By Kirsten Farmer, Partner, Alison Malek, Senior Associate and Bronte McAlpin, Law Graduate

In a recent decision of the Federal Court of Australia, the Court was asked to consider whether to terminate or stay a liquidation during a voluntary administration or, in the alternative, to replace the current Liquidator with the Administrators.

The Court did not deliver judgment but rather relied on and accepted the submissions of counsel for the Administrators.

Background

TDE. Pty Limited (in liquidation) (administrators appointed) (Company) operates a retail business selling leather goods and accessories trading as “TDE” and “The Daily Edited”.

The Company warehouses its stock in leased premises in Alexandria and sells that stock both through an online platform and through a leased shop in the Queen Victoria Building on George Street, Sydney.

On 23 September 2022, the Company entered into an agreement (Sale Agreement) with a related company to sell the whole of the business and the Company’s assets.

On 30 September 2022, a Liquidator was appointed to the Company pursuant to section 491 of the Corporations Act (2001) (Cth) (Corporations Act).

On 12 October 2022, the Liquidator issued his initial report to creditors, which included an observation that he was investigating the Sale Agreement.

On 28 October 2022, the Liquidator appointed the Administrators as joint and several administrators of the Company pursuant to section 436B(1) of the Corporations Act.

Shortly thereafter, the Administrators rescinded the Sale Agreement.

Following recission of the Sale Agreement, the Administrators continue to operate the business with the assistance of the employees, suppliers and the ANZ Banking Group.

On 10 November 2022, the Administrators commenced a sales campaign for the business and the Company’s assets.

Court Application

Recently, the Administrators successfully made an urgent application to the Court for orders to extend the convening period until 24 February 2023. This case note does not address the relevant principles to be established to obtain an order extending the convening period as they are well known and the subject of many decisions of both the Supreme Court and the Federal Court. See for example, a summary of the principles in Crawford, in the matter of North Queensland Heavy Haulage Services (2017) FCA 63; Re Australian Discount Pty Limited (2009) NSWSC 110; and Re Riviera Group Pty Limited (2009) NSWSC 585; (2009) 72 ACSR 352.

As part of the Court application, the Administrators also sought orders for a termination or stay of the liquidation or for their replacement of the Liquidator.  This case note addresses the Court’s views on whether the winding up of the Company ought to be terminated or stayed or, in the alternative, whether the Administrators should replace the Liquidator as the liquidators of the Company.

It has been suggested that the Courts ordinarily would not terminate a winding up simply because a company has been placed into administration (Re JKB Constructions Pty Limited (2006) NSWSC 1040 at [8]). However, section 90-15 of Schedule 2 of the Corporations Act (IPS) and section 482 of the Corporations Act affords the Court a wide discretion to terminate a winding up in appropriate circumstances.

Recently, in Merchant Overseas Logistics Pty Limited (2022) VSC 154, Osbourne J noted at [50] that the Court has a discretion as to whether to terminate a winding up and, in exercising this discretion, the Court will consider the interests of:

1. creditors of the company (including future creditors);
2. the liquidator, particularly with respect to costs;
3. the contributories; and
4. the public, including the public interest in matters of commercial morality, and the public interest that insolvent companies should be wound up.

In the alternative to a termination or a stay, the Administrators sought an order that they replace the Liquidator as the liquidators of the Company. The power for the Court to do so is now found in sections 90-15(1) and (3)(b) and (c) of the IPS.

In deciding that this was an appropriate case for an order that the Administrators replace the Liquidator, the Court agreed with the Administrators’ submissions that because:

1. the Liquidator had consented to his removal and did not otherwise wish to be re-appointed as liquidator;
2. having traded the business and undertaken the administration, the Administrators would be better placed to carry out the liquidation; and
3. the scheme of Part 5.3A recognises the benefit in having an administrator subsequently appointed as liquidator because upon the transition of a company from administration to liquidation, the “default position” under sections 446A and 499 of the Corporations Act is that the administrator is taken to have been appointed as the liquidator.

Orders made

In addition to ordering the extension of the convening period, the Court ordered that the Administrators replace the Liquidator as liquidators of the Company.

The Court was not persuaded that an order should be made to terminate or stay the liquidation because the Administrators had given evidence that they expected the Company would be wound up following the sale of the Company’s business and assets. In circumstances where it was not expected that a deed of company arrangement (DOCA) would be proposed, the Court was not willing to order the liquidation be stayed or terminated.

Takeaways

Where a company is subject to both liquidation and administration, and the administrators seek a termination or stay of the liquidation, the Court will not exercise the power lightly. Instead, the Court will be attracted to an order that the administrators replace the liquidator if there is evidence that the liquidator consents to being removed. This is particularly so where no DOCA has been proposed and it is expected that the company will be wound up at the conclusion of the administration.