Appointed too late – company fails to avoid liquidation

Section 440A(2) of the Corporations Act 2001 (Cth) (the Act) requires the Court to adjourn a winding up application if it is satisfied that it would be in the best interest of creditors for the company to continue under administration rather than be wound up. In the matter of Integrated Green Energy Solutions Ltd (administrators appointed)[1], voluntary administrators were appointed the evening before the hearing of the winding up application and sought a one (1) month adjournment to allow the administrators to investigate the affairs of the company and for a Deed of Company Arrangement (DOCA) to be put forward.

Background

Mac Wealth Holdings (Mac) obtained judgment for more than $12 million against Integrated Green Energy Solutions (IGE). Mac relied on the judgment and served a creditor’s statutory demand on IGE. IGE was unsuccessful in seeking Court orders for the statutory demand to be set aside and as a result, was presumed to be insolvent. Mac applied to wind up IGE in insolvency.

At a directions hearing, IGE informed the Court that it would be making payment to Mac in accordance with a settlement agreed in April 2021. The Court scheduled the hearing of the winding up application on Monday, 31 May 2021 and directions were made for the filing and service of IGE’s evidence which would need to rebut the presumption of insolvency if it wanted to avoid being wound up by the Court.

At the hearing, IGE relied on an affidavit of its managing director which detailed funds available to IGE under a loan agreement with Structured Growth Capital Inc (SGC) that would enable IGE to pay the judgment debt to Mac. In addition, IGE also relied on affidavits of its executive chairman and one of the administrators.

In addition, IGE filed and served an affidavit from a registered liquidator and director of Duff & Phelps, annexing an independent report that stated IGE would be solvent on the assumption that funds were provided by SGC (no such funds were ever provided).

On the evening of Friday, 28 May 2021, IGE’s board of directors resolved under section 436A of the Act to appoint voluntary administrators. The administrators of IGE were granted leave at the hearing on 31 May 2021 to seek an adjournment under section 440A(2) of the Act.

The Court considered that the applicable legal principles regarding the granting of an adjournment were not in dispute. These were summarised in submissions prepared by Counsel for Mac, including that:

• relevant circumstances must exist to satisfy the Court that there is “sufficient possibility, and not mere speculation” that it is in creditors’ interests to adjourn the winding up application to facilitate continuation of the administration;[2]
• where an administrator has been appointed on the eve of the hearing of a winding up application, any application for an adjournment under section 440A(2) should be treated with scepticism;[3] and
• the timing of a voluntary administrator’s appointment may have deprived the administrator of an opportunity to gain any real understanding of the company’s affairs.[4]

One of the administrators deposed that he had only been able to make “very preliminary” inquiries into the financial status of IGE since his appointment the eve before the hearing. However, his inquiries allowed him to accept without hesitation in cross-examination that IGE was obviously insolvent and likely had been for some time. The administrator recorded a total amount of more than $40 million owing to IGE’s creditors.

In support of the adjournment, the administrator also deposed that there appeared to be a ‘prospect’ that a DOCA would be put forward by IGE. However, in cross-examination, the administrator confirmed he had not had any discussions with the directors about their intention to put forward a DOCA nor the details of any such DOCA and the Court considered that the administrator had not formed any independent opinion about whether the prospect of a DOCA was realistic.

The Court also considered that it was plain from the administrator’s affidavit and evidence given in cross examination, that he only had a very vague understanding of what any proposed DOCA put forward might involve and this was reflected by the recent appointment of the administrators, the limited information provided to the administrators and the lack of clarity in relation to the directors’ possible proposal in respect of the DOCA.

Despite the managing director’s and the administrator’s affidavits outlining lengthy dealings with SGC, the Court also found that the evidence did not show that SGC fully appreciated the impact of administration on any funds it may lend. The evidence also did not dispel doubts and concerns as to the prospect of SGC providing funding after significant delays to date.

The executive chairman’s affidavit sought to outline the basis for a potential DOCA being a ‘contribution’ of $8.6 million that had been negotiated with another company for the purchase of shares in IGE. The Court held that the evidence did not support an assertion that a ‘contribution’ would be made and rather, showed that the other company’s Chairman did not fully appreciate the impact of voluntary administration on IGE and any proposed ‘contribution’. The Court was also somewhat critical that as at May 2021, the executive chairman appeared to have failed to give further detailed thought to potential DOCA proposals given that the winding up application against IGE had been filed in November 2020.

Ultimately, the Court considered the evidence was not sufficient to show that it was in creditors’ interests to adjourn the winding up application and allow for further investigations by the voluntary administrators into a possible DOCA. The adjournment application was dismissed and IGE was wound up in insolvency.

Key takeaway

The appointment of administrators does not guarantee an adjournment of a winding up application, particularly in circumstances where the appointment is made at the 11^th hour.

A company looking to appoint an administrator and seek an adjournment, should do so without delay to allow the administrator to properly investigate the affairs of the company and consider any proposed DOCA.

If you found this insight article useful and you would like to subscribe to Gadens’ updates, click here.

Authored by:
Barbara-Ann Sim, Partner
Caitlin Milligan, Solicitor

[1] [2021] NSWSC 620.

[2] In the matter of Australian Tailings Group Pty Ltd [2020] NSWSC 1543 at [5] and [7].

[3] In the matter of Bobos Engineering Australia Pty Ltd [2015] NSWSC 2027 at [4].

[4] In the matter of Australian Tailings Group Pty Ltd [2020] NSWSC 1543 at [7].