23 Mar 2012

Firesales in voluntary administration

by Orla McCoy

Although the Australian voluntary administration regime served as the model for the UK administration system, one notable difference has emerged between the two systems: pre-packs.

Pre-packs – the use of a statutory insolvency regime to implement a pre-agreed debt / corporate restructuring – have not really taken off in Australia. In the UK, of course, they form a significant proportion of all administrations.

There are several reasons for this, including a general feeling that the independence of the administrator and the administrator's ability to investigate the company affairs impartially may be compromised by participation in what is effectively a "done deal".

Two recent court decisions illustrate the emphasis which both Australian insolvency administrators and courts place upon the investigative and other formal functions of administrators.


An Australian company which is facing insolvency may appoint a voluntary administrator (appointments can also be made by a liquidator of the company or by secured creditors holding a charge over all or substantially all of the company's property). The administrator immediately calls a meeting of creditors (the function of which is, in broad terms, to confirm the appointment). The administrator then has several weeks to investigate the company's affairs. Armed with the results of that investigation, the administrator then calls a second meeting of creditors. That meeting decides the fate of the company (liquidation, a formal debt restructuring plan (which may include the sale of part of the business) known as a "deed of company arrangement" or (the very rare) return of the company to the control of its directors).

As well as investigating the company, the administrator assumes management control of the company, pending the second meeting of creditors. The administrator also has a number of statutory powers. Those powers include the power to "terminate or dispose of all or any part of [the company's] business" (section 437A(1)(c), Corporations Act 2001).

Section 437A has been part of the voluntary administration regime since its inception in 1993. The apparent width of the power it gave to administrators was confirmed during the law reform process that led up to its enactment.

In response to an early draft of legislation, the South Australian Law Society had argued that the 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 suggested that any such disposal should require court approval.[1]

The Australian Law Reform Commission, which had produced the draft, took the view that a requirement for court approval would fetter the flexibility that was intended to be a hallmark of voluntary administration:

"[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".[2]

Since the legislation finally enacted by Parliament largely reflected the Commission's draft, it may be assumed that the legislature took the same view. On this basis, section 437A clearly 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 two recent matters: Advanced Medical Institute Pty Ltd (Administrators Appointed) and AMI Australia Holdings Pty Ltd (Administrators Appointed) [2011] NSWSC 574 and Killer, in the matter of North Coast Wood Panels Pty Ltd (Administrators Appointed) [2011] FCA 776.

Both administrations went to court because the administrators sought the comfort of a court direction for the proposals:

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

Why would administrators ask for the court's approval before selling the company's business, if section 437A already gave them that power?

Advanced Medical Institute

Advanced Medical Institute's problems extended beyond solvency: the Australian consumer protection regulator was in the process of applying for court orders which would make it very difficult for the company to stay in business.

The administrators asked the court to give them a direction that they would be justified in either:

  • shutting down the business; or
  • selling the business to the company's controller

without, in either case, first seeking creditor approval.

Selling the business to the controller of the company might ensure that the company's employees' leave and other entitlements might be saved, but would not benefit any other creditors (who would equally receive nothing in a liquidation scenario).

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

After reaffirming the principle that it is not the job of judges to make commercial decisions for external administrators, the Court held that 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."

The Court then granted the directions, but did not provide detailed reasons for that decision.

North Coast Wood Panels

North Coast Wood Panels involved a proposed urgent sale to a third party, on arm's length terms. Again, the court gave the administrators the directions they sought. However, this time, the judgment provided some indication of the court's reasoning.

It began by acknowledging the apparent width of the powers conferred by section 437A(1)(a):

"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."

It also – and perhaps crucially – referred to what it called the "orthodox" course followed in voluntary administrations:

"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."

Although the court did not specifically say so, it was presumably the fact that they were proposing to depart from this "orthodoxy" which inspired the administrators to apply for Court directions before selling the company's business.

The policy

Advanced Medical Institute and North Coast Wood Panels produced similar outcomes, but do not have the same policy implications. At this point, it is useful to note the policy behind the statutory provision that allows administrators to seek court directions:

"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."[3]

Reference may also be made to the judgment in Re Ansett Australia Ltd (No. 3) [2002] FCA 90; (2002) 115 FCR 409:

"… 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 give administrators some degree of protection against after-the-event claims that actions such as selling the business were unreasonable or in some way tainted with impropriety.

Given the very short time granted to administrators to investigate the company and report to creditors on the appropriate course for the company (the standard statutory period being 20 business days from the date of appointment – although this period can be extended by application to the court in an appropriate matter), the administrator's statutory power to sell a company’s business would necessarily have to be exercised within a very short time-frame and, in almost every situation, before the creditors met to vote on the company’s fate. There is a clear disjunction (if not outright contradiction) between this legal position and the "orthodoxy" described in the North Coast Wood Panels judgment.

That is not to say that the court was incorrect in its description of the orthodoxy. It is quite true that the overwhelming majority of administrations follow that path (except where the court intervenes and orders the company straight into liquidation, for example, on the application of a major creditor).

Nevertheless, viewed in purely legal terms, it is difficult to understand why a course of action clearly within the contemplation of the legislation should require court approval. It might be argued that there is no harm in the administrators' obtaining the protective effect of court directions. Against that, it should be pointed out that that reason is, in some senses, inconsistent with the policy behind section 4378A(1)(a), referred to above.

That is not to say that directions are always unnecessary. Although the Advanced Medical Institute judgment does not indicate why the administrators sought the protection of court directions, it may be surmised that the nature of the sale – to the company's controller – clearly differentiated it from the arm's-length transaction in North Coast Wood Panels.

Earlier decisions in which directions have been given bear out the thesis that the judicial power should be exercised when the administrators propose to do more than merely apply an objective business judgment to the proposed transaction:

  • Re eisa Ltd (admin apptd); Application of Love (2000) 35 ACSR 394 involved a sale of business to the company's secured creditor;
  • GBS Gold involved an early payment of creditors when there was no legal or business reason for doing so (the administrator wanted to ensure that redundant employees received their entitlements before Christmas).

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.

The pre-praxis

Despite a history of almost 20 years, it is clear that the law governing voluntary administrations in Australian is still far from settled. It is not clear whether North Coast Wood Panels is an outlier, or evidences an emerging jurisprudence of reliance on court directions for administrator-initiated sales of business.

What Advanced Medical Institute and North Coast Wood Panels may illustrate, however, is a strong conservative streak in some aspects of Australian insolvency practice, particularly when it comes to rapid resolution of the company's financial situation: investigation of the company's affairs and allowing creditors a significant say in the company’s future are not matters which conventionally take second place to getting in cash quickly. In that atmosphere, it is, perhaps, not surprising that pre-packs have not become a common event in the original home of administrations.

[1] Quoted in the Australian Law Reform Commission, General Insolvency Inquiry, Report 45 (Harmer Report), 1988, vol 1, at para 87.

[2] Ibid.

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

This article was published in the INSOL Electronic Newsletter Issue No 8 August 2011

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.