Ipso facto stays and extending the convening period for 12 months: judicial guidance for administrators

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By Kirsten Farmer, Partner, Alison Malek, Senior Associate and Isabella Marriott, Lawyer

In a recent decision of the Federal Court of Australia, Rathner, in the matter of Citius Property Pty Ltd (Administrator Appointed) [2023] FCA 26, the Court:

  1. agreed to extend the convening period for the second meeting of creditors by 12 months; and
  2. clarified the operation of the ‘ipso facto’ stay to pre-appointment contracts contained in section 451E(1) of the Corporations Act 2001 (Cth) (Act).

Background

Citius Property Pty Ltd (Citius) is a property management and consultancy company. In December 2022, an Administrator was appointed to Citius.

Citius’ principal asset was an agreement with DWPL Nominees Pty Ltd and Dexus Wholesale Management Limited (together, Dexus) for the provision of project management services in relation to a commercial property development in Victoria (Dexus Agreement) where certain fees were payable to Citius at different stages of the project until completion. The Dexus Agreement contained an ipso facto clause whereby Dexus had a contractual right to terminate the agreement upon Citius entering administration.

Extension of convening period

Section 439A(7) of the Act provides that if an application is made to extend the convening period, the Court may only make such orders if it is satisfied that it would be in the best interests of creditors.

The relevant principles were summarised by Middleton J in Strawbridge, in the matter of Virgin Australia Holdings Ltd (administrators appointed) (No 2) [2020] FCA 117:

“…In making such an order, the Court must reach an appropriate balance between an expectation that the administration will be relatively speedy and summary, and the countervailing factor that undue speed should not be allowed to prejudice sensible and constructive actions directed to maximising a return for creditors” (citations omitted).

The categories of cases in which an extension is granted include those where:

  1. the size and scope of the business in administration is substantial;
  2. the extension will allow sale of the business as a going concern; and/or
  3. more generally, additional time is likely to enhance the return for unsecured creditors.

The Court will also consider the effect of the extension on relevant stakeholders, namely:

  1. the opinion of the administrator;
  2. the views of any committee of creditors; and
  3. the impact of the extension sought on creditors and interested parties, including employees and the company’s contractual counterparts.

The Administrator’s primary submission was that Citius would benefit from the continued operation of the statutory stay on the exercise by Dexus of their right to terminate the Dexus Agreement by reason that Citius entered administration as follows:

  1. by extending the convening period, Citius could continue to perform its obligations under the Dexus Agreement, entitling it to receive approximately $383,000 (excluding GST) on completion. Of that, approximately $90,000 would be available for distribution to creditors; and
  2. this would have the effect of discharging the claims of priority creditors in full and paying part of the claim of the first-ranking secured creditor. In comparison, if the extension of the convening period was not granted and Citius could not perform its obligations under the Dexus Agreement, it was submitted that there would be no funds available for distribution to creditors.

Secondary reasons for the granting of the lengthy extension were raised, including that it would give the director time to consider whether he wished to propound a deed of company arrangement which may produce a better return for creditors than a winding up, and also to give the Administrator further time to conclude his investigations. It was also submitted that the proposed extension would not prejudice creditors, and no creditor had expressed opposition to the extension sought. The extension was also unanimously supported by Citius’ Committee of Inspection.

Ipso facto orders

Under section 451E(1) of the Act, a right to terminate a contract will not be enforceable to the extent that those rights are triggered by the company entering administration for the length of the stay period.

The Administrator therefore also sought a direction that he was justified and acting reasonably on the basis that if the administration of Citius ends because of a resolution or order for Citius to be wound up, the stay on the enforcement of certain contractual rights described in section 451E(1) of the Act continues to operate until the winding up of Citius is complete.

Under section 451E(2), the length of this stay period ends:

  1. when the administration ends;
  2. if one or more orders are made under subsection (3) extending the length of the stay period –when the last made of those orders ceases to be in force; or
  3. if the administration ends because of a resolution or order for the company to be wound up–when the company’s affairs have been fully wound up.

Section 451E of the Act has never been judicially considered prior to this judgment. Accordingly, the Administrator submitted that it was appropriate to make the orders sought in the absence of any judicial consideration of section 451E to provide certainty to the Administrator and Citius as to its position regarding the Dexus Agreement.

The Court’s decision

Extension of convening period

Although the extension sought was for an unusually long period, the Court granted it for the following reasons:

  1. the extension is consistent with Part 5.3A of the Act, which provides for the affairs of a company to be administered in a manner that results in a better return for the company’s creditors and members than if the company was immediately wound up;
  2. if the extension is granted, there will be a surplus of funds available for creditors. If no extension is granted, there is unlikely to be any funds available for distribution to creditors;
  3. no creditor expressed opposition to the extension and the orders provide interested creditors with liberty to apply in the future if their interests become prejudiced;
  4. if the extension was not granted and the priority creditors, being employees of Citius, applied under the FEG scheme, they would not receive employer superannuation contributions. In comparison, by allowing the extension and the subsequent payout to first ranking creditors, the Administrator expects to be able to discharge the employee’s claims in full by August or September 2023; and
  5. Dexus is unlikely to be prejudiced in circumstances where they have not communicated their opposition to the application for extension and did not seek to be heard at the hearing of the application. It also remains open to Dexus to restore the matter before the court to address any prejudice if it arises in the future.

Ipso facto orders

With respect to the ipso facto orders, the Court determined that the orders sought by the Administrator were not necessary in circumstances where the language and purpose of section 451E(1) of the Act is clear on its terms.

The Court said that it was clear that sect 451E(1) operates with respect to Citius (being a company in voluntary administration) and restrains Dexus from exercising its right to terminate under the Dexus Agreement by reason of Citius’ entry into administration for the duration of the administration and, if the administration ends by resolution or order to wind up Citius, for the duration of the winding up.

Key Takeaways

The Court’s decision provides guidance for Administrators who may be seeking to extend a convening period for a lengthy period in circumstances where to do so would be in the best interest of creditors. If providing that extension provides the ability for creditors to receive funds that they otherwise would not receive, and it is unlikely that the extension would prejudice other stakeholders, such an extension may be granted.

Further, although orders were not ultimately made on the operation of the ipso facto stay, the Court has confirmed that the ipso facto stay operates as intended in voluntary administrations. Here, the Court clarified that the ipso facto stay does not stay the exercise of a contractual right that arises by reason of liquidation but will stay any rights that arise by way of administration and will continue during a subsequent liquidation.

For further information, please do not hesitate to contact us.

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