Insolvency Update: Back To The Future – From Liquidation To Voluntary Administration

In the recent case of Mansfield (Liquidator), In the matter of NR Complex Pty Ltd (In Liquidation) (Receivers and Managers Appointed) [2023] FCA 614, the Federal Court of Australia considered an application by the liquidator (Liquidator) of NR Complex Pty Ltd (In Liquidation) (Receivers and Managers Appointed) (NRC) to be appointed as voluntary administrator of NRC pursuant to section 436B(2)(g) of the Corporations Act 2001 (Cth) (Act).

During the liquidation of NRC, the Liquidator received a proposal for a deed of company arrangement and subsequently applied for orders appointing himself as the voluntary administrator of NRC so that the deed proposal could be considered by the creditors of NRC.  The Liquidator also sought a suite of orders staying the winding up of NRC and truncating the voluntary administration of NRC.

In his decision, Justice Halley provided a useful refresher of the principles relating to the ‘reversal’ of an insolvency company out of liquidation into voluntary administration.

Background

NRC was incorporated on 3 March 2011, and was a developer of residential and commercial properties.  NRC was placed into receivership on 3 December 2020 and was subsequently wound up by the Court on 7 December 2022.

The unsecured claims in the liquidation of NRC exceeded $22.8 million, and the Liquidator concluded that there were insufficient funds in the liquidation to permit the declaration of a dividend to any class of creditor.  Any future dividend would depend on recoveries, but the Liquidator considered these to be uncommercial to pursue.  There was also no funding in the liquidation of NRC.

Subsequently, on 29 May 2023, the Liquidator received a proposal for a deed of company arrangement (DOCA) and received $450,000 from the deed proponents to:

• fund an application by the Liquidator to reverse the company into administration so that creditor could consider the DOCA proposal; and
• constitute the deed fund if the DOCA was ultimately entered into. 

The Liquidator reviewed the proposal and formed the view that the effectuation of the DOCA would see a better return to participating unsecured creditors by circa 2.51% to 2.63% than if NRC was wound up. 

The Liquidator then applied to the Court for, amongst other things, the following orders:

• that leave be granted under section 436B(2)(g) of the Act to enable the Liquidator’s appointment as a voluntary administrator of NRC;
• the voluntary administration procedure be truncated pursuant to section 447A of the Act; and
• the winding up of NRC be stayed from the time the Liquidator was appointed as administrator until the end of the voluntary administration of NRC pursuant to section 482(1) of the Act.

The Deputy Commissioner of Taxation (DCT), being the principal creditor of NRC, was represented at the hearing of the application.  Save for proposing some amendments to the orders sought by the Liquidator, the DCT did not oppose any of the orders sought in the application.

Disposition of the application for orders appointing the liquidator as administrator

Section 436B(1) of the Act provides that a liquidator or provisional liquidator of a company may, by writing, appoint an administrator of the company if he or she thinks that the company is insolvent, or is likely to become insolvent at some future time.  However, section 436B(2)(g) provides that a liquidator or provisional liquidator of a company must not appoint himself or herself as administrator unless the appointment is made with the leave of the Court. 

Justice Halley cited numerous case authorities dealing with applications of this kind and reaffirmed that the following matters are relevant to the granting of leave pursuant to section 436B(2)(g) of the Act:

• Although the test for leave is not an onerous one, the grant of leave should not be treated as a mere formality or procedural obstacle.
• A liquidator will generally be granted leave to appoint themselves as the administrator unless there are distinct reasons as to why they are not a suitable person.  This is consistent with the “desirability of continuity” of persons in charge of the management of the company.
• The primary question is whether the liquidator is “an appropriate person to be an administrator”.  The appropriateness of an appointment requires consideration of whether there are any matters such as a conflict of interest, threat to independence or anything else offensive to commercial morality.
• The Court should consider the proposed appointee’s familiarity with the business and affairs of the company, the likely reduction in duplication and associated costs where a liquidator is appointed as administrator including where considerable work has already been undertaken and where continuity of appointees is desirable having regard to the ongoing negotiations and/or complex arrangements.

Justice Halley ultimately granted leave for the Liquidator to appoint himself as voluntary administrator of NRC.  In reaching that conclusion, his Honour made the following observations:

• The Liquidator was appropriately qualified for the purposes of section 448B of the Act (i.e. the Liquidator is a registered liquidator).
• The Liquidator had developed familiarity with the affairs of NRC due to the investigations he had carried out during the liquidation.  As such, his appointment as voluntary administrator would avoid the inevitable duplication involved in appointing an alternative administrator.
• The Liquidator had engaged with the representatives of the deed proponents with respect to the DOCA and had received the deed funds required for the implementation of the DOCA in his solicitor’s trust account. 
• Expenses had been incurred and work-in-progress had accrued in the liquidation.  These expenses would likely be duplicated and wasted if the Liquidator was not appointed as the administrator of NRC.
• There is no real or potential conflict of duty or interest and no other manner which could be considered offensive to commercial morality.

Overall, Justice Halley was satisfied that there was an advantage to the efficient administration of NRD in maintaining continuity between the liquidation and voluntary administration of NRC.

Disposition of application for orders truncating the administration

The Liquidator sought orders under section 447A to alter the conduct of the proposed administration, including:

• to remove the requirement that a first meeting of creditors be held;
• to remove the requirement for the directors to provide reports about NRC’s business, property, affairs and financial circumstances pursuant to section 438B(2) of the Act;
• to allow the second meeting of creditors be convened at any time during the convening period, provided that notice of such meeting is provided in accordance with rule 75-225 of the Insolvency Practice Rules (Corporations) 2016 (Cth);
• to allow the Liquidator (as administrator of NRC) to accept proofs of debt lodged in the liquidation without adjustment for interest in respect of the claims the subject of such proofs of debts; and
• to exclude a potential resolution under section 439C(c) of the Act to wind up NRC at the second meetings of creditors to avoid NRC being in two parallel liquidations.

Section 447A(1) of the Act empowers the Court to make any orders it thinks appropriate about how Part 5.3A of the Act is to operate in relation to a particular company.  Justice Halley cited the prevailing case authorities of Strawbridge, In the matter of Virgin Australia Holdings Limited (Administrators Appointed) (No 2)¹ and Australasian Memory Pty Ltd v Brien² and reaffirmed that:

• the Court’s main concern in the making of an order pursuant to section 447A is to consider the best interests of the creditors of a company as a whole.
• the powers of the Court under section 447A are wide but not entirely without limit.  The Court’s discretion under section 447A is limited in that the court cannot make a section 447A order altering the times fixed by the provisions of Part 5.3A or affecting vesting rights, a section 447A order can only have prospective effect, and section 447A does not apply unless there is a continuing administration (or, presumably, an extant deed of company arrangement).

Justice Halley made the orders sought by the Liquidator under section 447A to alter the conduct of the administration of NRC because the orders sought would facilitate the administration of the business, property and affairs of NRC in a way that may well result in a better return for its creditors than would result from an immediate winding up.  Justice Halley noted that this was consistent with the object of Part 5.3A of the Act.

Disposition of the application for order staying the winding up

Section 482(1) of the Act provides that on an application by a party with standing (pursuant to section 482(1A)), a Court may, at any time during the winding up of a company, make an order:

• staying the winding up either indefinitely or for a limited time; or
• terminating the winding up on a specified day.

Justice Halley cited In the matter of Equiticorp Australia (In Liquidation) and Ors³ and Hughes, In the matter of Vah Newco No.2 Pty Ltd (In Liquidation)⁴ and reaffirmed that the stay of a winding up upon the appointment of an administrator “may be appropriate where it is designed to facilitate the proposed restructuring transaction and finalise the external administrations (rather than restore the company to ordinary trading operations)”.

His Honour was satisfied that the winding up of NRC should be stayed on the basis that a continuation of the liquidation in parallel with the voluntary administration would be “duplicative and wasteful”.  By ordering a stay of the winding up, the Court retained the discretion to consider whether it would be in the creditors’ interests for the termination of the liquidation to occur at a later point in time.

Lavan comments

This case serves as a reminder that a liquidator can reverse a company out of liquidation into voluntary or deed administration if he or she forms the view that the interests of the creditors and the company would be best served by avoiding a winding up and allowing the company to enter into a deed of company arrangement. 

The decision provides a useful example of the orders that should be sought by a liquidator for the transition of an company from liquidation into voluntary or deed administration. 

If you have any questions regarding the transition of a company from liquidation into voluntary or deed administration, the experienced Lavan team is here to help.