To the Brink and Back: In the matter of Merchant Overseas Logistics Pty Ltd [2022] VSC 154

In a recent Supreme Court of Victoria decision[1] in which we acted for the successful liquidators, the Court made various orders to enable the company to complete an ultra-efficient, streamlined second voluntary administration to expedite creditor consideration of a new DOCA proposal.

Key points

• Liquidators will be granted leave to appoint themselves as administrators where the proposed appointment serves the best interests of creditors (including minimisation of cost and duplication).
• Section 447A of the Corporations Act 2001 (Cth) (the Act) and section 90-15 of the Insolvency Practice Schedule (Corporations) 2016 (IPS) are highly useful tools for optimising the efficiency of the voluntary administration process and any related restructuring plan.
• Self-executing orders for termination of the liquidation can avoid the need for further court applications and thereby provide an integral component of an efficient corporate rescue plan.  

Background

On 31 October 2017, the liquidators were appointed as the voluntary administrators of Merchant Overseas Logistics Pty Ltd (in liquidation) (the Company).

The Company’s creditors resolved to execute a DOCA on 6 March 2018 (First DOCA). However, on 28 August 2020, the First DOCA was automatically terminated following the Deed Fund not being established by the required deadline. The Company went into liquidation and the deed administrators became the liquidators.

In late September 2021, following months of further investigations and negotiations, the liquidators received a proposal for a new DOCA (Second DOCA).

Orders sought

The orders sought by the liquidators to achieve a streamlined second administration included:

• Orders granting leave for the liquidators to be appointed as administrators of the Company and deed administrators of the Second DOCA;
• Orders under section 447A of the Act and section 90-15 of the IPS to facilitate greater efficiency of the administration and Second DOCA, including:
  • no requirement for a first meeting of creditors;
  • meetings may be convened and held at any time during the convening period and held electronically;
  • relieving the Company’s directors from the s 438B(2) obligation to provide a report about the Company’s business, property, affairs and financial circumstances;
  • confirmation that the liquidators were justified in not requiring or receiving a ‘Report as to Affairs’ or ‘Report on Company Activities and Property’ from any directors and not conducting investigations into (and reporting to creditors about) potential recovery actions; and
  • proofs of debt previously lodged in the liquidation be accepted as proofs of debt in the administration without adjustment for interest.
• Orders that the winding up be stayed from the time that the liquidators appointed themselves as administrators and terminating the winding up upon the Second DOCA’s full effectuation.

The Court’s decision

Orders sought pursuant to sections 436B(2)(g) and 448C(1) of the Act

Under section 436B, the liquidators could not appoint themselves without a creditors’ resolution or leave of the Court, and further, required the leave of the Court to seek or consent to being appointed administrators pursuant to section 448C, as the liquidators were officers of the Company.

The Court confirmed that the question for the Court was whether the liquidators were ‘an appropriate person to be an administrator’. This required consideration of any potential conflicts of interest, threats to independence or anything that was ‘offensive to commercial morality’ with respect to the proposed appointment. The Court accepted that the liquidators already had an in-depth understanding of the Company’s affairs and had undertaken substantial work in connection with the Company’s external administration.

The Court accepted the liquidators’ submissions that none of the Company’s creditors, nor ASIC, had opposed the relief sought, the appointment of other qualified persons would lead to duplication of work and additional costs, and there was no real or potential conflict of interest or lack of independence arising from the liquidators’ previous appointments or the proponent of the Second DOCA.

Given the above, the Court held that it would be in the creditors’ interests to grant leave pursuant to section 436B(2) of the Act.

Orders sought pursuant to section 447 of the Act and section 90-15 of the IPS

The liquidators sought orders under section 447A of the Act and section 90-15 of the IPS on the basis that such orders would facilitate a streamlined and ultra-efficient administration of the Company and were otherwise in creditors’ best interests by reason of the following matters:

• minimising unnecessary costs and superfluous administrative burden in circumstances where creditors were already aware of the Company’s affairs and circumstances; and
• given that the Company had been in external administration for five years and the liquidation being unfunded, creditors’ best interests were served by expediting consideration and implementation of the Second DOCA and dispensing with the various reports and investigations that otherwise would have been required.

Orders sought pursuant to section 482 of the Act

The Court noted that the stay and termination of the liquidation sought pursuant to section 482 of the Act is a matter of discretion and that the liquidators bore the onus of setting out why such a stay should be granted given key considerations such as the interests of creditors, the liquidators, contributories and the public, the Company’s solvency and any risk of the Company remaining insolvent after termination of the winding up.

The Court accepted the liquidators’ submission that any risk to future creditors and the public interest was sufficiently mitigated by the cumulative effect of the debt extinguishment provided by the Second DOCA’s effectuation and a written undertaking from the Company’s directors that it would not actively trade or incur any new debts in the event that the Second DOCA was effectuated. The Court also noted that all interested parties had been notified of the liquidators’ application and had not opposed the orders sought, no “manifestly delinquent” mismanagement of the Company had been identified, and due to the written undertaking not to actively trade, there was no prospect of a new group of creditors being unacceptably prejudiced. Further, because the requested orders formed part of a suite of orders intended to enable the consideration of the new DOCA proposal, the Court considered that the policy objectives underlying Part 5.3A of the Act were relevant public interest factors which weighed in favour of granting the relief sought.

The Merchant decision sets out a useful roadmap for restructuring practitioners seeking innovative and cost-effective measures for rescuing companies from liquidation. The decision illustrates the ongoing relevance and flexibility of voluntary administrations and DOCAs as tools for corporate restructuring and renewal, particularly given the broad application of section 447A of the Act and section 90-15 of the IPS.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).