TGIF 31 March 2023 – Court sceptical of eleventh-hour appointment of administrator to ‘defend’ a winding up

In Re Brew Still Pty Ltd (admin apptd) [2023] NSWSC 256, Black J of the New South Wales Supreme Court declined an application for an adjournment of one month brought by the voluntary administrator appointed to Brew Still Pty Ltd three days prior to the hearing of the winding up application.

Key takeaways

• Where a voluntary administrator is appointed shortly before a winding up application is to be heard, it may be difficult to show that the administrator has had time to form any realistic, non-speculative views about whether continuing voluntary administration (as opposed to winding up) is in the best interest of creditors.
  
  
• The failure to comply with a statutory demand constitutes an event of default, even where the underlying default judgment is set aside, and will not avoid a winding up if no attempt is made to establish solvency or set aside the statutory demand.
  
  
• Courts will have discretion to make a costs order against the administrator if the application for an adjournment of the winding up application is unsuccessful.

Background

The Plaintiffs, both creditors, applied to wind up Brew Still Pty Ltd (Company) in insolvency. The Deputy Commissioner of Taxation (Supporting Creditor) also appeared in the application as a supporting creditor in respect of superannuation guarantee contributions and penalties owed by the Company. The application was set down for hearing on 17 March 2023, but the Company’s director appointed a voluntary administrator (Administrator) on 14 March 2023. The day before the winding up application, the Administrator applied for an order adjourning the application to 21 April 2023 (a date shortly before the second meeting of creditors), so as to allow time to conduct further inquiries and determine if voluntary administration would result in a better outcome for the Company’s creditors than immediate liquidation.

In support of this position, the Administrator expressed the view that the adjournment was in the best interests of creditors, despite estimating that fees of A$50,000 plus GST were likely to be incurred in that time.

The Plaintiffs and the Supporting Creditor opposed the application for adjournment because the voluntary administration process appeared to be a defensive step to the Plaintiffs’ winding up application and the appointment of the Administrator was made too late to provide useful evidence regarding the outcome of an adjournment.

Adjournment application refused

The Court refused the adjournment application for several reasons:

• While the extra month would give the Administrator time to undertake further investigations, there was no evidence to suggest those investigations were likely to lead to a positive outcome involving a restructure to the creditors’ benefit. The Court noted that it was just as likely that further investigation would only further erode the creditors’ position (due to the Administrator’s A$50,000+ fee and other costs expected to be incurred in the administration) and expose the Supporting Creditor to the risk of further unpaid tax liabilities.
  
  
• While the Administrator stated that he had received a “deed of proposal described as a draft trading plan” from the director, that document was not in evidence and the Administrator indicated he had not had sufficient time to substantively review it.
  
  
• Further, the basis on which the draft trading plan would be funded was not put into evidence. There was no evidence that other shareholders had indicated any desire to contribute further funds to the Company’s recapitalisation. Therefore, the submission that the plan would be beneficial to creditors was merely speculative.
  
  
• The Company submitted that its asset pool outweighed its debts by some margin and that several items of plant and equipment had been implicitly determined as surplus to requirements. However, those items of plant and equipment were not identified in the evidence and no indication was given as to their value. As the independent valuation sought by the Administrator had not yet been received, the submission that the value of assets outweighed debts was also speculative.
  
  
• The Administrator’s late appointment meant that he was not sufficiently well informed about the Company’s affairs to form any realistic view about voluntary administration being to the creditors’ advantage as opposed to liquidation.

Outcome

The Court then determined that a winding up order should be made on the basis of the Company’s failure to comply with the statutory demand. The presumption of insolvency arising from the failure to comply with the statutory demand was not rebutted by the Company (likely because it had resolved to appoint an administrator on the basis of the Company’s insolvency).

The Administrator was ordered to pay the Plaintiffs’ and Supporting Creditor’s costs of the adjournment application.

Comments

This case is a reminder that it remains unlikely that a company can avoid a liquidation process by appointing an administrator at the last minute, absent clear evidence that the administration process will lead to a better outcome for creditors. The winding up process cannot be circumvented simply by appointing an administrator.

An administrator’s actual knowledge of a company will be assessed and the court will consider if the administrator could realistically have come to an informed view about the position of the company in the time available. The court’s assessment will depend on what evidence the administrator and the company can put forward to show an actual likelihood of benefit to creditors rather than relying on mere speculation.

This case should also stand as an example of the circumstances in which courts will impose a costs order on the administrator making the adjournment application, so that creditor’s returns are not eroded by the application having been made.