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2 July 2014 Extending a convening period before it expires - relevant principles

By Marc Baddams, Senior Associate


In Brief

The administrator of a company under administration must convene a meeting of the company's creditors within the convening period set out in section 439A(5) of the Corporations Act 2001 (Cth) or as extended by the Court under section 439A(6). The courts have shown a willingness to extend the convening period provided there is good reason for such an extension and an appropriate balance is struck between a swift administration and the maximisation of a return to creditors and shareholders.


One recent example of a determination of an application to extend a convening period is the case of Kijurina (as Administrator), in the matter of IGEA Life Sciences Pty Ltd (Administrators Appointed) v IGEA Life Sciences Pty Ltd (Administrators Appointed) [2014] FCA 509. In that case, her Honour Farrell J confirmed that the principles relevant to an application to extend the convening period under section 439A(6) are those summarised in Silvia, in the matter of Austcorp Group Limited (Administrators Appointed) [2009] FCA 636 (Austcorp) at [18] by Lindgren J and in Re Riviera Group Pty Ltd (admins apptd) (recs and mgrs apptd) (2009) 72 ACSR 352 (Riviera) at [13] by Austin J. In that regard, Farrell J stated:

[18]         …Justice Austin identified a number of justifications for allowing an extension of time, including that the time is required to allow the sale of the business as a going concern and that an extension of time is likely to enhance the return for unsecured creditors.
 
[19]         In Austcorp, Lindgren J at [18] described the factors which must be balanced in deciding whether or not to make an order extending the convening period:

 ...the function of the court is to strike an appropriate balance between the legislature’s expectation that the administration will be a relatively swift and summary procedure, and the requirement that undue speed should not be allowed to prejudice sensible and constructive actions directed towards maximising the return for creditors and any return for shareholders

It is useful to refer back to the full decisions in both Austcorp and Riviera in considering the any application to extend a convening period pursuant to section 439A(6) of the Corporations Act.

Austcorp


In Austcorp, at [18], Lindgren J summarised the overlapping considerations affecting the exercise of the discretion whether to extend the convening period as follows (citations omitted):

  1. the Court should recognise the objective of speed of administration that was associated with the introduction of Part 5.3A by the Corporate Law Reform Act 1992 (Cth) as from 23 June 1993. The Court should also recognise the objectives stated in para 507 of the explanatory memorandum associated with the Bill for that Act, that it was expected that the power to extend the period would be exercised infrequently since it is an important objective of Part 5.3A that creditors be fully informed about the company’s position as early as possible and have an opportunity to vote on its future as soon as possible;
     
  2. the function of the Court is to strike an appropriate balance between the legislature’s expectation that the administration will be a relatively swift and summary procedure, and the requirement that undue speed should not be allowed to prejudice sensible and constructive actions directed towards maximising the return for creditors and any return for shareholders;
     
  3. the prospects of a better outcome for creditors through a longer period of administration may outweigh the general expectation of a prompt resolution of the administration;
     
  4. a particular consideration against the too ready grant of an extension is the fact that while the voluntary administration continues there is an embargo or moratorium on the enforcement of remedies by secured creditors, lessors and others;
     
  5. the application is to be assessed by reference to whether an extension is necessary to enable the administrators to prepare and provide the report and statements, and, in particular, to arrive at the opinion referred to in s 439A(4), in order to inform creditors adequately so that they will be in a position to decide whether to terminate the administration, execute a deed of company arrangement or place the company in liquidation;
     
  6. it is often desirable that any extension be accompanied by an order under s 447A, permitting the meeting to be held at any time during the convening period as extended.

Helpfully, Lindgren J also identified cases where extensions of five months to ten months had been granted and considered such extensions to be "lengthy extensions" (at [19]).

Riviera Group


In Riviera, at [13], Austin J grouped the reasons previously given by courts for an extension into the following broad categories (citations omitted):

  • the size and scope of the business;
  • substantial offshore activities;
  • large number of employees with complex entitlements;
  • complex corporate group structure and intercompany loans;
  • complex transactions entered into by the company (e.g. securities lending or derivatives transactions);
  • complex prospects of recovery proceedings;
  • lack of access to corporate financial records;
  • the time needed to execute an orderly process of disposal of assets;
  • the time needed for thorough assessment of a proposal for a deed of company arrangement;
  • where the extension will allow sale of the business as a going concern;
  • more generally, that additional time is likely to enhance the return for unsecured creditors.

Austin J also said, at [14]:
 
The cases show that where a substantial issue in any of these categories is established (and a fortiori, where the facts fit into more than one category), the court tends to grant an extension, and the extension tends to be for the time sought by the administrator provided that the evidentiary case has been properly prepared, there is no evidence of material prejudice to those affected by the moratorium imposed by an administration, and the court is satisfied that the administrator's estimate of time has a reasonable basis.

The upshot

 
If it becomes apparent to an administrator that an issue in one or more of those categories referred to by Austin J in Riviera will necessitate an extension of the convening period pursuant to section 439A(6), action should be taken quickly and during the period prescribed by section 439A(5) to seek an extension.
 
The preparation for such an application will invariably require a detailed affidavit setting out the information available at the time to the administrator about the company's affairs, the steps taken and to be taken by the administrator in the discharge of his or her obligations under 439A(4) and generally in advancing the objects of Part 5.3A of the Corporations Act. The affidavit should include details of any of those issues identified in Riviera, together with further details of any prejudice or benefit arising from the extension to, for example, employees, lessors, secured creditors, unsecured creditors and shareholders. The attitude of those parties to the extension should also be set out.  
 
With the proper evidence before the court, the relevant balancing exercise can be undertaken and an application for the extension of a convening period can be a relatively straightforward process.

For more information please contact:

Marc Baddams, Partner  |  Phone: +61 2 9233 5544  |  Email: mrb@swaab.com.au

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This article is not legal advice and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.

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