Australia: Big trouble in small business restructuring

In brief

Creditors commonly find that their applications to wind up a company are suddenly deferred at the last minute by the appointment of a voluntary administrator.  Now, in the early days of the small business restructuring (Part 5.3B) process, the courts are already grappling with those circumstances in the context of that new regime. At the time of writing1, only four restructuring appointments under Part 5.3B have been notified to ASIC. Two of them have been the subject of court proceedings.

The resulting decisions reveal:

  • the approach to assessing satisfaction of the liability limit in the eligibility criteria may be that of performing a "just estimate";
  • the difficulty in challenging a restructuring process on any application to adjourn a winding up application;
  • a more favourable proposed restructuring plan than the anticipated outcome of a liquidation is likely sufficient to support an adjournment of winding up proceeding until after the voting process on a restructuring plan concludes.


Key Takeaways

Re Dessco Pty Ltd [2021] VSC 94 (26 February 2021)

Winding up proceedings were brought against Dessco Pty Ltd based on a failure to comply with a statutMaory demand.  On 15 February 2021 a restructuring practitioner was appointed to the company.  On the same day, the company made an application to adjourn the winding up application.

  • The judicial registrar in the Supreme Court of Victoria rejected an argument that the company did not satisfy the eligibility requirements for the appointment, the applicant creditor having said that the liabilities of the company, including contingent claims, exceeded $1 million.

The assessment of the amount of a contingent claim performed by the restructuring practitioner was accepted by the court.  This was performed on a "just estimate" basis.  The court considered this was the appropriate test for determining the liabilities and satisfaction of the eligibility criteria, adopting it by analogy to the test for a liquidator adjudicating on a proof of debt.

It was said that it was appropriate for regard to be had to relevant accounting standards when assessing contingent claims.

The process under the legislation for challenging an assessment of a creditor's claim was considered the more appropriate way to determining disputes over the quantum of liabilities of the company, then in the course of an application to adjourn the winding up.

  • It was accepted that the test for an adjournment - being satisfied that it is in the interests of creditors for the restructuring appointment to continue - was analogous the similarly worded test for adjourning a winding up application in the face of a voluntary administration.

A draft restructuring plan had been prepared, but at the time of the application had not been sent to creditors more generally.  The evidence of no return to creditors in a liquidation, as opposed to 5 cents in the dollar to be proposed in the restructuring plan, satisfied the requirement of it being in the creditors' interests to adjourn.

An adjournment has been granted until shortly after the creditors vote on the restructuring plan.

Re DST Project Management and Construction Pty Ltd [2021] VSC 108 (9 March 2021)

Similarly, winding up proceedings were filed on 2 February 2021 against DST Project Management and Construction Pty Ltd based on a statutory demand.  On that same day, a restructuring practitioner was appointed to the company.

Prior to the hearing before the Supreme Court of Victoria, a restructuring plan had been put to creditors.  The judgment indicates that a report to creditors had been sent out as part of the pack putting the restructuring plan.  The report appears to have covered various issues not strictly required by the requirements of the new regime, including a comparison with the outcome of a liquidation.

Whilst voting had not concluded, creditors holding 85.26% of the value of the identified debt had voted for the plan.  The independence of these creditors from the company was challenged, albeit it was acknowledged they were eligible to vote.

As in the Dessco decision, the judicial registrar accepted the test for adjourning the winding up application was analogous to that applying under part 5.3A of the Corporations Act 2001 (Cth).  The court noted there is a lesser standard of investigation required for a restructuring when compared with that for a voluntary administration.  That being the case, and with the benefit of evidence to suggest the return to creditors would be better under the plan, it was acknowledged the test for an adjournment might be more easily satisfied in a restructuring than in an administration.  The court did reach a conclusion on that point.

Accepting what amounted to a recommendation by the restructuring practitioner in his report, the judicial registrar was not prepared to decide the merits of the challenges to independence in the context of the application for an adjournment.  It was said these points could be addressed in a direct application to challenge the plan in due course, if such an application was made.

An adjournment was also granted until shortly after the conclusion of the vote in respect of the plan.

1 12 March 2021

Contact Information
Ian Innes
Partner at BakerMcKenzie
Peter Lucarelli
Partner at BakerMcKenzie

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