Impact of small business restructuring on winding up applications

  • TurkAlert
  • Published 25.03.2021
Re Dessco Pty Ltd [2021] VSC 94 
Re DST Project Management and Construction Pty Ltd [2021] VSC 108

Key Takeaways

The Victorian Supreme Court has provided some initial guidance as to how courts will deal with applications to wind up a company where that company is undergoing a small business restructure.

The Court has considered the wording of s453Q(1) to be harmonious to the wording of s440A(2) which applies in circumstances where an administrator is appointed to the company after the filing of a winding up application. Creditors should expect applications to adjourn wind up proceedings relying on s453Q(1) to be determined on an ‘best interest of creditors’ test, following the commentary and case law on s440A(2) of the Act.

Background

Provisions of the Corporations Act 2001 (Cth) (Act) commenced on 1 January 2021, allowing eligible companies an opportunity to restructure with the assistance of a small business restructuring practitioner (SBRP) (s452A of the Act).

Eligibility criteria is set out in s453C of the Act, and in the regulations. A key requirement for eligibility is that the total liabilities of the company do not exceed $1million.

The Victorian Supreme Court has handed down two decisions this month, providing some initial guidance as to how applications to wind up will be dealt with, where the subject company is undergoing a small business restructure.

Judgments

In Re Dessco Pty Ltd [2021] VSC 94  (Dessco), the plaintiff Mr Davey, filed an application to wind up Dessco following its failure to comply with a creditor statutory demand for payment. The demand was based on a Magistrates’ Court order made on 5 June 2020, which required Dessco to pay $81,748.29 and interest of $35,344.32 to Mr Davey.

The Magistrates’ Court order also required that Dessco and its director compensate Mr Davey in respect of a Practitioners Remuneration Order. A compensation bill had been served by Mr Davey for an amount $607,951.19, being the amount Mr Davey said represented the compensation. That bill was the subject of proceedings in the Costs Court of Victoria.

Dessco filed an application seeking an adjournment of the winding up proceedings pursuant to s453Q of the Act. Section 453Q(1) requires an application to wind up a company be adjourned if that company is under restructuring and if the Court is satisfied that it is in the interests of creditors to continue under restructuring rather than being wound up.

The Court directed Dessco to provide material from the SBRP regarding its eligibility under the Act for proposed restructuring.

Dessco served evidence in the form of a report from its SBRP Practitioner, Mr McDermott. Mr McDermott estimated the admissible debts to be $750,592. This figure included approximately $200,000 for contingent liabilities - including Mr Davey’s claim which was being considered by the Costs Court. Mr McDermott said he discounted the bill on the basis that he said that the bill contained errors that inflated the total claim and that he believed the amount Dessco would ‘rationally pay’ to settle the bill would be $200,000.

Mr Davey opposed the application for an adjournment. Mr Davey said Dessco was ineligible for restructuring because its liabilities exceeded $1million. Mr Davey did not accept the proposed discounting of his claim and said that this was ‘a cynical attempt by Dessco to bring the liabilities under $1million so that Dessco is eligible for restructuring’.

The Court found that an application for an adjournment of a winding up application was not the appropriate forum to quantify the contingent liabilities of a company, particularly where there were already proceedings in the Costs Court to do so.

The Court accepted the definition of ‘admissible debt’, in respect of eligibility, included contingent debts, but found that the restructuring practitioner was not obliged to accept the quantification of those amounts contended for by the creditor. The Court found that the SBRP was required to form a view of the company’s eligibility based on the factual material available. While the estimated value must be based on reasonable grounds, the practitioner was not required to carry out a comprehensive detailed enquiry.

The Court had particular regard to Mr McDermott’s views noting he had special obligations under the Act to terminate the restructuring if the company became ineligible.

The Court found that the ‘best interests of creditors’ test is analogous to the test under s440A(2) of the Act where a company is placed under administration. In those instances, authorities establish that the best interests of creditors relates to whether creditors would get more by way of payment of their debts in administration as opposed to winding up.

This task is more difficult with small business restructuring, because until a plan is actually developed it is difficult to ascertain the likely return to creditors. Noting Dessco had intended to offer 5c in the dollar to creditors, the Court was satisfied that it was in the interests of creditors of the company to continue under restructuring rather than being wound up. Accordingly, the Court adjourned the proceedings.

In Re DST Project Management and Construction Pty Ltd [2021] VSC 108  (DST), the plaintiff, Redhill Bricklaying Pty Ltd (Redhill) commenced winding up proceedings against DST following a failure to comply with a statutory demand. On the same day, DST appointed a SBRP.

DST sought to adjourn the application, relying on s453Q of the Act. In support DST relied upon an affidavit from the SBRP Adam Preiner. Redhill accepted that DST met the eligibility criteria.

On 23 February 2021, the SBRP issued a proposed restructuring plan to DST’s creditors. The report contained a comparison of the outcome to creditors under that proposed plan, being 7.62 cents in the dollar, compared with a hypothetical liquidation, being 3.78 cents in the dollar. The SBRP estimated the costs of the proposed restructuring plan to be $3,000, compared to $24,750 - $48,400 in a traditional liquidation. The SBRP concluded that, in his opinion, the restructuring plan was in the best interest of the creditors of DST.

The proposed plan had been accepted by majority of the creditors of DST by 27 February 2021. The proposal acceptance period was due to end on 15 March 2021. DST sought an adjournment to allow this period to continue.

Redhill opposed the adjournment application, contending:

  1. the plan was proposed so as to use creditors ‘friendly’ to DST to pass the plan to the detriment of trade creditors such as Redhill;
  2. there were reasons to doubt the information provided to the SBRP by DST;
  3. given the timing of the appointment of the SBRP, the Court should approach the appointment with  ‘a degree of scepticism’ as to whether the appointment was a last ditch attempt to avoid liquidation; and
  4. creditors would benefit from the appointment of a liquidator who would investigate DST.

The Court again considered that the wording of s453Q of the Act is harmonious to that of s440A(2) and accordingly applied the authorities on s440A(2).

The Court again noted that it must be persuaded that it is in the interest of the creditors to proceed with administration (or in this case, small business restructuring), rather than it may be in the best interests to do so. This requires consideration of whether the creditors could hope to receive more in the administration as compared to a winding up. There must be ‘sufficient possibility, as distinct from optimistic speculation, that the adjournment is in the interests of creditors’.

The Court considered that there was no question of the SBRP’s independence, and he had fulfilled his duties in properly investigating the debts. The debts accepted by the SBRP were properly investigated to ensure that they were not debts owed to excluded creditors.

There was no evidence of sufficient weight before the Judge to enable him to be satisfied that the material provided to the SBRP and the investigations undertaken by him were not reliable.

The Court was satisfied that it was in the best interest of creditors of DST to continue under restructuring, and there was no evidence from the SBRP’s investigations, nor submitted by Redhill, that supported the view that further investigations by a liquidator would increase the return to creditors.

The Court made no comment on the timing of the appointment of the SBPP.

Implications

No doubt we will see more decisions in the near future providing guidance as to how applications to wind up will be dealt with where the company has elected to appoint a small business restructuring practitioner.

For the time being, creditors should expect those applications to be determined on an ‘best interest of creditors’ test, following the commentary and case law on s440A(2) of the Act. In light of the reduced investigations required of SBRP, whether there is sufficient evidence available from the company and SBRP to make this determination will be interesting.

Lisa Morrissey

Partner

P: 02 8257 5721

Email Lisa