06 Dec 2012

A Hastie end to an administration

by Nick Poole, Peter Bowden, Christopher Hibbard

Courts are willing, in certain circumstances, to consider the commercial realities of voluntary administrations, and can be flexible.

Two recent decisions by the Federal Court regarding the Hastie Group insolvency raise interesting issues around cross-border insolvency. The decisions show that courts can be flexible when considering unusual circumstances that arise during voluntary administrations and are willing to relieve an administrator of their statutory obligations in certain situations (Carson, in the matter of Hastie Group Limited (No 4) [2012] FCA 968 and Carson, in the matter of Hastie Group Limited (No 5) [2012] FCA 1174).

Administrators are appointed to Hastie Group companies – and run into some problems

On 28 May 2012, administrators were appointed to a number of companies in the Hastie Group, including Hastie International Pty Ltd and Hastie Saudi Arabia Pty Ltd. Hastie Saudi represented the business interests of the Hastie Group in Saudi Arabia, and Hastie International represented the business interests of the Hastie Group in the United Arab Emirates.

The Administrators had trouble investigating the affairs of Hastie International and their efforts were exasperated by the fact that the UAE did not recognise their appointment as administrators. To enable them to properly investigate the affairs of the company, the Administrators sent a consultant to Dubai to meet with representatives of Hastie International's employees. However, the meeting did not proceed as planned. The consultant was informed that he and the Administrators would break local law if they told employees that their entitlements may not be paid and they would risk criminal liability if they sought registration on the business licence for Hastie International. Unsurprisingly, the consultant left Dubai in a hurry following the meeting.

The Administrators subsequently received legal advice confirming that local courts would likely not recognise them as administrators, and that foreign companies operating through branches in the UAE are subject to the bankruptcy regime contained in the local Commercial Transaction Law.

Next stop: The Federal Court

Accordingly, the Administrators reached the conclusion that they could not investigate the affairs of Hastie International or Hastie Saudi as required by section 438A of the Corporations Act.

As the Administrators formed the view that Hastie International was insolvent at the time, an application for winding up was made under section 459P of the Act, which allows for certain people, including the company, to apply for a winding up order.

Justice Emmett noted that the Administrators had the power to bring the application under section 459P pursuant to section 437A(1)(d), which allows for an Administrator to "perform any function, and exercise any power, that the company… could perform or exercise if the company were not under administration". The application to wind up Hastie Saudi, by contrast, was made under section 461(1)(k), which provides that a Court can wind up a company where "it is just and equitable that the company be wound up".

The order was made and the Administrators were appointed liquidators of the companies.

Appointing an agent to do the legwork

Through the course of their appointment as administrators and liquidators, the Administrators were made aware of a number of current bonds and ongoing letters of credit issued by Hastie International, as well as outstanding receivables owed to Hastie International. The approximate value of the property was A$110 million, whereas the Hastie Group (including Hastie International) owed a sum in excess of A$536 million to the syndicate of lenders who held securities over the assets of most of the companies in the Hastie Group.

After making inquiries as to the most appropriate way to realise the UAE property, and noting the difficulties they had previously faced, the Administrators decided to nominate an agent to pursue Hastie International's debtors. Accordingly, they decided to enter an agreement with Hill International (Middle East) Ltd. The Administrators formed the view that Hill had suitable experience and expertise in attempting recoveries in distressed scenarios in the UAE, as well as knowledge of insolvency practices in the UK and Australia.

The terms of the agreement included the Administrators granting a power of attorney in favour of Hill. Given the Administrators had no funds available to them to pay Hill, the terms of the proposed arrangements with Hill also included payment by way of a success fee (inclusive of a substantial proportion of the net sum recovered in respect of receivables).

Section 477(2B) of the Act requires a liquidator to seek approval from the court, the committee of inspection or a resolution of the creditors before entering an agreement that may last for more than three months. The term of the agreement with Hill was likely to end after more than three months and the Administrators decided that, given the circumstances, it would be impossible to convene a meeting of creditors in the UAE. They therefore sought an order from the court.

In his judgment, Justice Emmett outlined what the court should consider when presented with an application under section 477(2B). He said: "It is not for the Court to determine the commercial merits of a proposed arrangement that the Liquidators wish to enter into. That is a matter for their judgment. The function of the Court … is to ensure that the Liquidators have, having regard to their commercial judgment, given appropriate attention to all of the possible adverse consequences that might result from the proposed agreement." He also noted that it "is clearly in the interests of the creditors of Hastie International that further steps be taken".

The court made an order allowing the Administrators to enter the agreement with Hill.

What does this mean for insolvency practitioners?

The cases demonstrate that courts are willing, in certain circumstances, to consider the commercial realities of voluntary administrations, and can be flexible by allowing an administrator to be relieved of their statutory obligations if extenuating circumstances prevail.

Insolvency practitioners should be aware that courts will exercise broad discretion in considering an application under section 477(2B). The court's role is only to ensure that the liquidators have properly considered all possible adverse consequences and the interests of the creditors.

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