Waif in Insolvency Law' (1994) 2 Insol Law Jnl 59
McCrostie, David 'Is there a shift in favour of administration over liquidation?' (2002) 3 (4) Insolvency Law Bulletin 69
Parliamentary Joint Committee on Corporations and Financial Services, Corporate Insolvency Laws: a Stocktake (June 2004)
Powers, Lindsay 'The liability of members of creditor committees - the price for staying 'close to the action'? (2005) 13 Insolv LJ 195
Routledge, J 'An Explanatory Empirical Analysis of Part 5.3A of the Corporations Law' (1998) 16 C & SLJ 4
Schulte, Richard 'Voluntary Administration and section440A - adjournment of winding up applications when company under administration'
(2004) 4 (6) Insolvency Law Bulletin 85
Walter, David J 'The voluntary administrator's equitable lien: Nature, scope and priority' (2004) 12 Insolv LJ 150
