“Let there be a vote” – Victorian Supreme Court grants adjournment under recent Small Business Restructuring Reforms

In Re Dessco Pty Ltd,[1] the Victorian Supreme Court adjourned a winding up application for 50 days to allow time for creditors to vote on a restructuring plan.

Whilst the adjournment was opposed by the Plaintiff, the Judicial Registrar of the Court accepted the assessment formed by the Small Business Restructuring Practitioner that the company was eligible to avail itself of the new regime having regard to the criteria that must be satisfied (and the ‘just estimate’ approach adopted in respect of contingent liabilities) and the interests of the company’s creditors.

The facts

Mr Davey, the Plaintiff, filed a winding up application against Dessco Pty Ltd (Dessco) for failure to satisfy a Creditors Statutory Demand.

The Creditors Statutory Demand was based upon orders of the Victorian Magistrates Court to pay Mr Davey in excess of $115,000. Those orders also required payment of further amounts to compensate Mr Davey (which he quantified to be more than $600,000 and which were subject to separate proceedings to determine the quantum).

Subsequently, Dessco:

1. Filed an interlocutory application seeking an adjournment of the winding up application for 50 days pursuant to section 453Q of the Corporations Act 2001 (Cth) (the Act); and
2. Appointed a Small Business Restructuring Practitioner, Mr Ross McDermott (Mr McDermott).

In determining Dessco’s adjournment application to allow restructuring to continue, the Court considered:

1. Dessco’s eligibility – in particular whether its liabilities exceeded $1 million; and
2. Whether restructuring would be in the best interest of Dessco’s creditors.

Did Dessco’s liabilities exceed $1 million?

Mr Davey contended that Dessco was ineligible to restructure under the new regime because its liabilities exceeded $1 million.  In calculating this, Mr Davey included his claim for compensation which exceeded $600,000.

In contrast, Mr McDermott’s report relied upon by Dessco adopted a ‘just estimate’ approach which allowed a sum of $200,000.00 for contingent liabilities in respect of Mr Davey’s compensation claim.  Significantly, Mr McDermott’s report highlighted a number of inconsistencies which inflated the total amount of the claim. These included addition errors, a mixture of GST inclusive and exclusive amounts and a high percentage of work that had been charged on hourly rates which were above the rates set out in the costs agreement.

It was uncontentious that under section 553(1) of the Act, the contingent claims against Dessco must be accounted for in the calculation of its liabilities and assessment of its eligibility under the new regime.  However, the Court confirmed that a restructuring practitioner such as Mr McDermott, in the early stages of a restructuring process, is not obliged to accept the creditor’s quantification of the contingent debt.

Instead, similar to liquidators in a winding up, Mr McDermott was able to adopt the ‘just estimate’ approach in valuing claims against Dessco and assessing its eligibility to appoint a Small Business Restructuring Practitioner.

 The Court ultimately accepted Mr McDermott’s assessment resulting from his ‘just estimate’ approach, together with his report which estimated the admissible debt or claims against Dessco as being $750,592.00.

Was restructuring in the ‘best interests of creditors’?

Dessco indicated that its proposed restructuring plan would allow for creditors to potentially receive 5 cents in the dollar if the restructuring proceeded compared to no return if Dessco was placed into liquidation.

As an initial argument, Mr Davey contended that the restructuring plan had already lapsed as he had rejected it.  The Court considered that unless a restructuring plan had been submitted by Mr McDermott to creditors for consideration together with supporting documents required by sub-regulation 5.3B.21(1) of the Corporations Regulations 2001, the plan had not yet validly been submitted under the regime and was not able to be rejected or had lapsed.

In considering whether restructuring was in the best interests of creditors, the Court held that the applicable test under section 453Q is analogous to the test under section 440A of the Act (which concerns whether continuation of voluntary administration is in the best interest of creditors).

Mr McDermott’s opinion was that continuation of the restructuring process and allowing creditors to vote on the restructuring plan was in the best interest of creditors.  In support of the restructure, Dessco submitted that the business was viable and if it was wound up, amongst other things, its legal costs in the winding up would exceeds its assets and creditors would be unpaid.

In response, Mr Davey submitted that it was not in his interests as a creditor to allow Dessco to restructure because it appointed a restructuring practitioner at a very late stage in the winding up application and the adjournment would allow Dessco to continue to trade while insolvent.

The Court was satisfied that it was in the interests of Dessco’s creditors for it to continue under the restructuring process allowing creditors to vote on the restructuring plan rather than be wound up. In particular, the potential of a dividend of 5 cents in the dollar to creditors resulting from the restructure was in the best interest of creditors.

Key Takeaway

This early direction from the Victorian Supreme Court provides the first guidance of its kind on the suite of insolvency reforms introduced by the Federal Government in response to COVID-19.

The matter highlights some parallels with the voluntary administration process and that the Court is reluctant to wind up a company that is subject to a restructuring process even in circumstances where the Small Business Restructuring Practitioner has been appointed at the eleventh hour in a winding up proceeding.

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Authored by:

Barbara-Ann Sim, Partner
Caitlin Milligan, Solicitor

[1] [2021] VSC 94.