The significance of this decision
On 3 May 2019, the Federal Court of Australia dismissed an application brought by the administrators of an oil and gas exploration company, Paltar Petroleum Limited (Paltar) to adjourn proceedings for the winding-up of the company in insolvency. The decision illustrates that the belated appointment of administrators appointed by directors in response to pending winding-up proceedings is unlikely to keep at bay the approaching fire of liquidation; indeed, it may accelerate it.
JWS acted for the plaintiff, California-based T-S Capital Partners, LLC (T-S Capital), a creditor and contributory of Paltar. On 12 October 2018, T-S Capital commenced proceedings for an order winding up Paltar in insolvency.
The case for an adjournment
The administrators sought to adjourn the winding-up proceedings on two bases:
- that under s 440A(2) of the Corporations Act 2001 (Cth) (the Act), it was in the interests of Paltar’s creditors for the company to continue under administration until at least the second meeting of creditors; and
- in the alternative, a shorter adjournment of one week under s 467(1)(b) of the Act, which confers a broad discretion upon the Court to adjourn winding-up proceedings.
In considering the interaction of these provisions, the Court concluded that even if a more lengthy adjournment were not in the best interests of creditors, the Court nonetheless retained a residual discretion under s 467 of the Act to enable further investigation by Paltar’s administrators to better assess those interests. The administrators conceded that if they were unsuccessful in seeking an adjournment, it was inevitable that Paltar would be wound up.
The administrators’ application under s 440A(2) comprised three limbs:
- that there was “potential” for a deed of company arrangement (DOCA) to be proposed which appeared to have a realistic prospect of maximising Paltar’s chances of continuing in existence and delivering a better return for creditors and members than would result from an immediate winding-up;
- that the general body of creditors would benefit from an opportunity for the administrators to investigate Paltar’s affairs, including the proposed DOCA terms and possible liquidation outcomes and to provide a second report to creditors; and
- that T-S Capital “as creditor” would not suffer any prejudice were Paltar to continue under administration.
In finding that the Court was not satisfied that an adjournment was in the interests of Paltar’s creditors, the Court re-affirmed that s 440A requires at least “some persuasive evidence” that there are assets which, if realised under an administration, would produce a larger or at least an accelerated dividend for creditors than in a liquidation scenario. Significantly, the directors’ appointment of administrators just two weeks before the final hearing and submitting a DOCA proposal after that point, the hearing having been listed almost six months prior, attracted “some scepticism with regard to the value to creditors in the administration continuing”.
The Court held that the DOCA proposal was laden with uncertainty, that the DOCA proponents had already had a very long time to resolve Paltar’s liquidity difficulties, and that the consideration of an absence of prejudice to T-S Capital was not a relevant consideration under s 440A(2). In comparing the competing scenarios of administration and winding-up, the Court held that the position was “essentially neutral”, lacking the persuasive evidence required to mandate an adjournment. With respect to the residual discretion under s 467(1)(b), the Court was unpersuaded that much was likely to change in the near future and again cited the ample time already afforded to the DOCA proponents.
The following key points emerge from the Paltar decision:
- The threshold for obtaining an adjournment of winding up proceedings is a considerable one requiring a “substantial degree of persuasion”. Where continuation of administration would produce an equivalent outcome to a winding up, an adjournment will not be granted.
- The Court will view with significant scepticism any belated appointment of administrators which appears to be an attempt to stave off an immediate winding-up, particularly in circumstances where the directors have had significant time to restructure the company’s finances.