Second and subsequent Court sanctioned extensions to convening periods

In a determination hot off the virtual press, on 21 April 2016, Lavan Legal was successful in obtaining orders of the Supreme Court of Western Australia granting a second extension to the convening period to the administrator of two companies.

The convening period was extended for a further period of 5 months, making the total extension time 10 months from the date the convening period first fell due under the Corporations Act 2001 (Cth) (Act). While an extension of that duration is not necessarily unusual, this decision is significant because, unlike many of the existing authorities, this matter does not involve a complex web of related entities or layers of business operations. There were however various events leading up to the respective convening periods which, as matters of fact, prevented the administrator from being able to meaningfully provide a recommendation to the creditors of the companies for the purposes of section 439A of the Act.

The principles relating to the extension of a convening period are well known and whilst differing approaches have been adopted; Hayes, Re Estate Property Group Ltd [2007] FCA 935; Mentha, Re Hans Continental Smallgoods Pty Ltd (2008) 26 ACLC 1, 589, the Court retains discretion to extend the convening period on application to it; section 439A(6) of the Act. The intention of that provision is described by the Explanatory Memorandum to the Act as follows:

The court will be given a power to extend these periods ... though it is not expected that this power will be exercised frequently, since it is an important objective of the new provisions for creditors to be fully informed about the company's position as early as possible and have an opportunity to vote on its future as soon as possible.

Whilst generally, administrators of a company ought to adhere to the timelines of the Act, the Courts have recognised there may be instances where the convening period should be extended so as to give effect to Part 5.3A of the Act; Re Evans & Tate Limited (Administrators Appointed) (Receivers & Managers Appointed); Ex Parte Jones (2007) 25 ACLC 1, 580 at [20] – [21]; Re Diamond Press Australia Pty Ltd [2001] NSWSC 313 (Barrett J) at [10] – [11].

In Re Austcorp Group Limited (Administrators Appointed) [2009] FCA 636 at [18], Lindgren J noted that the function of the court in applications of this kind is to strike an appropriate balance between the legislature’s expectation that an administration will be a relatively swift and summary procedure, and the requirement that undue speed should not be allowed to prejudice sensible and constructive actions directed towards maximising the return for creditors and any return for shareholders. Indeed, over time, over time, Courts have become less strict about the length of the extension sought and granted; early decisions allowing no more than 3 weeks, even for complex administrations where, in today’s decisions, extensions of 6 months are frequent and usual and not limited to matters involving complex corporate structures. The latter is no doubt a reflection of the Courts’ increasingly pragmatic approach to the potential impact of a strict approach to Part 5.3A on unsecured creditors. This approach also recognises practical commercial considerations such as the time required to allow for the sale of a company’s business as a going concern which to enhance the return for unsecured creditors: Re Riviera Group Pty Ltd (admin apptd) (recs and mgrs apptd) (2009) 72 ACSR 352 at [13], Austin J.

The significance of the administrator’s ability to form a view on the future of the company or companies, and to report to creditors on the commercial outcomes of that view, remain pivotal to the Court’s consideration and particularly so when seeking a second extension. In our view therefore, and having regard to matters in which we have recently been instructed, the Court will be persuaded by detailed evidence concerning the tasks performed by the administrator since their appointment and the impact on the unsecured creditors if the convening period is not extended initially or again.

While administrators may consider holding Deeds of Company Arrangements as an interim solution to guard against the risk of placing potentially viable companies into liquidation, our recent experience suggests that, on properly detailed evidence and disclosure of steps taken in the administrations up to the date of the application, the Court will take a sympathetic, and indeed pragmatic, approach to the administrator’s plight. The Court’s imprimatur of course provides certainty to the administrator, as well as potential strategic leverage for any negotiations over the company’s fate, and ultimately comfort in the event of any third party creditor challenge.

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.