To provide detailed evidence or not to provide detailed evidence? That is the question

Considerations in determining whether the extension of a convening period should be granted

Introduction

It is common knowledge amongst insolvency practitioners that an administrator of a company must convene a meeting of the company’s creditors within the convening period set out in section 439A(5) of the Corporations Act 2001 (Cth) (Act). 

However, due to the circumstances surrounding the company in administration, it may be necessary to apply for an extension of the convening period pursuant to section 439A(6) of the Act.

Recently, the courts have re-stated the principal considerations that influence the decision as to whether to grant an extension of time to convene a meeting of the company’s creditors.

Notably, in the case of Lombe, in the matter of Force Corp Pty Limited (Receivers and Managers Appointed) (Administrators Appointed) [2015] FCA 1272 (Lombe), Wigney J re-iterated the factors which must be taken into account in deciding whether to extend the convening period.[1]

Lombe - Key Facts

The administrators of Force Corp Pty Limited and a number of associated entities (collectively Force Corp) applied to extend the period within which the administrators must convene the second meeting of creditors pursuant to section 439A(6) of the Act.

The administrators advanced two reasons in support of their application, namely that:

• receivers had been appointed to Force Corp and evidence was put before the Court by the receivers indicating that the sale of Force Corp as a going concern offered the best opportunity to secure an outcome that was in the best interests of the creditors; and
• the receivers had taken control of the books and records of Force Corp thereby inhibiting the administrators’ investigations into the company’s affairs.

Relevant principles

In making his decision Wigney J, by reference to the case of Parbery, in the matter of NewSat Limited (Administrators Appointed) (Receivers and Managers Appointed) [2015] FCA 435, noted that:

• the Court has the power to order the extension of the convening period under sections 439A(6) and 447A of the Act;
• in determining whether to extend the convening period, the Court must have regard to the objects of Part 5.3A of the Act, namely whether the reasons for the extension will likely:
  • maximise the chance of the company under administration continuing in existence; or
  • if that is not possible, achieve a better return for the company’s creditors and members than would result from the company’s immediate liquidation;
  • in order for administrators to carry out their functions properly, it is necessary for them to have sufficient time to investigate the affairs of the company under administration and to provide relevant commercial information and advice to creditors;[2] and
  • the Court must balance the expectation that the administration will be a relatively speedy and summary matter against the consideration that undue speed should not be allowed to prejudice constructive commercial actions directed to maximising the return for creditors and the potential return to shareholders:

The lens to be used to assess that balance should not be so narrow that it focuses merely on some scholastic analysis of the text applied from the usually pessimistic perspective of an insolvency practitioner.  After all, a potential outcome of Pt 5.3A may be a restructuring or a trade out which enables the company under administration and its activities to continue to the benefit of creditors and all stake-holders.

The essential issue in Lombe (and in most cases) is whether the extension was necessary to enable the administrators to arrive at an opinion so as to place creditors in the position to choose between the relevant alternatives.

Factors to consider

The factors justifying an extension of time within which to convene a meeting of creditors include:[3]

• whether there is a lack of any or timely access to financial or other business records (as was the case in Lombe);
• the level of co-operation of the company’s officers or employees in providing useful and timely information to the administrator to facilitate his investigations;
• the size and scope of the business of the company or the group (as was considered in Lombe);
• whether there are substantial international activities;
• whether there are a large number of employees with complex statutory and other entitlements relating to rights of redundancy payments, annual leave, long service leave and the like;
• whether one is dealing with a complex group structure including significant inter-company loans;
• where there have been complex transactions entered into by the company or the group (as the case may be);
• the time needed to effect an orderly process for the disposal of assets in a manner sufficient to maximise the return to creditors (which was a principal consideration in Lombe);
• the time needed for a thorough assessment of a proposal for a deed of company arrangement to enable the company to trade out or to restructure its affairs (which was another principal consideration in Lombe);
• whether any extension would maximise the chances of the sale of the relevant business as a going concern (another principal consideration in Lombe);
• the number in quantity, value and type of the creditors and the level of complexity in any securitisation or sub-ordination arrangements;
• if receivers have been (or may be) appointed, any additional complexity involved in the timing and relationship of such receivers’ activities as it affects the administration and the options available to the company under administration;
• if a group is involved, the investigation of the desirability or appropriateness of “pooling” assets and creditors’ claims or of one or more deeds of company arrangement;
• whether there are any unusual substantial transactions that warrant further investigation in order for the administrators to properly advise creditors concerning potential recovery or other action; and
• more generally, whether additional time is likely to enhance the return for creditors.

The decision

Having regard to the assets of Force Corp, the potential return to creditors that may arise as a result of the sale of assets of Force Corp as a going concern and the investigations yet to be completed by the administrators’, Wigney J ordered that the time for convening the second creditors’ meeting of Force Corp be extended by a period of 6 months to 8 February 2016. 

Lavan Legal comment

This case illustrates that, in order for an extension of time to convene a meeting of creditors to be granted, detailed evidence must be provided to the Court to enable it to make an informed decision.

This evidence should assist the Court in striking a balance between the expectation that the administration will be conducted in a speedy and summary manner against the need to ensure that undue speed will not prejudice sensible and constructive actions directed towards maximising the return for both creditors and shareholders. 

Without detailed evidence, it is unlikely that such an application will be successful.