It is not uncommon for administrators to be appointed in the period between a company being served with a creditor’s winding up application and the date on which that application is to be heard. Despite their appointment, and unless the administrator attempts to intervene, the Court can and often will hear the winding up application and, if appropriate, order that the company be wound up and terminate the administration.
Administrators may apply to adjourn an application to wind up a company which is under administration pursuant to s 440A(2) of the Corporations Act 2001 (Cth) (Act). In order to do so, they must satisfy the Court that the continuation of the administration is in the best interests of creditors.
“Best interests” test
An adjournment will not be granted as a matter of course. The onus is on an administrator to satisfy the “best interests” test, namely that it is in the best interests of creditors that the company continue in administration.
The principles a court will consider when granting an adjournment under s 440A(2) include:
- whether a 439A report has been issued;1
- whether a proposed deed of company arrangement is to be considered at a second meeting of creditors;2
- a comparison between the likely return to creditors under administration versus liquidation;3
- the interests of creditors in light of the length of adjournment sought, its purpose and consequences;4
- if “there is a sufficient possibility, as distinct from mere optimistic speculation, that creditors’ interests will be accommodated to a greater degree in an administration than in a winding up”.5
In most cases, the “best interests” test will be satisfied if there is a reasonable prospect of a beneficial deed of company arrangement, sale of business or trading on of the company, which would result in a greater return to creditors than an immediate winding up.
Some authorities provide that even if the “best interests” requirements of s 440A(2) are not satisfied, the Court still has jurisdiction to adjourn the winding up application if it considers it necessary.6 The discretion is contained in s 467(1) of the Act, which allows the Court to dismiss the winding up application, or adjourn the hearing conditionally or unconditionally.
Short adjournments may also be granted using this discretion without necessarily needing to prove that the “best interests” test is satisfied. This is by exercise of the inherent jurisdiction of the Court to control its processes, and may be granted to enable:
- administrators to complete their investigations and hold a second meeting of creditors;7
- creditors to consider a proposed deed of company arrangement;8
- alternatives to winding up applications to be considered;9 or
- evidence to be obtained and more considered argument to be addressed on both sides.10
Ordinarily, the length of such adjournments would be a few days to a week, and the Court would require the administrators to seek a formal adjournment pursuant to s 440A(2) before the second meeting of creditors.
A balancing act
Adjournment applications are not merely administrative and, before it will grant a s 440A(2) application, the Court will need to be properly satisfied that it is in the best interests of the creditors to do so.
The power to grant adjournments is consistent with the view that creditors, rather than a court, are usually better judges of what is in their interests and should be given the opportunity to consider a deed of company arrangement and if they may receive a better outcome under that arrangement as opposed to liquidation.11 It is also consistent with the objectives behind Part 5.3A of Chapter 5 of the Act which offers creditors alternatives to winding up.12
However, this needs to be balanced against the need to restrain directors from appointing administrators to frustrate a winding up application properly brought by a creditor pursuant to the Act.
As a matter of practice, in most cases the best course is to make an application for a short adjournment to properly investigate and then to prepare a formal s 440A(2) application. If an administrator presses ahead with a s 440A(2) application and is rejected because the proper evidence is not yet available, the Court is unlikely to allow an administrator a second attempt.
If the Court rejects an administrator’s s 440A(2) application, it may also be appropriate for the administrator to adopt a fall-back position that they ought to be appointed as liquidator, given their previous involvement in the company.