TGIF 24 May 2019: The long and winding up road: Federal Court rejects administrators’ bid to adjourn winding up application

In Fyna Constructions, the Federal Court rejected an administrators’ bid to adjourn a winding up application citing insufficient evidence to support a greater return to creditors. 

Background

Fyna Constructions (Fyna) hired and sold scaffolding and construction equipment. It incurred liabilities to the Australian Taxation Office of almost $1.3 million, an objection to which had been disallowed.

In November 2017, the Deputy Commissioner of Taxation (DCT) served a statutory demand on Fyna. Fyna then sought to have the demand set aside with that application dismissed by consent.

In August 2018, the DCT applied to have Fyna wound up. Despite the DCT being ready to move on the application, and no evidence being filed by Fyna, the first return date was adjourned on three separate occasions.

On 11 April 2019, less than two weeks before the scheduled hearing of the winding up application, administrators were appointed to Fyna. Creditors were subsequently informed that the first meeting of creditors was scheduled on 23 April, i.e. the day before the hearing.

Application for adjournment

At the hearing, Fyna conceded it no longer opposed the winding up but instead sought an adjournment so the administrators could progress their investigations. A DOCA had been proposed by the sole director, in a letter to the administrators dated before they were appointed, which suggested a better return to creditors than an immediate winding-up.

The Deed Fund under the proposed DOCA was to include amounts recovered from Fyna’s debtors, a personal contribution from Fyna’s director, a contribution by a related entity, and regular contributions from unspecified sources. The payments were to be guaranteed by another plant hire company, Winlina, and the director agreed to postpone or subordinate both his claims and those of other, related entities against the company.

What happened?

Section 440A provides that the court must adjourn a winding up application if satisfied a continuation of the administration, rather than a winding up, is in the interests of the company’s creditors. The administrators did not invoke s 467 which, the Court said, was an alternative source of power that gave the court a broad discretion to grant an adjournment.

As such, persuasive evidence was required that:

• creditors’ interests would be better served by the adjournment (for example, the assets realised in the administration would generate a larger dividend than in a winding up); and
• there was a prospect the company could overcome its difficulties in the short-term.

The administrators failed to discharge that onus with the Court expressly noting its entitlement to have regard to the lateness of the appointment, prior to the scheduled hearing, as a relevant contextual matter that affected its assessment of any evidence.

Further, the Court noted that:

• no appeal or review had commenced in relation to the failed objection to tax liabilities;
• there was an “absence of any evidence” as to the financial state, or identities, of the supposed contributors to the Deed Fund or Winlina as guarantor; and
• the full amount of the Deed Fund would not be available for at least six further months from the adjournment.

As a consequence, the suggestion that the adjournment would benefit creditors was held to be no more than optimistic speculation and the application was refused.

Indeed, the largest external creditor opposed the adjournment. The Court ascribed significant weight to the DCT’s view that its commercial interests were better served by an immediate winding up and it would vote against the proposed DOCA. There was no evidence as to the views of Fyna’s other creditors, most of whom were related entities to Fyna.

There was also limited evidence in response to the winding up application itself. This precluded the Court from ascertaining the underlying value in Fyna and from satisfying itself that trading in administration would not erode assets.

Significance

An application for winding up will rarely be adjourned unless a strong case is presented that there will be a greater or more accelerated return to creditors than in liquidation.

Where administrators are appointed, “persuasive evidence” is required of a realistically superior alternative for creditors (as opposed to further delays in asset realisation). That evidence should prove the underlying value of the company and the reliability of any contributions that the administrators intend to use to meet the company’s debts.

When there are advantages in either course, a short adjournment may be allowed so that creditors can vote on which option they prefer.