In the recent case of Rathner, In the matter of Citius Property Pty Ltd (Administrator Appointed), 1 the Federal Court of Australia considered an application brought by the administrator of Citius Property Pty Ltd (Citius) for orders in relation to the administration of the company.
The first part of the application was for orthodox orders extending the convening period for the second meeting of creditors pursuant to section 439A(6) of the Corporations Act 2001 (Cth) (Act). However, the second part of the application was for orders to confirm that the stay of an ipso facto clause pursuant to section 451E of the Act operates for the length of the administration, and if the administration concludes because the company is wound up, until the winding up is complete.
In his decision, O’Bryan J provided a useful refresher of the principles relating to extending a convening period, but more importantly provided the first judicial consideration of the operation of the statutory stay regime for ipso facto clauses.
Citius was incorporated on 1 December 2002, and provided consultancy and project management services in connection with the development of industrial properties.
On 28 December 2022, following the delivery of an adverse judgment and the making of adverse costs orders against Citius in a court proceeding, Mr Tobin (who was at all times the sole shareholder, director and secretary of Citius) placed Citius into voluntary administration.
Citius’ only material asset was an agreement dated 19 December 2018 with DWPL Nominees Pty Ltd and Dexus Wholesale Management Limited (together the Dexus Parties) for the provision of project management services by Citius in connection with a commercial property development project (Dexus Agreement).
The Dexus Agreement provided for a term ending in December 2023 (unless the project was completed or sold earlier than that), with Citius’ fee to be paid in fixed monthly instalments along with a performance fee pro-rated across certain project milestones. The Dexus Agreement also contained an ipso facto clause that entitled the Dexus Parties to terminate the Dexus Agreement if (amongst other things) an Insolvency Event occurred in respect of Citius, including “[Citius taking] any step to obtain protection or is granted protection from its creditors under any applicable legislation or an administrator is appointed” (the Ipso Facto Clause).
As there were no funds available for distribution to creditors in the administration of Citius, the administrator sought orders pursuant to sections 447A(1) and 439A(6) of the Act to extend the convening period for 12 months to allow Citius to continue performing its obligation under the Dexus Agreement to generate funds for distribution to creditors.
The administrator also sought orders and directions pursuant to section 451E(3)(a) of the Act and section 90-15 of the Insolvency Practice Schedule (Corporations) (Schedule 2 of the Act) (IPS) with respect to the scope and operation of the stay on the enforcement of the Ipso Facto Clause pursuant to section 451E of the Act.
The administrator’s application was supported by the Committee of Inspection and was not opposed by any party, including the secured creditor of Citius or the Dexus Parties.
Section 439A(6) of the Act gives the Court power to extend the convening period of the second meeting of creditors. Justice O’Bryan outlined a number of matters relevant to the extension of a convening period pursuant to section 439A(6) of the Act:
Justice O’Bryan noted that the length and purpose of the extension sought by the administrator in this case were unusual, but ultimately granted the extension. His Honour accepted the administrator’s submissions and held that:
Justice O’Bryan held that the extension, although lengthy, was consistent with the object of Part 5.3A of the Act, namely to provide for the business, property and affairs of an insolvent company to be administered in a way that maximises the chances of the company or its business continuing in existence or, if that is not possible, that results in a better return for the company’s creditors and members than would result from an immediate winding up.
Section 451E(1) of the Act relevantly provides that a contractual right that is in substance triggered by a corporate party being placed into administration cannot be enforced against that corporate party for the period set out in section 451E(2).
Section 451E(2) provides that the right in question cannot be enforced during the period starting from when the company goes into administration and ending on the latest of the following:
It is worth noting that the administrator’s application was to ensure that the statutory stay of the Ipso Facto Clause in the Dexus Agreement would continue to operate even if the administration ended and Citius was placed into liquidation. The administrator’s concern was that there appeared to be a potential anomaly in the operation of section 451E in that the stay was available to a company in liquidation that had previously been in administration but was not available to a company that went straight into liquidation, and the administrator wanted to obtain directions to confirm that there could be no question that section 451E should be given effect on its terms – ie that the Ipso Facto Clause would be stayed if Citius’ administration ended and Citius was placed into liquidation.
Justice O’Bryan considered this argument but ultimately declined to make the orders sought by the administrator.
His Honour held that the language and purpose of section 451E(1) of the Act is clear on its terms such that the stay of an ipso facto clause under section 451E:
His Honour went on to find that it was clear in the present case that section 451E operated to restrain the Dexus Parties from terminating the Dexus Agreement by reason of Citius going into administration, and that if the administration ended by reason of an order or resolution that Citius be wound up, then the restraint would continue for the duration of the winding up.
This case is the first time that the regime in section 451E has been considered by a Court, and it raises a number of interesting questions including as to what would be the proper outcome if a contract contained distinct and separate rights to terminate the contract, only one of which was triggered by the company going into administration and the other being triggered by the company going into liquidation. Based on this decision, it appears that a separate right triggered by liquidation would not be caught by the statutory regime.
The case also provides a useful refresher on the principles relevant to an application to extend the convening period for a company in administration.
If you have any questions about the operation of section 451E of the Act or how extensions of the convening period for companies in administration work, the experienced Lavan team is here to help.