With the Australian Taxation Office very active in winding up companies for unpaid taxes, it is now commonplace for insolvency professionals to be faced with pending winding up petitions when considering an appointment as voluntary administrator. Obtaining an adjournment of the petition is often the first critical task in an administration.
But there is often little appreciation of the Court’s expectations as to the factors that will justify an adjournment of the petition, to enable the administration to proceed; adjournments are often sought hastily and without much thought. This note sets out – with the benefit of the most recent decisions – the test for an adjournment, the expectations on supporting affidavit evidence and the relevant factors to address in that affidavit.
Test for an adjournment – section 440A, Corporations Act
A court will 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.[1]
For a court to adjourn the hearing, it must be satisfied that there is a “sufficient possibility,” which is “more than mere optimistic speculation“,[2] that creditors’ interests will be accommodated to a greater degree in an administration than in a winding up.[3]
Expectation on evidence and proof
The onus is on the party seeking the adjournment to satisfy the “sufficient possibility” test.[4] That is, the administrator carries the burden.
There is no precise evidential standard of proof.[5] It has been held that as long as a court can be persuaded that the evidence before it satisfies the test, a case can be made out.[6] However it has been acknowledged that the standard requires “persuasive evidence” to enable it to be seen that there are assets that one form of external administration would produce a larger or accelerated dividend to creditors over the other,[7] where this hope must be real and not a remote possibility.[8]
Some authorities have considered this threshold to be too high where evidence is considered in isolation from the facts and decision.[9] Others have regarded the overall standard to require a “substantial degree of persuasion” to satisfy a court that it is in the interest of the company’s creditors for the company to continue under administration, rather than be wound-up.[10] It is unclear, however, if this relatively tough standard relates to the quality of the affidavit evidence or the overall balance of relevant factors (discussed below) .
Importantly, however, it is clear that, where an adjournment is sought after a short period of time after an administrator is appointed, it has been regarded that little material is needed to justify a short adjournment.[11] The longer the time an adjournment is sought after the appointment of an administrator, however, the amount and quality of material required to persuade the court will increase.[12]
Relevant factors to consider
The Courts have considered a range of factors to determine whether an adjournment will be granted in accordance with section 440A(2) of the Corporations Act.
Factors that support the granting of an adjournment include:
- whether creditors could hope to receive a greater dividend on their debts from one form of external administration than the other;[13]
- prospects of success of a cross-claim in relation to the debt underlying the winding up petition;[14]
- the costs of winding up (compared to an administration};[15]
- a realistic possibility that a large sale of the company’s assets or business can be negotiated by an administrator;[16]
- a realistic prospect that a deed of company arrangement may be proposed.[17]
Factors that may influence a Court’s decision to not grant an adjournment include:
- that a DOCA proposal must involve more than “faint speculation“;[18]
- high future legal costs and disbursements in the administration procedure;[19]
- where there will be prejudice or a “real detriment” to employee creditors who are shut out of entitlements (including under the Fair Entitlements Guarantee Act) from the continuance of the administration;[20]
- obstacles to achieving the aim of a DOCA proposal (for instance, conditions precedent not readily capable of satisfaction);[21]
- where a director does not have the capacity to meet a judgment for insolvent trading.[22]
From that point, the determination becomes a matter of weighing those competing factors.
Practitioners would be well advised to approach any affidavit in support of an adjournment application by reference to the above “shopping list” of factors. Making the Court’s job easier, when assessing the relevant factors for and against an application of this kind, is always a good place to start.
[1] Corporations Act 2001 (Cth) s 440A(2).
[2] Weriton Finance Pty Ltd v PNR Pty Ltd (in admin); Australian Residential and Commercial Finance Pty Ltd v PNR Pty Ltd [2012] NSWSC 1402 [16]; Re TMTE Group Pty Ltd [2014] NSWSC 1895 [24]; Re Bobos Engineering Australia Pty Ltd [2015] NSWSC 2045 [6].
[3] Lubavitch Mazal Pty Ltd v Yeshiva Properties No 1 Pty Ltd [2003] NSWSC 535 [77] (Austin J).
[4] Deputy Commissioner of Taxation v Bradley Keeling Management Pty Ltd [2003] NSWSC 47 [17].
[5] Lubavitch Mazal Pty Ltd v Yeshiva Properties No 1 Pty Ltd [2003] NSWSC 535 [77] (Austin J); Weriton Finance Pty Ltd v PNR Pty Ltd (in admin); Australian Residential and Commercial Finance Pty Ltd v PNR Pty Ltd [2012] NSWSC 1402 [16].
[6] Lubavitch Mazal Pty Ltd v Yeshiva Properties No 1 Pty Ltd [2003] NSWSC 535 [77] (Austin J); Weriton Finance Pty Ltd v PNR Pty Ltd (in admin); Australian Residential and Commercial Finance Pty Ltd v PNR Pty Ltd [2012] NSWSC 1402 [16].
[7] Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456; Lubavitch Mazal Pty Ltd v Yeshiva Properties No 1 Pty Ltd [2003] NSWSC 535 [77] (Austin J); Sunstate Orchards Pty Ltd v Citrus Queensland Pty Ltd [2009] FCA 452 [28].
[8] Lubavitch Mazal Pty Ltd v Yeshiva Properties No 1 Pty Ltd [2003] NSWSC 535 [77] (Austin J); Sunstate Orchards Pty Ltd v Citrus Queensland Pty Ltd [2009] FCA 452 [28].
[9] Lubavitch Mazal Pty Ltd v Yeshiva Properties No 1 Pty Ltd [2003] NSWSC 535 [77] (Austin J).
[10] Re Offshore and Ocean Engineering Pty Ltd [2012] NSWSC 1296 [6].
[11] Deputy Commissioner of Taxation v Bradley Keeling Management Pty Ltd [2003] NSWSC 47 [18].
[12] Deputy Commissioner of Taxation v Bradley Keeling Management Pty Ltd [2003] NSWSC 47 [18].
[13] Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456.
[14] Weriton Finance Pty Ltd v PNR Pty Ltd (in admin); Australian Residential and Commercial Finance Pty Ltd v PNR Pty Ltd [2012] NSWSC 1402 [25].
[15] Re Denham Constructions Pty Ltd [2016] NSWSC 1425 [24].
[16] Re Bobos Engineering Australia Pty Ltd [2015] NSWSC 2045 [6].
[17] Re Bobos Engineering Australia Pty Ltd [2015] NSWSC 2045 [7].
[18] Weriton Finance Pty Ltd v PNR Pty Ltd (in admin); Australian Residential and Commercial Finance Pty Ltd v PNR Pty Ltd [2012] NSWSC 1402 [25].
[19] Weriton Finance Pty Ltd v PNR Pty Ltd (in admin); Australian Residential and Commercial Finance Pty Ltd v PNR Pty Ltd [2012] NSWSC 1402 [25].
[20] Re Denham Constructions Pty Ltd [2016] NSWSC 1425 [25].
[21] Re Denham Constructions Pty Ltd [2016] NSWSC 1425 [25].
[22] Re Bero Admin Services Pty Ltd [2015] NSWSC 2097 [18].
