ADMINISTRATORS BEWARE – WINDING UP PROCEEDINGS IN PROGRESS

If a company goes into administration this does not necessarily mean that winding up proceedings will be put on hold whilst the creditors determine the fate of the company. If a Winding Up Application has already been filed into court prior to the company going into administration then under Section 440A(2) of the Corporations Law the court is only required to adjourn the hearing of the Winding Up Application if it is satisfied that it is in the interests of the company’s creditors for the company to continue under administration rather than be wound up. The practical effect of this is that an Administrator should carefully assess the position of a company prior to accepting the position of Administrator if there are winding up proceedings on foot. Although the appointment of an Administrator will usually have the effect of a petitioning creditor adjourning the winding up proceedings and waiting for the creditors to decide the fate of the company, this is not necessarily the case. If the petitioning creditor or a party seeking to be substituted as the creditor wants to force the issue then the court will be required to satisfy itself that the administration should proceed. This will have the effect of putting the onus on the company through the Administrator proving to the court that the company’s creditors will be in a better position for the administration to continue rather than liquidating the company. It will be up to the Administrator on behalf of the company to satisfy the court that the company is in a position to fulfil any proposed obligations under the scheme of administration and then demonstrate to the court how the creditors will be better off under the administration. To satisfy itself the court should critically examine all funding proposals being put by the company and the veracity of any future income the company might earn if its life is to be sustained. The likely legal costs involved in such an examination could be substantial and would need to be incurred by the Administrator. A prudent Administrator would ensure there is proper funding in these circumstances as the company might be put to proof to satisfy the court. In DCT v Yates Security Services Pty Ltd [Sup Ct of NSW–17 Nov 1997] (1998) 16 ACLC 448 one substantial issue was that if the administration proceeded rather than a Winding Up Order being made the relation-back day would be 4 November 1997 if a Liquidator were appointed rather than 21 February 1997. In those circumstances there was the prospect of creditors having received ‘unfair preferences’ from August 1996 to May 1997 being able to avoid the legal consequences of those preferences. Simon Della Marta simondm@gells.com.au

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