JOEL COOK Associate, Litigation and Dispute Resolution Group, McCabes
ANDREW LACEY Principal, Litigation and Dispute Resolution Group, McCabes
ONE SIZE DOES NOT FIT ALL
Varying the scope of the Part 5.3A moratorium on proceedings against companies in voluntary administration.
Part 5.3A of the Corporations Act 2001 (Cth) (the Act), titled `Administration of a company's affairs with a view to executing a deed of company arrangement', codifies an extensive regime of rules and protocols which govern the conduct of companies in administration. The provisions of that Part which commonly become the subject of court intervention relate to the convening of meetings and administrators' reports to creditors, administrators' liability and the execution and effect of deeds of company arrangement. While the regime in Part 5.3A applies to all companies in administration, there is a recognition that it is not a case of `one-sizefits-all' and that, in appropriate circumstances, the operation of the Part can be modified to suit specific circumstances or in varying ways. Section 447A of the Act empowers the Court to make `such order as it thinks appropriate' about how Part 5.3A of the Act is to operate in relation to a particular company. This article discusses a recent application brought by an administrator for orders under s 447A to highlight the flexibility which can be achieved by invoking this provision.
SCOPE OF THE POWER
Given the frequency by which administrators make applications for orders under s 447A, it is unsurprising that there is a considerable volume of decisions which consider the scope of the power given to the Court by s 447A. In Re THO Services Limited  NSWSC 509, a recent decision which is discussed in further detail below, the Court considered some of leading authorities.
One of those is the High Court decision in Australasian Memory Pty Ltd v Brian (2000) 200 CLR 270, which related, primarily, to orders made by the Supreme Court of New South Wales in relation to the convening of a meeting of creditors which was claimed by the appellants to be invalid. The High Court, in dismissing the appeal, unanimously found that the Supreme Court had the power to abridge the time for convening a meeting of creditors which had already been held, and validate a resolution passed by the creditors at that meeting.
Re Ansett Australia Ltd  FCA 1806 is another decision which is often cited in relation to the scope of s 447A. In that decision, the Federal Court made various orders modifying the way in which Part 5.3A of the Act
was to operate in respect of Ansett Australia Limited. The background facts related essentially to the subrogation of priority creditors' rights to the Commonwealth.
The Court ultimately held that while the Court did not have an express power to `approve' agreements entered into or proposed to be entered into by administrators acting pursuant to Part 5.3A, s 447A did provide such a power.1
The authorities such as Australasian Memory and Re Ansett set out a number of the key principles relevant to the exercise of the Court's discretion. They can be summarised as follows: The power in s 447A is not to be
exercised merely to cure defects or remedy consequences if there is a departure in a particular case from the regime set out in Part 5.3A.2 The examples provided by s 447A(2) are not exhaustive of the scope of the Court's power. The legislative intention behind s 447A is that the regime in Part 5.3A is not intended to be applied to all companies in a fixed and unchanging way. Section 447A permits the making of orders which would alter how provisions in that Part are to apply to a particular company.3
1 Re Ansett at . 2 At ; citing Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 156 FLR 453. 3 At .
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There is no temporal limitation to the application of the power; it can be used to make orders with future effect, and in respect of past matters or events.4
The decision of Goldberg J in Re Ansett is one of many decisions which demonstrate that s 447A is not only concerned with procedural matters (such as modifying the time by which a particular things are to be done), but it can be invoked to change the substantive mechanics of Part 5.3A of the Act. Further, orders can be made which would impinge upon or affect the rights of unsecured creditors.5
However, the power is not entirely without limit: the weight of the authorities provides that any exercise of power under s 447A must be consistent with the object of Part 5.3A.6
The objects of the Part, set out at s 435A of the Act, state that the business, property and affairs of an insolvent company is to be administered in a way that:
(a)maximises the chances of the company, or as much as possible of its business, continuing in existence; or
(b)if it is not possible for the company or its business to continue in existence results in a better return for the company's creditors and members than would result from an immediate winding up of the company.
Given the general nature of those objects, the only practical limitations on the court's exercise of s 447A are the factual circumstances of a particular case and the justification for any departure from the regime in Part 5.3A, which are to be considered on a caseby-case basis.
We will see from the decisions discussed below that even a considerable departure from the regime in Part 5.3A will be permitted where it can be justified on the basis of being consistent with the objects of the Part.
The provisions in the Act which operate to stay claims of creditors in administration, deed administration and liquidation respectively differ in their terms, scope and application. It is a curious inconsistency which is generally accepted as being intentional on the part of legislators (although the policy reason for the difference is not entirely clear). This practical disparity was the focus of the recent decision of Brereton J in Re THO Services Limited  NSWSC 509.
The plaintiff in those proceedings was the administrator of THO Services Limited (THO). At the time of the plaintiff's appointment in January 2016, THO was a defendant in proceedings which had recently been commenced by the Commonwealth of Australia in the International Chamber of Commerce, Court of Arbitration (the Arbitration).
The Arbitration related to alleged building defects associated with a physical fitness complex, including swimming pool, which THO had contracted to build at a RAAF Base in Queensland, and a resulting claim for loss and damage in excess of $12 million.
While the provisions in the Act relating to the moratorium of creditors' claims in respect of a creditors' voluntary liquidation (s 500) and in respect of a company the subject of a deed of company arrangement (s 444E) would operate to stay the Arbitration, commercial arbitrations are not stayed automatically by operation of the moratorium provision relating to administrations (s 440D). This is because s 440D, unlike the other moratorium provisions, only prohibits a creditor from taking steps in respect in respect of `a proceeding in a court'. It was accepted in Re THO that the Arbitration was not a proceeding `in a court'.
After receiving notice of the Commonwealth's claim, THO had
notified its insurers and sought indemnification under two separate insurance policies. However, at the time of the administrator's appointment, the insurers' positions were unknown. This left the administrator in the unenviable position of either spending the company's resources in defending the Arbitration, or taking no steps in the proceedings with the risk that doing so would prejudice THO's insurance coverage.
As his Honour noted, the administrator could not safely ignore the Arbitration.7 However, the projected costs of defending the Arbitration during the administration were significant and the company's resources were limited.
Accordingly, the administrator subsequently sought relief from the Supreme Court pursuant to s 447A such that s 440D would operate in respect of THO as if `proceeding in a court' included the Arbitration.
The Commonwealth opposed the orders sought on the basis that, principally: section 447A could not be used
in the way proposed by the administrators, and the Court could not make an order extending the scope of s 440D to commercial arbitrations because to do would make an order in respect of a subject matter outside of Part 5.3A, namely, commercial arbitrations. If s 447A could be used in this way, the Court should not exercise its discretion in the manner sought.
The Court was not persuaded by the submission that commercial arbitrations are not a matter which falls within the scope of Part 5.3A and therefore the Arbitration should not be affected by a modification to s 440D. The Court found that the order sought by the administrator was not one which concerned arbitration, it was an order in connection with an insolvency administration.8
4 At . 5 At . 6 See, for example, Re Sons of Gwalia Ltd; Ex parte Love (2008) 218 FLR 49; Macquarie University Union Ltd (in prov liq) v Venues at Macquarie Pty Ltd  FCA 721 at . 7 At . 8 At .
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In arriving at its decision, the Court considered the purpose of the moratorium of creditors' claims in administration: to avoid disruption and distraction. Another matter considered by the Court was the benefit of avoiding expenditure of the company's resources if a stay was imposed. In this regard the court acknowledged that while the Commonwealth's claim was significant in quantum (and indeed dwarfed those of all other creditors), it was as yet unestablished and unliquidated. Further, failing to grant the stay would in effect prioritise or give special treatment to the Commonwealth's claim.9
It is clear from the judgment in Re THO that underpinning the specific facts and matters of that case was the Court's consideration of the objects of Part 5.3A and the interests of creditors as a whole.
The Court ultimately found that the Court did have power under s 447A to extend the reach of s 440D to a private commercial arbitration against the company and that exercising the power in the manner sought was justified in this particular case.
The decision appears to be the first use of the s 447A to impose a stay on a commercial arbitration.
There are countless other examples of the application of s 447A to achieve the objects of Part 5.3A. It is convenient here to highlight some of those decisions in relation to s 439A meetings of creditors to show how courts have exercised the power in s 447A in that context.
CALLING MEETINGS DURING THE
SECTION 439A CONVENING PERIOD During the administration of THO, the administrator sought and was granted an extension of the convening period
for the s 439A meeting of creditors. The extension was granted to (primarily) allow an insurer to confirm its position in respect of a specific indemnification decision. The period of the extension was 12 weeks, but it was unknown at the time of the application exactly how long was required.
Ordinarily, pursuant to s 439A(2), the s 439A meeting of creditors must be held within five business days before or after the end of the convening period. Accordingly, the administrator sought orders under s 447A complementing the extension so that the administrator could convene the s 437A meeting of creditors at any time during the extension period or within five days after its expiry. Similar orders have been made in other instances: Re Daisytek Australia Pty Ltd (administrator appointed) (2003) 45 ASCR 446.
This example is a good example of how the rigidity of Part 5.3A is often tweaked for the benefit of due administration and in the interests of creditors.
SECOND EXTENSION OF THE 439A
CONVENING PERIOD In In Hancock, in the matter of Tarleton & Peters Pty Limited (Administrator Appointed) (No 2)  FCA 1232, the Federal Court considered the Court's ability to grant a second extension of the s 439A meeting of creditors pursuant to s 439A(6). Gleeson J acknowledged that there was some doubt as to this question, however, there was no doubt that s 447A could be invoked for that purpose, if the circumstances required.
The court in Hancock considered the circumstances did justify a second extension on the basis that the committee of creditors consented and there was no evidence of any prejudice
to creditors if the second extension was granted. The Court also expressly noted the objects of Part 5.3A.10
SECTION 439A MEETING Administrators are often minded to defer the making of a resolution under s 439C. This is commonly because: creditors are not in a position to
make an informed decision as to the fate of the company the administrators have not exhausted negotiations with possible proponents of deeds of company arrangement which could provide a beneficial outcome to creditors over liquidation certain contracts or transactions would be prejudiced if the company was put into liquidation, i.e. keeping a company in administration will maximise assets available to creditors.
Importantly, once the s 439A meeting of creditors has been convened, it is not possible to seek an extension of the convening period under s 439A(6), because the meeting has been convened. Ordinarily, if an administrator wishes to defer the making of a resolution under s 439C, they would generally look to s 439B(2) which provides:
A meeting convened under s 439A may be adjourned from time to time, but the period of the adjournment, or the total of the periods of adjournment, must not exceed 45 business days.
However, there is no power in s 439B for administrators to apply to the court to seek an extension of the 45 days. It is this inflexibility which has been addressed by application of s 447A in the past.
9 At -. 10 At .
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In McGrath, in the matter of Henry Walker Eltin Group Limited (administrators appointed)  FCA 1479, Gyles J made orders, pursuant to s447A(1), that Part 5.3A was to operate in respect of the companies the subject of those proceedings such that creditors were empowered to adjourn the s 439A meeting of creditors for not more than 180 days.
The plaintiffs' justification of the application was that the administrators required more time to permit completion of the sale of the subject company's operations so that, when creditors came to vote on a proposed
deed of company arrangement, they will effectively be dealing with the disposal of the surplus cash proceeds of the realisation of the assets.
FINAL THOUGHTS Section 447A is an `integral part of the legislative scheme' 11 of Part 5.3A and plays an important role in the administration of insolvent companies, in order to ensure that the prescriptive provisions of the Act can be applied in a manner which promotes outcomes which are consistent with the objects of Part 5.3A.
The authorities also make plain that
the power in s 447A does not merely relate to procedural requirements (such as modifying the time by which a particular things are to be done), but can be invoked where appropriate to change the substantive mechanics, and expand the operation of Part 5.3A of the Act.
Insolvency practitioners should not feel constrained by the express provisions in Part 5.3A. The authorities make it clear that the requirements of the provisions contained therein can be manipulated in a flexible way, using s 447A, in order to advance the objects of the Part.
11 Australasian Memory at .
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