TGIF 27 October 2023 - Lifting a stay under the SBR regime

This week’s TGIF summarises the Federal Court of Australia’s recent decision granting leave to proceed against a company despite the appointment of a small business restructuring (SBR) practitioner under Pt 5.3B of the Corporations Act 2001 (Cth) (Corporations Act).

Key takeaways

• The statutory stay available under the SBR regime, introduced in 2021, has been approached by the Federal Court as analogous to that applicable to voluntary administration.
  
  
• Where a company goes into SBR, a court may exercise its discretion to lift the stay having regard to a wide range of factors and subject to such other matters that it considers appropriate.
  
  
• Here, the factors relevant to the Court’s discretion included that the relevant claims would likely take the company’s liabilities above the $1 million eligibility threshold for an SBR, that it was probable that the claims would be covered by insurance and that there would be significant prejudice to the plaintiff if it was unable to commence proceedings prior to a limitation period expiring imminently.

What happened?

The proceedings were brought last month by BHL, a listed investment company, against John Bridgeman Limited (JBL), JB Markets Pty Ltd (JBM) and others.

BHL had appointed JBL in 2017 to provide financial services in connection with managing BHL’s investment portfolio. JBL was an authorised corporate representative of JBM, the AFSL holder.

BHL relevantly argued that:

• JBL breached certain duties to BHL in connection with the management of its investment portfolio;
  
  
• JBM was responsible for JBL’s conduct relating to the provision of financial advice to BHL and was liable for any loss stemming from such conduct; and
  
  
• in particular, JBM contravened its statutory duties as AFSL holder by failing to monitor or train JBL adequately in connection with JBL’s activities.

On 25 August 2023, JBM appointed a restructuring practitioner under section 453B(1) of the Corporations Act.

This came to BHL’s attention on 5 September 2023. The following day, BHL filed an originating process and affidavit in support, approaching the court for urgent relief pursuant to section 453S of the Corporations Act to bring a proceeding against JBM.

Why did the Court grant leave?

The Court granted leave for BHL to proceed against JBM despite the SBR regime for the following reasons.

1. Non-opposition by restructuring practitioner
   
   JBM’s appointed restructuring practitioner indicated that he had no objection to the section 453S order.
   
   
2. Likelihood of JBM failing to satisfy eligibility criteria
   
   One of the main eligibility criteria for the SBR regime is that the total liabilities of the company on the day the restructuring begins should not be over $1 million.
   
   As the value of BHL’s claim exceeded $1 million, the Court accepted that there was a real likelihood that the restructuring process would come to an end as a result of JBM not satisfying the eligibility criteria.
   
   
3. Relevant circumstances supporting leave by analogy to Part 5.3A
   
   Justice Markovic observed that the terms of section 453S in Part 5.3B were relevantly identical to 440D in Part 5.3A, which concerns a stay arising upon voluntary administration.
   
   Moreover, Parts 5.3A and 5.3B contain analogous objects, being to assist a company to stay in business. Accordingly, the established principles relating to consideration of granting of leave under section 440D may also apply with respect to section 453S.
   
   Both were held to confer a discretion of the Court, involving consideration of the circumstances of the case.
   
   In this case it was relevant that the claims were found to have a solid foundation and that there was a serious dispute.
   
   Other factors a court may take into account when determining whether it is appropriate to grant leave, corresponding to those applicable when applying to lift an administration stay, are as follows:
   
   
   • whether the company is insured against the liability which is the subject of the proceedings;
     
     
   • whether the administrator or restructuring practitioner would be unreasonably distracted from their statutory duties and incur unnecessary and substantial legal costs;
     
     
   • the stage of the proceedings;
     
     
   • who appointed the administrator or restructuring practitioner and who is applying for leave;
     
     
   • whether the claim is monetary in nature;
     
     
   • whether the applicant will suffer any disadvantage if leave is not granted;
     
     
   • what funds the company has available to defend against litigation; and
     
     
   • whether there are good reasons for permitting a creditor to depart from the general intention of Part 5.3A (namely, that a creditor ought not to be able to take action against the company in such circumstances) or corresponding objectives of Part 5.3B.
     
     
4. Prejudice if unable to commence before becoming time-barred
   
   The Court found that the limitation period relating to one of BHL’s claims would expire imminently. It accordingly concluded that BHL would be prejudiced if it were not permitted to commence the proceeding against JBM in relation to those claims before the limitation period expired.
   
   
5. Insurance
   
   The Court also found that JBM was required to hold a professional indemnity insurance policy under the Corporations Act and regulations and that there was a reasonable prospect that BHL’s claims might be covered by insurance.

Conclusion

The SBR regime is still relatively new. This case, in which Corrs acted for the successful applicant, fills a gap in judicial commentary in respect of the circumstances in which an SBR stay may be lifted.

The decision indicates that similar considerations apply as for a voluntary administration stay, together with specific considerations applicable to the SBR regime (such as the eligibility criteria referred to above).

Creditors should be alert to the potential need for them to apply to Court for the lifting of the statutory stay, including where they have a potential claim against a company in SBR that takes the company’s liabilities beyond the $1 million cap on eligibility.