Show Me The Money - Administrators Obtain A Stay On Pre-Administration Court Orders For Payment Of Monies From A Court Fund

In the recent case of ADG Digital Pty Ltd v Trigon Trading Pty Ltd (Admins Apptd) [2023] FCA 232, the Federal Court considered the interesting question of whether mere compliance with an existing court order in ongoing proceedings could and should be stayed following a party to the proceedings being placed into administration.

The case involved existing proceedings between ADG Digital Pty Ltd (ADG) and Trigon Trading Pty Ltd (Company), whereby monies had been paid by or on behalf of the Company into Court, and ADG had obtained orders for around $6m to be transferred by the Court to ADG as soon as reasonably practicable.  However, the Company then went into administration and the Company’s administrators (Administrators) applied to stay the order for the release of the funds to ADG.

In considering the application, Button J carefully considered the terms and scope of the statutory stay in section 440D of the Corporations Act 2001 (Cth) (Act), as well as the Federal Court’s powers to grant a stay and the impact on proceedings where a party is placed into administration.

Background

The Company carried on a digital asset trading business, including trading in cryptocurrency and other blockchain-based currency.  ADG is an Australian company which provides advisory and wealth management services to clients in respect of digital assets.

In September 2022, ADG and the Company entered into an arrangement whereby ADG engaged the Company to assist it with transferring funds from the Bahamas into Australia as ADG had encountered difficulties in making the transfer itself.  The arrangement involved the following steps:

• ADG would instruct its bank in the Bahamas, Deltec Bank & Trust Limited (Deltec), to transfer AUD16m from ADG’s account with Deltec into an account held by the Company with Deltec; and
• the Company would then undertake the necessary steps to transfer the AUD16m from its Deltec account to ADG’s Australian bank account with Westpac.

The following events then took place:

• on 7 November 2022, ADG transferred the AUD16m from its Deltec account to the Company’s Deltec account;
• the Company then encountered its own delays in trying to directly transfer the funds to ADG’s Westpac account.  The Company offered to return the funds to ADG, but ADG elected to wait to see if the Company could resolve the issue; and
• on 16 November 2022, the Company informed ADG that it had tried to transfer some of the funds (around AUD5m) to Australia via a transaction with FTX Trading Ltd (FTX) but that FTX had collapsed shortly after the funds were transferred to it.  ADG’s position was that it had not authorised the Company to make the transfer to FTX.

ADG then commenced proceedings in the Federal Court, which resulted in the following orders being made:

• on 18 November 2022 ADG applied for and obtained an ex parte freezing order against the Company, which was discharged and replaced by a further interim freezing order on 21 November 2022;

• on 25 November 2022, ADG obtained orders requiring (amongst other things) that the Company instruct Deltec to pay the remaining AUD11m into Court pending resolution of the dispute between ADG and the Company; and
• on 1 December, ADG obtained orders that following receipt by the Court of the AUD11m:
  • AUD5.1m would be retained in the Court’s account (to reflect the value of a cross claim foreshadowed by the Company); and
  • the balance of the AUD11m (approximately AUD6m) would be transferred to ADG “as soon as practicable” (Balance Transfer Order).

The Company was placed into administration on 16 December 2022, and the Administrators were appointed to replace the original administrators on 28 December 2022.

As to the funds paid into Court:

• the Company had issued instructions to Deltec to transfer the AUD11m to the Court after the orders of 1 December 2022 and before the Company went into administration, but Deltec did not make the transfer at that time;
• after their appointment, the Administrators became aware of the orders of 1 December 2022 and contacted Deltec to countermand the previous instructions and to request that the funds instead be transferred first to the Administrators’ account, but Deltec did not respond to or comply with this request; and
• then on 6 February 2023, Deltec transferred the AUD11m to the Court.

The Administrators then filed an interlocutory application in the proceedings between ADG and the Company seeking a stay of the Balance Transfer Order under rule 41.03 of the Federal Court Rules 2011 (Cth) (Rules) or alternatively pursuant to orders under section 447A and section 440D on the basis that the statutory stay under section 440D should be applied to the releasing of funds pursuant to the Balance Transfer Order. 

The arguments

The Administrators argued (amongst other things) that the stay should be granted on the following grounds:

• the transfer into Court occurred after the Administrators had been appointed and had countermanded the earlier instructions to Deltec to make the transfer, and therefore should not have happened.  The stay would therefore preserve the status quo (ie the position that should have been obtained if Deltec had properly followed instructions);
• the stay would give effect to the intention behind section 440D and the objectives of Part 5.3A of the Act and prevent the progress of the ADG action and the dissipation of the Company’s assets while the administration is ongoing;
• if the Company went into liquidation, the payment into Court could be voided with the funds to go back to the Company’s estate, so the stay would protect this potential scenario; and
• in a general sense, if the funds were released to ADG they would likely then flow to ADG’s own clients.  This would prejudice the Company’s creditors to the extent that any liquidators of the Company might have claims against ADG to recover the funds.

The application was opposed by ADG which argued that:

• ADG’s monies were held by the Company on trust for ADG, and these monies were not property of the Company or subject to any right or claim by the creditors of the Company.  The stay should therefore not be granted as it would only operate to hold ADG out of receiving back its own money; and
• even if this position was disputed by the Administrators, the stay should not be granted as the Administrators had not provided any proposal or timetable for resolving the trust issue, and the stay therefore lacked balance and utility as it did not promote certainty and only prolonged the uncertainty as to the position re the funds for both ADG and the creditors of the Company.

The decision

After careful consideration of the parties’ arguments, the Court ultimately granted the stay and made orders pursuant to r 41.03 of the Rules that the Balance Transfer Order be stayed until two weeks after the date of the second creditors’ meeting, unless at that meeting the creditors vote to return control of the Company to its director in which case the stay should end when control is in fact returned to the director.

Although the Court had some sympathy for ADG’s arguments, the Court ultimately held that:

• a balance had to be struck between ADG’s rights and claims against the funds on the one hand, and the preservation of the Company’s property, the protection of the creditors’ interests and the need to recognise and give effect to the object and purpose of Part 5.3A of the Act on the other;
• in terms of the impact of the administration of the Company on the ongoing proceedings, “[o]nce Trigon entered into administration, the question of the fate of the Court Fund ceased to be a purely inter-partes matter; fidelity to the statutory scheme for companies in administration, and the interests of the creditor body … come into view”;
• the grant of a stay would:
  • give effect to the statutory intention in section 440D that any action or civil proceeding against a company in administration be barred from commencing or continuing; and
  • avoid the risk of executing an order which might facilitate what could become a voidable transaction and which would therefore be inconsistent with the pari passu distribution principle underpinning Part 5.3A of the Act;
• while ADG had valid arguments as to whether the funds were held on trust for ADG, this could not outweigh the need to preserve the Company’s assets and to preserve the status quo pending the outcome of the administration as:
  • it was not feasible to resolve the trust issue before the end of the convening period;
  • the Court did not believe either party’s position on the claims to be so strong as to not require further inquiry; and
  • the Company had a significant deficiency between its assets and its liabilities;
• there was also evidence led to show that a single DOCA proposal had been received by the Administrators from the director of the Company which if approved would allow for the funds to be released to ADG.  Therefore, the likely outcomes of the administration would either be that ADG would get its funds back pursuant to the DOCA, or the Company would go into liquidation, the liquidators would then have to engage on the trust issue, and ADG would have sufficient avenues to protect its interests and to argue its position as against the liquidators assuming that the liquidators did not accept ADG’s position; and
• in light of the above matters, a short term stay (limited in the way described above) would appropriately balance the different interests of ADG, the Company and the Company’s creditors, particularly given the statutory mechanisms available to both ADG and the Administrators to remedy any adversity that might arise from the stay.

Interestingly, the Court noted in relation to the relief sought in the alternative under sections 447A and 440D of the Act that:

• the Administrators had not managed to locate any authority to show that payment under the Balance Transfer Order would constitute a step in the proceedings for the purposes of section 440D;
• there was conflicting authority on whether section 440D prevents a Court from delivering a reserved judgment; and
• given that the application was made out on the principles applying to a stay under the Rules, it was therefore not necessary to determine whether performance or execution of an existing order would be caught by the statutory stay under section 440D.

Lavan comment

This is an interesting decision as it illustrates how the Courts will generally seek to preserve the purpose and operation of Part 5.3A of the Act so far as is possible, while also respecting and balancing the interests of third parties. 

While it is a little disappointing that Button J side stepped the question of whether performance or execution of an existing order would be caught by the statutory stay under section 440D, the decision provides a neat illustration of how the purpose and operation of Part 5.3A of the Act can be taken into account when considering a stay under the ordinary Court rules.

If you have any questions about the statutory stay under section 440D of the Act or about any of the matters arising from this case, the experienced Lavan team is here to help.