Creditors’ Best Interests: Have they Changed?

By Paul Mac and Saran Bavich

In the matter of SFL/Piletech (EA) Pty Ltd [2018] NSWSC 637

Section 440A of the Corporations Act 2001 (Cth) (the Act) provides that a Court is to adjourn the hearing of a winding up application if the company is under administration and the Court is satisfied that it is in the interests of the company’s creditors for the company to continue under administration rather than be wound up. The authorities on this section are well established and the principles to be applied in such an application are well known. Despite this, there is a tendency for the outcome of these applications to be unpredictable.

Such was the case in the recent New South Wales Supreme Court decision In the matter of SFL/Piltech (EA) Pty Ltd, where, despite all the signs pointing in the favour of the grant of an adjournment, one overriding factor ultimately culminated in the Court dismissing the application and winding the company up.

The Facts

SFL/Piletech (EA) Pty Ltd (EA) was one of nine companies in the SFL group.

• On 1 December 2017, Boral Construction Materials Group Limited (Boral) commenced winding up proceedings against EA based on a failure to comply with a statutory demand claiming debts of $150,675.86. This application was first returnable on 6 February 2018.

• On 22 December 2017, before the first return date, administrators were appointed to EA and on 23 January 2018, eight of the other nine companies in the SFL group also appointed the same administrator.

• The administrators arranged for the second meeting of the creditors of EA to be held at the same time as the second meeting for all of the other group companies, and therefore sought an adjournment of the EA winding up proceedings to a date after that meeting had taken place.

• The affairs of the companies in the group were intertwined, each being both a debtor and a creditor of other group companies. EA was indebted to SFL/Piletech MA (MA) for $12,598,000, while MA was indebted to the holding company Steel Foundations Limited (SFL) for $14,347,000. The administrators formed the view that the loans to EA were irrecoverable. EA and SFL were the only companies in the group that had assets other than intercompany loans.

• For the purposes of the second meeting of creditors, the administrators proposed a deed of company arrangement (DOCA), which would involve the pooling of assets of the group companies, the extinguishment of all intercompany loans and the deferral of claims by MA against the other companies (including EA).

Reasons for decision

• On its face, a number of factors would have supported a determination that the creditors’ interests would be accommodated to a greater degree in an administration than in a winding up. For example:

• Other than Boral, which represented less than 5% of the unrelated unsecured creditors, the remainder of the creditors indicated they would support an adjournment of the winding up (the Court noting that there is force in the view that creditors are the best judges of their own interests); and
• The administrators demonstrated a clear benefit in the DOCA scenario vis a vis an immediate liquidation, in that:
  • although the loan to SFL would no longer be available to EA, it was irrecoverable in any event;
  • MA, being the largest creditor of EA would not participate in the deed fund, whereas in a liquidation, MA would be entitled to approximately 80% of any dividend; and
  • there was a better financial return to creditors under a DOCA scenario.

Boral mounted several arguments in opposition to the adjournment, most of which were not deemed persuasive by the Court (for example that, because the unreliable state of EA’s accounts, the true benefit under the DOCA was not clear, the administrators’ investigations into recoveries from directors were inadequate, distributions would be paid more quickly in a liquidation etc).

However, one argument advanced that was deemed meritorious (and ultimately decisive) was that there was not truly a benefit for EA in the DOCA through deferral of its debt to MA, because if EA were wound up, then it could bring about a winding up of SFL and in turn MA and the other group companies. This would render enliven the pooling of assets under section 571 of the Act in any event. Accordingly, this would attract all of the benefits of the DOCA and in addition, preserve the potential for liquidators’ recoveries (which would not be available in an administration). The Court considered that if EA were wound up, a liquidator would likely adopt that course and that the only way the continued administration of EA could result in a superior outcome for its creditors was if the liquidator of EA were to act perversely.

On that basis, the Court dismissed the adjournment application and made orders winding up EA in insolvency.

Key takeaways

When weighing up the benefits to creditors of a company continuing in administration as opposed to being wound up, an administrator ought to bear in mind the value of thinking “outside the box” when considering all options available to a liquidator. This will assist in forming a more balanced an objective view on what action a liquidator would likely take in that scenario.

Further and as a corollary to the above, when obtaining the creditors’ views as to whether they would support an adjournment of the winding up proceedings, it is important to explain and properly inform them of the options available to a liquidator, as this will likely impact on the position the creditors ultimately adopt.

For more information contact Paul Mac or Saran Bavich