Too little, too late: Court refuses application to adjourn winding up

This time last year, we published an artice in respect of a decision of the Supreme Court of Western Australia to adjourn a winding up application to enable a Deed of a Company Arrangement (DOCA) proposal to be put to creditors, even though the administrators were appointed a year after the winding up application began.

In that article we noted that it was a matter for the Court’s discretion whether or not to make such orders.

Earlier this month, in In Polar Agencies Pty Ltd (ACN 130 636 869) [2019] VSC 43, Matthews JR in the Supreme Court of Victoria considered a separate case in which an application for adjournment was made, with the opposite result.

Background facts

On 16 November 2018, Lovelltex Pty Ltd (Lovelltex) filed an application to wind up Polar Agencies Pty Ltd (Polar) based on non-compliance with a statutory demand.

On 19 December 2018, the winding up hearing was adjourned to 6 February 2019.

On the day prior to the adjourned hearing, the directors of Lovelltex appointed voluntary administrators to Lovelltex.
On the morning of the hearing, the administrators filed:

• an application pursuant to section 440A(2) of the Corporations Act¹ to adjourn the winding up; and
• an affidavit of its solicitor (and not an administrator) in support of that application.

Decision

the administrators argued for an adjournment for 6 weeks, by which time it was said that the administrators would have prepared their report to creditors under section 439A of the Corporations Act.

Lovelltex opposed the application citing (among other things) the decision in Gorst Rural Supplies Pty Ltd v Glenroy (Lake Bolac) Pty Ltd [2012] VSC 60 which held that to adjourn a winding up application, a ‘real prospect’ as opposed to a ‘mere speculative possibility’, but not necessarily a ‘comfortable satisfaction’ of a higher return to creditors was required.

It was held that:

• the DOCA proposal involved only a small cash injection of $100,000, around half of which would be for the administrators’ fees and the remaining $50,000 would go to the secured creditor (but no other creditors);
• there was no evidence that the directors would be able to make the payment of $100,000;
• any other value from the DOCA in terms of further cash contributions was completely reliant on the defendant continuing to trade, and trade profitably;
• the assertions in the affidavit had not been verified by an administrator due to the timing of the appointment; and
• as a result, there was only a ‘mere speculative possibility’ that it was in the interests of creditors for the administration to continue rather than the defendant be wound up.

Accordingly, the application for an adjournment was refused and the Judicial Registrar further ordered that Polar be wound up in insolvency and appointed a liquidator for that purpose.

Lavan comment

The Court was critical of the plaintiff’s lack of explanation about the timing of the administrators’ appointment as well as the lack of persuasive evidence in support of the application to adjourn the winding up.  To that end, the Court held (citing Gorst) that while the interests of creditors are paramount, the appointment of the administrators the day prior to the winding up hearing was tantamount to an abuse of the processes of Part 5.3A of the Corporations Act.

As previously advised, practitioners should be mindful of the timing of any appointment in circumstances where a winding up application has been filed or is expected to be filed imminently.

It is important when determining whether to file an application to adjourn a winding up to consider whether or not sufficient persuasive evidence can be put before the Court demonstrating that the adjournment could result in a better return to creditors as opposed to a winding up.

Provided such evidence can be demonstrated, administrators should not be afraid of acquitting themselves of the adjournment process.