Voluntary administration: Extension of the convening period for a second meeting of creditors

Voluntary administration: Extension of the convening period for a second meeting of creditors

Lombe re Australian Discount Retail Pty Ltd [2009] NSWSC 110, Supreme Court of New South Wales, Barrett J, 3 March 2009

(a) Summary

This case concerned an application by the administrators of Australian Discount Retail Pty Limited and 38 wholly-owned subsidiaries (the ADR Group) for a substantial extension of the convening period of the second meeting of creditors under Part 5.3A of the Corporations Act 2001 No. 50 (Cth) (the Act).  The court had previously made an order effecting a short extension of time pursuant to s. 439A(6) of the Act.

The question to be determined was whether there was good cause for departing from the time limits set down by the Act for the convening of such a meeting.  That is, would the extension of time maximise the chances of the company or as much as possible of its business continuing in existence, or if continuation was not possible, to achieve a better return for creditors and members than would result from an immediate winding up.

Barrett J held that due to the particular circumstances of the case, the interests of creditors would be best served by granting the extension of the convening period, rather than forcing the meeting to occur at an early date.  His Honour further held that the proper statutory basis for effecting the extension is s. 447A of the Act, as it is unclear whether the amendments to s. 439A, as provided for in the Corporations Amendment (Insolvency) Act 2007 No/ 132 (Cth) (the Amendment), allow several extensions to be granted under s. 439A(6).

(b) Facts  

Administrators were appointed to the ADR Group on 20 January 2009.  On 16 February 2009 the administrators obtained a short extension of the convening period for the second meeting of creditors until 9 March 2009. The administrators then sought a further extension until 18 August 2009. This added up to a total extension of six months.

On the same day the administrators were appointed, secured creditors appointed receivers of the assets and undertakings of the companies.  The receivers undertook to sell the assets and undertakings as a going concern, believing this would achieve a better outcome for creditors than would result from selling the property in parts. For example, the sale of the ADR Group as a going concern would likely result in most of the 10,000 employees of the ADR Group being retained, as well as enabling suppliers and other contractors to continue to do business with the new owner.

The receivers supported the application for an extension of the convening period.  One of the receivers deposed that a large number of persons had expressed interest in the sale of the ADR Group and a number had submitted non-binding indicative offers.  The receivers expected a successful bidder to be chosen and to have entered into a sale and purchase agreement around the end of March 2009.  After this, the successful bidder would require a considerable period of time within which to make arrangements with lessors of the premises of the 39 companies.  Accordingly, a substantial extension of the convening period was required.

(c) Decision  

(i) Extension of the convening period  

Barrett J began by noting that the approach to be taken in such applications is for the time limits set down by the Act to be adhered to, unless good cause is shown.  The good cause must be such as to promote the objects of Part 5.3A as stated in s. 435A. Therefore, the ability to maximise the chances of the company or as much as possible of its business to continue in existence, must be weighed against the expectation that voluntary administration will be effected quickly, so that there is a speedy resolution of creditors’ positions.

Here, each of the 39 companies in the ADR Group had a committee of creditors, 38 of which had unanimously resolved to support the application for an extension of the convening period.  Further, his Honour felt it would be counterproductive for the administrators to be compelled to convene the second meeting too quickly, as such a meeting is best held at a time when it is possible to give creditors definitive financial information that will assist them in their decision-making.  Barrett J held that creditors’ decision-making would be made more difficult and complicated if they were compelled to make a decision about their company’s future based on speculation about the possibility of a going concern sale.  Further time for the formulation and digestion of recommendations based on established realities would avoid the possibility of what might be a premature decision in favour of winding up as the only practically available option. In this case, although the creditors would not be left waiting unduly, the creditors were content for additional time to be taken to achieve a more certain and hopefully profitable outcome.

For these reasons, his Honour held that the interests of creditors would be best served by granting the extension sought by the administrators.

(ii) Statutory basis for effecting the extension of the convening period  

His Honour stated that the court’s power of extension under s. 439A(6) had previously been exercised in this matter and a number of cases held that s. 439A(6) permits only one extension of the convening period to be made.  In one such case, Re Henry Walker Eltin Group Ltd [2005] FCA 984, Hely J referred to cases in which a second extension was made pursuant to s. 447A – Re Western National Earthmoving Corporation Pty Ltd (1997) 141 FLR 121 and Re Envirostar Energy Ltd [2002] NSWSC 1246.  However, Barrett J noted that these cases had all been decided before the introduction of the Amendment.

The Amendment allows an extension of the convening period to be made at any time if the court believes it would be in the best interests of the creditors.  Barrett J found that while it is unclear whether the amended form of s. 439A(6) allows subsequent extensions of the convening period to be made, it is likely that the Amendment was only intended to allow a second meeting to be held outside the convening period because of technical defects discovered after a meeting had been held.  Therefore, his Honour expressed doubt about whether the Amendment created a general jurisdiction to make multiple extensions under s. 439A(6), although he did not decide the matter. Section 447A (which permits the court to make any such order it thinks appropriate about how Part 5.3A operates in relation to a particular company) may be used to allow for subsequent extensions (according to the cases).  His Honour preferred to rely on s. 447A and held that the proper statutory basis for effecting the extension was s. 447A. His Honour was satisfied that it was in the best interests of creditors that the convening period be so extended.

Barrett J also allowed an order under s. 447A to enable the administrators to hold the second meeting at any time during the extended period, or within five business days after its end, rather than strictly in accordance with s. 439A(2).  Section 439A(2) provides that the meeting must be held within five business days before or after the end of the convening period.  His Honour stated this order would allow the administrators to bring the meeting on promptly, should a sale be completed earlier than expected, without having to wait for the end of the extended period.

 

Co-authored by Haley Aprile.

Published by SAI Global on behalf of Centre for Corporate Law and Securities Regulation, Faculty of Law, the University of Melbourne with the support of the Australian Securities and Investments Commission, the Australian Securities Exchange and the leading law firms.