In the recent case of White (Administrator), in the matter of Schramm Australia Holding Pty Ltd  FCA 261, the Federal Court considered an urgent application by the administrators of the Schramm Australia group of companies for a three-month extension of time for convening the second meetings of creditors.
The administrators were appointed to the three companies in the group on 22 February 2023. As a result, the convening period for the second meetings of creditors expired on 23 March 2023. On 22 March 2023, the Court heard and determined an urgent application by the administrators pursuant to sections 439A(6) and 447A of the Corporations Act 2001 (Cth) (Act) and section 90-15 of the Insolvency Practice Schedule (Corporations) (IPS) to extend the convening period by three months to 23 June 2023. The administrators also sought a ‘Daiseytek’ order permitting them to hold the meetings at any time during the extended convening period, or within five business days after it, notwithstanding the terms of section 439A(2) of the Act.
In considering and granting the application, the Court conveniently summarised the principles applicable to an application to extend a convening period, and the case overall provides a useful example of the matters to be addressed in such an application.
The Schramm Australia Group is made up of three companies, being Schramm Australia Holding Pty Ltd (Schramm), Airdrill Pty Ltd (Airdrill) and Airdrill Hammers and Bits Pty Ltd (Airdrill H&B) (together the Companies). The group is wholly owned by Schramm II Inc, a company incorporated in the United States of America, and has two business lines, one of which manufactures and supplies land based, mobile and hydraulic drilling rigs and is operated by Airdrill, and the other which manufactures and supplies drilling consumables and is operated by Airdrill H&B.
On 22 February 2023 administrators were appointed to the Companies pursuant to section 436A of the Act (Administrators) and immediately commenced work to continue trading the two businesses, investigate the affairs of the Companies and the potential for a sale of the businesses and/or the Companies, and to conduct a sale process.
Unfortunately, due to the size and complexity of the Companies and the businesses, by the end of the standard convening period the Administrators:
- had not completed their investigations into the affairs of the Companies. For example, the Administrators had established that the Companies had executed a general security deed in favour of Decathlon Alpha IV, L.P. (Decathalon) which purported to secure a facility between Decathlon and Schramm II Inc, and where it appeared that Decathalon had advanced approximately USD6.7m to Schramm II Inc. However, the Administrators' investigations into the general security deed and the position of Decathlon were still ongoing;
- had commenced but not been able to complete a sale process in relation to the business and the Companies. For example, as at 22 March 2023 the Administrators had run a sale campaign and had received 43 expressions of interest, 29 signed confidentiality deeds and 10 non-binding indicative offers, but a number of interested parties had indicated that they had not had sufficient time to complete due diligence and that any offer in the circumstances would have to be subject to significant conditions. Further, the Administrators were also aware that in order to proceed with any sale there would have to be more time for preparation of final binding offers, and to address any issues arising in respect of the Foreign Investment Review Board or the Australian Competition and Consumer Commission; and
- had formed the view that an immediate liquidation of Airdrill would likely result in unsecured creditors receiving a nil return, and an immediate liquidation of Airdrill H&B would likely result in unsecured creditors receiving a nil or negligible return.
As a result of the above, the Administrators applied for a three-month extension of the convening periods for the Companies on the basis that this would allow sufficient time for the sale process to be appropriately run and completed, and for the Administrators to prepare their report to the creditors. This application was heard on the day before the day on which the original convening periods expired.
Principles regarding extension of convening period
The Court noted that it had recently summarised the key principles to be applied when considering an application to extend a convening period in Algeri (administrator), in the matter of Murray & Roberts Pty Ltd (Administrators Appointed) (No 2)  FCA 1563, and adopted and repeated (and therefore reinforced) that same summary in this case:
- The Court must have regard to the objects set out in section 435A of the Act and reach an appropriate balance between the expectation that an administration will be undertaken in a relatively speedy and summary manner with the need to ensure that the administration is not concluded without consideration of sensible and constructive options directed towards maximising returns for creditors and any return for shareholders.
- The administrator’s view on such an application is significant and, particularly where the administration is complex, it should carry weight.
- The court must take into account the detriment to third parties, including the suspension of rights and remedies of secured creditors, lessors and others.
- The court has recognised that interests of creditors can be prejudiced not only by delay but also by the convening of premature meetings where the administrator has been unable to obtain adequate information for the preparation of the administrators’ report in a form enabling creditors to make an informed decision.
- The following relevant categories of case in which an extension had been granted are:
- where the extension will allow the sale of the business as a going concern;
- where the size and scope of the business in administration is substantial; and
- more generally, where additional time is likely to enhance the return for unsecured creditors.
- Courts have been disposed to grant substantial extensions in cases where the administration has been complicated.
- Provided the evidentiary case for extension has been properly prepared, there has been no evidence of material prejudice to those affected by the moratorium imposed by the administration, and the estimate of time has had a reasonable basis, the courts have tended to grant extensions for the periods sought by administrators.
In its decision, the Court noted the following matters which were established by the evidence led by the Administrators:
- if the convening periods were not extended, the Administrators would not have any viable proposals to put to the creditors. The likely outcome would therefore be that the meetings would have to be adjourned and then reconvened, and that additional costs would be incurred in preparing two sets of reports to creditors;
- the creditors had been notified of the Administrators’ intention to apply to extend the convening periods and no creditor had indicated that they opposed the extension;
- as to the employees, their chances of remaining in employment with the Companies would be maximised by allowing the sale process to complete. If the sale process was not completed, it was likely that the employees would be made redundant, plus the chances of realising the circulating assets of the Companies to meet the priority claims of employees would be reduced in a liquidation scenario;
- while the landlords of the premises rented by the Companies might be prejudiced by an extension of the statutory moratorium, the Administrators were paying the rents due to the landlords plus there would be a number of potential advantages to the landlords if a sale were to be completed, such that the landlords would be no worse off if the convening periods were extended;
- the secured creditor, Decathalon, had confirmed that it supported the three-month extenson.
Having regard to the evidence, the Court considered the three month extension of the convening period was justified and appropriate. The Court noted that the purpose of the administrators’ extension fell squarely within the principles in Re Riveria Group, the period sought had a reasonable basis and there was no evidence of material prejudice to unsecured creditors, employees, landlords or the secured creditor.
The Daisytek order was also granted to facilitate any prospect of convening the meetings earlier than the latest possible date.
This decision not only reaffirms the principles to be applied when considering an extension of a convening period, but it provides a useful guide as to the evidence that should be put before the Court when such an application is made.
If you have any questions regarding any of the matters arising from this case, the experienced Lavan team is here to help.
Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.