06 Jun 2013

Courts won't rubberstamp an administrator's application to extend the convening period

by Peter Bowden, Nick Poole, Paul James

Six month extensions to convening periods should not be seen as a fait accompli, particularly if the administrator's application is opposed.

There is a commonly held belief that courts will readily grant an administrator's application for an extension to the convening period. This might have been true once, but it is fast turning into an urban myth, judging by two recent decisions in the Federal Court.

While the two cases approached the issue in a different way, and had contrasting results, they both suggest courts will ask some searching questions of administrators seeking an extension, and examine the factual matrix carefully.

Application granted: In the matter of Harrisons Pharmacy Pty Limited (Administrators Appointed) (Receivers and Managers Appointed) [2013] FCA 458

In Harrisons, the administrators of nine companies connected with pharmacy and medical businesses successfully applied to the Federal Court (in New South Wales) for orders that the convening period with respect to the administrations of the companies be extended for six months.

Although the proceedings were brought by the administrators, the receivers and managers of the companies were the driving force behind the application for the extension (as is quite common in practice).

The extension was sought on the basis that the receivers considered that a sale of some or all of the businesses as going concerns was likely to maximise the return to creditors.

After analysing the factors relevant to a court's discretion in granting an extension of the convening period, Justice Farrell concluded that it was appropriate to grant an extension. However, she noted that "an extension of 6 months is a long time… the Court should consider the appropriateness of the length of the extension sought."

Justice Farrell set out a useful summary of the relevant considerations for extension applications:

  • The extension should be for no longer than is required for a diligent exercise of the powers of the administrators and where relevant, the receivers and managers. While successive applications to the court involve cost, there are also fees incurred by administrators and receivers and managers which mount up over time and these are unnecessary expenses if the administrators or receivers and managers are not diligent.
  • It is undesirable for claims which are subject to a moratorium to be extant any longer than necessary.
  • Where the primary asset of the business is goodwill, an overly protracted administration is unsettling to staff who may leave for more certain employment, diminishing the value of the business of the company in administration.
  • Unnecessary delays in an administration expose the assets of the company to market risk.
  • The longer the administration and the receivership, the greater potential there is for the interests of the secured creditor and the unsecured creditors to diverge, to the detriment of the unsecured creditors.
  • It was the intention of the legislature that administrations be conducted expeditiously.

Ultimately, where there were numerous non-binding offers for the businesses, contracts yet to be negotiated and multiple lessor and regulatory approvals to be obtained, Justice Farrell was satisfied that a six-month extension was justified.

While she did not stress the point, it seems that a significant factor in the administrators' favour was that they had received no objections to the proposed extension at the time of the hearing.

Application refused: Re Autodom Ltd (Administrators Appointed) (Receivers and Managers Appointed) [2012] FCA 1393

Autodom concerned a similar application in the Federal Court in Perth by administrators of certain companies to extend the convening period for a period of up to four months. This was on the basis that the administrators were experiencing difficulties and needed more time to make suitable recommendations to creditors than the statutory scheme would otherwise permit.

Both the companies' employees and a landlord (Hajosa Investments Pty Ltd) opposed the administrators' application. Of most interest was the opposition by Hajosa which, during the section 440B statutory moratorium, could not take possession of property it had leased to the relevant company.

Hajosa argued that prolonging the administrations would be no use. The administrators and their staff had spent some 450 hours on the administrations but achieved limited progress (the lack of progress being a reason why such a substantial extension was sought). That extra cost (estimated by Hajosa to be in the order of $200,000) should be taken into account by the Court when deciding whether or not to extend the convening period. From Hajosa's perspective, there was no tangible evidence to suggest there was any realistic prospect of enhancing the interests of creditors and, as more time passed, there was a greater likelihood that further costs would be incurred.

Justice McKerracher agreed. There was a real prejudice to the employees and Hajosa in prolonging the administration, and the degree of certainty around a better outcome being achieved by prolonging the administration was so low that it could not be given significant weight. He therefore declined to extend the period of time in the manner sought by the administrators.

Instead, he extended the convening period for seven days to enable the second creditors’ meeting to be convened and conducted in accordance with the statutory obligations of the administrators.

Key lessons for insolvency practitioners

While the results differed, both cases point to an important trend in the Federal Court.

The Federal Court will carefully consider all the practical implications of any application to extend the convening period. For insolvency practitioners, this means:

  • you cannot assume your application will not be carefully scrutinised;
  • there is nothing magical about a six-month extension period – if a court considers a shorter period to be appropriate, it will order it;
  • your chances of obtaining an extension will be lessened if there is opposition;
  • your activities before the application, and progress made, will be relevant, so you need to ensure those can withstand scrutiny; and
  • courts will be particularly sensitive to the divergence of interests between various classes of creditors, especially as the costs will mount in an extended convening period.

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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.