Unverified adjournment application on eve of winding up application prompts personal costs order against appointees

The Supreme Court of New South Wales awarded a personal costs order against voluntary administrators appointed on the afternoon before the hearing of an application to wind up CII Group Pty Ltd (In Liquidation) ACN 106 253 310 (CII) for applying to adjourn the hearing pursuant to section 440A(2) of the Corporations Act 2001 (Cth) (Act). 

Justice Black’s decision is a cautionary tale for appointees that fail to adequately verify the merits of a voluntary administration prior to an imminent winding up application, that the standard for the Court to be satisfied to grant an adjournment sought under s 440A(2) of the Act requires a “sufficient possibility”, and not speculation, that creditors of the defendant-company would be advantaged by the company continuing under the administration.

In this article, we provide commentary on the judgment, In the matter of CII Group Pty Ltd (In Liquidation) ACN 106 253 310 [2025] NSWSC 318 per Black J.

Background

Dunmore Lang Colleges Limited (DLC) petitioned the Court on 16 August 2024 for CII to be wound up in insolvency on the basis of CII’s failure to comply with a statutory demand (Winding Up Application).

CII then on 13 September 2024 filed a notice of appearance in the proceeding on the basis that it could defend the Winding Up Application, because CII was solvent. CII did not contest the amount outstanding to DLC nor seek to set aside the statutory demand. 

Eleventh-hour appointment of voluntary administrators 

During this proceeding, CII asserted that it was solvent and filed voluminous expert evidence regarding its solvency, although CII later conceded that this evidence was based on unproved assumptions that were not capable of establishing its solvency.

On the afternoon before the hearing of the Winding Up Application scheduled on 26 March 2025 (Hearing), CII reversed its position as to its solvency by appointing Patrick Loi (Mr Loi) and John Chand as voluntary administrators of CII (Voluntary Administrators) on the basis that CII was insolvent or likely to become insolvent.

The Voluntary Administrators applied pursuant to section 440A(2) of the Act for an adjournment of the Hearing, to shortly after the time that the Voluntary Administrators’ report to creditors of CII would be issued for the second meeting of creditors, on the basis that it was in the interests of creditors for CII to continue under voluntary administration rather than to be wound up (s 440A(2) Application).

Limited scope of appointees’ inquiries prior to the winding up application

Mr Loi gave evidence that preliminary discussions held with the sole director of CII, Iwan Sunito (Mr Sunito), the day before the Hearing provided assurance that there were prospects of success of a Deed of Company Arrangement (DOCA) being funded. This evidence was given although Mr Loi had no knowledge of the truth of the facts underpinning that conclusion. For instance: 

• It was represented to Mr Loi that payments had been made towards a debt owed by CII to the ATO. This representation was not verified by Mr Loi.
• Mr Sunito proposed a DOCA, pursuant to which contributions totalling $1.4 million would be paid by the end of April 2025 and the balance would be paid within four months of the execution of the DOCA. No assessment was made of the ability of Mr Sunito, or a related entity, to pay those contributions.
• A payment of $100,000.00 (Payment) had been made to Mr Sunito’s solicitors’ trust account on 25 March 2025 to demonstrate that CII had capacity to move forward, even where it was not currently trading. Again, no assessment was otherwise made of the ability of Mr Sunito, or a related entity, to pay the DOCA contributions.
• Excel spreadsheets were provided representing assets, which could be used as security for advances of the contributions under a DOCA, that had not been verified. 

As the Voluntary Administrators were appointed on the afternoon before the Hearing, their staff did not have the opportunity to advance the voluntary administration of CII, conduct investigations into its financial affairs or to determine the viability of the proposed DOCA contributions. Despite the inability for the Voluntary Administrators to carry out such investigations, they submitted that given the appointment occurred the day before the Hearing, the late timing of the s 440A(2) Application was not a reason alone to dismiss the s 440A(2) Application.

DLC opposed this application and tendered minimal evidence in the form of two letters of demand dated 9 April 2024 and 17 April 2024 to demonstrate the protracted duration in which its debt has been outstanding. DLC also sought a personal costs order against Mr Loi.

Section 440A(2) of the Corporations Act

Section 440A(2) of the Act is phrased in mandatory terms, such that the Court is required to adjourn the hearing of a winding up application, if it is in the interests of creditors for the company to continue under administration rather than to be wound up. This overarching question prompted consideration of the extent to which the recent appointees had undertaken investigations of CII’s affairs and the proposed DOCA and could adduce evidence substantiating their claim that creditors would be advantaged by CII continuing under the administration, such that the Court could determine that this advantage was a “sufficient possibility”.

Findings

Justice Black dismissed the s 440A(2) Application and ordered that CII be wound up in insolvency. 

The Court’s assessment of the Voluntary Administrators’ adjournment application

The Court considered the s 440A(2) Application with scepticism in circumstances where the appointment of the Voluntary Administrators involved a spontaneous reversal of CII’s position on its insolvency, the day before the Hearing, after having claimed to be solvent for a lengthy period and having on a previous occasion filed voluminous expert evidence on its solvency. 

Justice Black questioned the reliability of Mr Sunito’s statements in circumstances where he claimed that CII’s insolvency was the basis for the appointment of the Voluntary Administrators, while also claiming to have access to resources to fund a DOCA. Justice Black considered that the s 440A(2) Application had limited prospects of success without the Voluntary Administrators verifying the truth of the information provided to them. Justice Black held, pursuant to His Honour’s earlier decision in Re Australian Tailings Group Pty Ltd [2020] NSWSC 1543 [5] – [7], that the Court required a “sufficient possibility” and “not speculation” that creditors of the Company would be advantaged by the adjournment of the Hearing.

Justice Black considered that in circumstances where payments were made to the ATO in the previous year, rather than to DLC, a voluntary administration would not be in the interests of creditors generally, because that would negate the possibility of a preference in favour of one creditor over another. By contrast, a liquidator of CII could recoup the payments as a preference payment and then distribute those funds to creditors on a pro rata basis.

Additionally, Justice Black did not accept the Voluntary Administrators’ submission that the Payment was an assurance of the prospects of a DOCA being funded, and instead inferred that Mr Sunito had made certain funds available, sufficient to fund the Voluntary Administrators’ fees and disbursements, but that did not demonstrate that CII’s creditors would receive a return from the DOCA. 

Personal costs order against voluntary administrator

Justice Black found that there was a sufficient degree of unreasonable conduct in Mr Loi bringing the s 440A(2) Application at the last minute and awarded a personal costs order against him. His Honour found that Mr Loi should have recognised that he did not know the truth of the factual matters upon which he relied to assert that CII’s creditors would be better off in voluntary administration, and that the s 440A(2) Application would “almost inevitably” fail.

The Voluntary Administrators sought to oppose the personal costs order and made submissions that the s 440A(2) Application had not expended an extensive amount of the Court’s time, as Mr Loi merely filed a short supporting affidavit, Counsel had otherwise been briefed for the Hearing before the appointment of the Voluntary Administrators and because Mr Loi was not a party to this proceeding.

Justice Black considered that the Voluntary Administrators’ submission in relation to the personal costs order misapprehended the purpose of a personal costs order. In particular, the Court highlighted that this application was brought by the Voluntary Administrators and that it was not the Court’s time that was taken up by Mr Loi’s application, but the time of the DLC’s solicitors, who would have otherwise been able to proceed with the Hearing of the winding up application and that additional time would be charged to DLC.

Justice Black made orders that Mr Loi pay the costs of and incidental to the Application as agreed or assessed, in the interests of justice, where DLC would otherwise be left to recoup its costs from CII, which was insolvent or likely to become insolvent, and thus unlikely to satisfy a costs order.