Striking the right balance

Key takeaways

In the recent decision of the Federal Court in Josa Constructions Pty Ltd (Administrators Appointed)and Equipment Hire Pty Ltd (Administrators Appointed) [2017] FCA 822, Johnson Winter & Slattery was successful in encouraging the Court to strike a balance between the legislative intention that an administration under Part 5.3A of the Corporations Act 2001 (Cth) (Act) be conducted with relative speed, and the overall objective of Part 5.3A to maximise the return for creditors and any return to shareholders.

The case

This case involved a group of related construction companies, which at the time of the appointment of voluntary administrators to Josa and Equipment Hire, were in the process of completing a contract with Penrith City Council to upgrade Penrith CBD’s drainage system. That contract was not due for completion until November 2017. The administrators advised the Court that the completion of the contract would result in an additional 40-50 cents in the dollar being available to the unsecured creditors of Josa. Interestingly, completion of the contract would not result in a direct benefit to the creditors of Equipment Hire, however as 62% of the unsecured creditors of Equipment Hire were also unsecured creditors of Josa, there was an indirect benefit to 62% of Equipment Hire’s unsecured creditors (and no identifiable detriment to Equipment Hire’s unsecured creditors).   

The convening period

The convening period for the second meeting of creditors was due to expire on 20 July 2017. The evidence before the Court when applying for an extension was that the administrators were in a position to convene the meeting of creditors and to provide to creditors the opinion required of them pursuant to s 439A(4)(b) of the Act – namely, whether the company ought to execute a deed of company arrangement (DOCA); be returned to the control of its directors; or be wound up. The administrators were of the opinion that without the requested extension to the convening period the companies ought to be wound up, and they estimated a nil return to unsecured creditors. Therefore the extension was in the best interests of the creditors and aligned with the objectives of Part 5.3A of the Act.

In granting the requested extension to the convening period by 3.5 months to 3 November 2017, the Court noted that the administrators:

• had advised unsecured creditors of Josa and Equipment Hire of the matters set out above and of their intended application to extend the convening period (and no creditor had objected or sought to be heard);
• had taken satisfactory steps to form the view that Josa, Equipment Hire and other (solvent) companies in the group could perform the Penrith contract;
• held the view that the prospect of completion of the Penrith contract was more likely to encourage a DOCA proposal to be made, as the in-flow of funds under the contract would reduce the size of the funding required under an acceptable DOCA; and
• had taken steps to satisfy themselves that there were minimal risks to Josa and Equipment Hire involved in completion of the Penrith contract.

In order to obtain maximum flexibility, the administrators sought (and the Court granted) a Daisytekorder*, allowing the administrators to convene the second meeting of creditors prior to the expiration of the convening period on 3 November 2017, if the contract is completed and payments received earlier than expected.

* In the matter of Daisytek Australia Pty Limited [2003] FCA 575; 45 ACSR 446