23 Mar 2012

Direct me if I am wrong...: Early Sales in Voluntary Administrations

by Orla McCoy

One could almost be forgiven for thinking that nowadays delayed second creditors' meetings are just par for the course .

Applications to extend the time for the second meeting - often for months - have become quite routine, and are rarely (if ever) refused.

Some observers might thus wonder if we are losing sight of one of the objectives of the VA procedure - that it "should be expeditious".[1]

Meanwhile, in another interesting development, almost at the other end of the VA spectrum, whilst sales of the company's business before the creditors even have their second meeting may often fly under the radar, two applications in June and July this year for judicial blessing have highlighted the considerations on the exercise of this power by administrators.

In both Advanced Medical Institute Pty Ltd and AMI Australia Holdings Pty Ltd [2011] NSWSC 574 and Killer, in the matter of North Coast Wood Panels Pty Ltd [2011] FCA 776, administrators received the judicial green light to sell the company’s business before the second creditors' meeting.

If the sale or disposal by administrators of the company's business before the second creditors' meeting (in essence depriving the creditors of potential section 439C "options") is the natural counterpoint to extensions of the convening period (invariably for the purpose of providing the creditors with section 439C "options"), is this development open to the criticism that it is being perhaps too expeditious?

The Harmer Law Reform Commission report would appear to indicate not.

The South Australian Law Society had argued to the Commission that its proposal to allow administrators to terminate or sell the company’s business was inappropriate because it was "foreseeable that creditors at their meeting may be confronted with a fait accompli and have no real or effective input into the final outcome of the administration". The Law Society wanted Court approval to be required for any such disposal. [2]

The Commission's response was that there was nothing inherently objectionable in giving an unfettered power of sale to an administrator:

"[I]t is not desirable to place the limitations suggested in the power of the administrator ... to sell all or part of its property. There may be critical circumstances which require a commercial decision with regard to a sale of property (for example, the business of the company as a going concern) in which the experience and expertise of an independent administrator will be invaluable".[3]

On its terms, it would appear that s 437A allows an administrator to act unilaterally and to sell the company's business without reference to either the Court or the creditors. That is not, however, what happened in Advanced Medical Institute and Killer.

In each case, the administrators sought the comfort of a court direction for the proposals.

In Advanced Medical Institute, the administrators asked for directions that they would be justified in immediately either shutting down the company's business or selling it. In Killer, the administrators asked for directions that it would be proper and reasonable for them to sell the company's business (again, almost immediately).

The Court in Killer observed that:

"Plainly enough, the administrators may dispose of all or part of the business of the company (s 437A(1)(c) of the Act) and the administrators have control of the company’s business, property and affairs (s 437A(1)(a) of the Act). In addition, the administrators have the powers conferred under s 442A of the Act."

Given such clear statutory powers, why would administrators ask for the Court's imprimatur before selling the company's business? Advanced Medical Institute and Killer provide two very different answers.

The cases

Advanced Medical Institute was in voluntary administration. The ACCC was about to obtain court orders which would make it very difficult for the company to stay in business.

The administrators sought a court direction that they would be justified in either shutting down the business or selling it to its controller, without first seeking creditor approval. The sale to the owner of the company would perhaps ensure that the company's employees' leave and other entitlements might be saved. It would not however benefit any other creditors (who would equally receive nothing in a liquidation.)

There was no indication in the judgment of the administrators' reasons for seeking these directions.

The Court reiterated the usual line about it not being the job of judges to make commercial decisions for external administrators, before saying that the administrators' proposals were justified:

"On the evidence before me, I would have no difficulty in stating that the administrators would be justified in taking whichever action they thought was appropriate. It seems to me that that is a question which they should decide. Obviously, there is some public interest in what happens but that is something which does not really bear upon the decision which they should make. Their decision must take into account the interests of those whose interests they represent and they are justified in coming to whichever decision they wish in respect of the two alternatives which have been put before me and which they consider is the appropriate commercial course to take."

It then gave the administrators the directions they sought. The Court did not say why it made the directions.

Killer involved a proposed urgent sale to a third party, on arm's length terms. Again, the Court gave the administrators the directions they sought.

The policy

Although they produced similar outcomes, the Court decisions in these two cases are quite different and have very different implications for administrators.

To see why, it is necessary to recall why Courts are asked to provide directions to administrators:

"The Corporations Law ... empowers administrators to apply to the Court for directions and impliedly empowers the Court to give them; but the Law does not specify any legal consequences or any protection for administrators arising out of directions. The effect appears to be that an administrator who acts on directions which he has obtained on proper disclosure will be thereby assisted in showing that his conduct was reasonable for any purpose for which that may be relevant."[4]

We may, therefore, speculate that the administrators in Advanced Medical Institute were motivated by the fact that they were proposing to sell the business to a related party of the company. This is quite different from the situation in Killer. There, it was not the nature of the proposed transaction that was apparently problematic; rather, it was the apparent inconsistency with the policy of Pt 5.3A:

"The course they propose ...will determine the fate of the Company without the orthodoxy of a complete investigation as contemplated by the Act. The disposition will occur within a short period of time and without the benefit of the administrators conducting a full examination of the affairs of the Company and seeking the views (and decision) of the creditors at a second meeting of creditors."

If it is correct that administrators have the power to sell a company’s business, it is almost axiomatic that that power will be exercised at relatively short notice. The Harmer proposal to give administrators this power was presumably predicated upon the assumption that the second creditors' meeting would normally be held within the relatively short statutory timeframes. It follows from this that the administrator's power of sale would have been expected to be exercised within an even shorter - and earlier - timeframe.

The Killer Court may, therefore, have been guilty of overstatement when it referred to the "orthodoxy ... as contemplated by the Act" of a sale being preceded by a "complete investigation" and the second meeting of creditors, both as to the process (being the conventional sequence of events) and the standard of investigation expected of a voluntary administrator. That sequential process may be the conventional one, but it is clearly not the only course contemplated by the Act.

This distinction has important practical ramifications for administrators.

The reference to a "complete investigation" by administrators might also give rise to some disquiet. Whilst the Act itself (at ss 438A, 438D and 439A(4)), the Corporations Regulations (specifically Reg. 5.3A.02) and Part D:25 of the IPA Code of Professional Practice for Insolvency Practitioners, prescribe and provide guidance, respectively, as to the matters which must be investigated and reported on, neither the Act, nor the authorities which have considered the sufficiency or otherwise of administrators' reports, mandate a "complete investigation". The professional judgment of administrators is emphasised (the authorities acknowledging that temporal and other limitations may assist in determining the extent of an administrator's duty to investigate). On the other hand, ASIC's 2008 review of (a sample of some 275) s 439A reports was critical of the exercise of that professional judgment, suggesting either insufficient investigations were undertaken or the results of those investigations were inadequately reported to creditors.[5] The guiding rule for the adequacy of a s 439A report is whether it gives creditors the requisite information to make an informed decision about the options available to a company under administration.

Going it alone

Much of the Killer judgment was concerned with whether the Court had power to make the directions sought. There was relatively little specific consideration of whether and why the directions should actually be given.

Nevertheless, it is a fair assumption that a major reason for making the directions lay in the Court's view that the early sale of business was not "orthodox ... as contemplated by the Act". If that is the case, the decision may have the unfortunate effect of encouraging administrators to seek Court endorsement before exercising their clear statutory powers. As noted above, the Harmer Report specifically rejected a suggestion that administrators should be required to seek Court approval before selling a company's business. The Courts have also duly recognised that in certain circumstances an urgent sale of the company's business or assets may represent the only foreseeable prospect of realisation for a company's constituents. The Courts have also recognised, as in Advanced Medical Institute, that the person best placed to weigh up the competing imperatives is the administrator. It follows that, in the absence of special factors, administrators should not need Court directions before selling the business.

What sort of special factors would justify Court directions? The answer to that lies in the William Felton statement that directions are to assist an administrator in showing that "his conduct was reasonable". Further guidance is found in the view expressed by Goldberg J in Re Ansett Australia Ltd (No. 3)[6] (at [46]) that:

"...it does not appear from the authorities that courts have given liquidators and administrators directions approving business or commercial decisions in circumstances where no issue has arisen in relation to a legal matter or the propriety or reasonableness of the decision."

Directions therefore may be seen as having a prophylactic benefit for administrators, in providing them with some protection against after-the-event claims that their actions - such as selling the business - were unreasonable or in some way tainted with impropriety.

It may be argued that, even if administrators do not need directions, they may still want their potential prophylactic benefits against as yet unforeseen complaints. The problem with that train of thought is that it ultimately negates both the clear conferral of power on administrators and another major policy underlying the enactment of Part 5.3A - the creation of an insolvency regime that did not require court supervision as a matter of course.

Rather than heading down this path, it would be better to look at some non-Killer instances in which directions have been given. Advance Medical Institute involved a sale to a related party, Re eisa Ltd (admin apptd); Application of Love[7] involved a sale of business to the company's secured creditor, while GBS Gold involved an early payment of creditors when there was no legal or business reason for doing so (the motivation being the administrator's desire to ensure that redundant employees received their entitlements before Christmas).

Each of the above cases required the administrators to do more than simply apply an objective business judgment to the proposed action. In GBS Gold, the administrator would be disposing of a large slab of the company's assets before the second creditors' meeting without having any legal or business imperative for doing so. The identity of the purchaser in Advanced Medical Institute took the proposed sale out of the realm of an entirely arm's-length transaction (vis-à-vis the company).

It is in this latter type of situation, we suggest, that administrators and Courts might consider directions. Where the proposed sale is at arm's-length and involves nothing more than the application of objective business principles, applied consistently with the objects of Part 5.3A of the Act, Court directions may provide administrators with little added protection.


[1] Harmer Report para 108. What makes this issue even more interesting is the fact that the statutory extension of the times limits a few years ago do not appear to have stemmed the rising number of court-ordered extensions.

[2] Quoted in Harmer at para 87.

[3] Ibid.

[4] Re William Felton & Co Pty Ltd (1998) 16 ACLC 1294, quoted in Re GBS Gold Australia Pty Ltd; Ex parte Saker [2009] WASC 25.

[5] Report 129: Review of s 439A reports for voluntary administrations , ASIC June 2008

[6] [2002] FCA 90; (2002) 115 FCR 409.

[7] (2000) 35 ACSR 394

This article was published in the Insolvency Law Journal Vol 12 No 1 August 2011

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