NSW decision has practical lessons for voluntary administrators in winding up hearings

In the proceedings, Dunmore Lang Colleges Ltd were seeking to wind up CII Group Pty Ltd (CII). Despite CII delaying the progress of proceedings by asserting it was solvent, voluntary administrators were appointed the day before hearing for a winding up application on the basis that the company was insolvent or likely to become insolvent.

Shortly after their appointment, the voluntary administrators applied under section 440A of the Corporations Act 2001 (Cth) to adjourn the winding up hearing, arguing that the voluntary administration process could potentially deliver a better outcome for creditors than an immediate winding up of the company.

In an affidavit, one of the voluntary administrator stated that, in a conversation immediately prior to the appointment, CII’s sole director had claimed that there was a single creditor aside from the Australian Taxation Office (ATO), and that he intended to propose a deed of company arrangement (DOCA) involving contributions totalling A$1.4 million (approx. US$921,060) to settle the debt. Some of these contributions would be paid by the end of April 2025, and the rest within four months.

The court found that the timing of the voluntary administrators’ appointment – occurring just one day before the scheduled hearing – alongside the limited evidence relied on in the affidavit, demonstrated that the voluntary administrators did not have a meaningful opportunity to investigate CII’s financial affairs or verify the director’s claims.

The court was also critical of the evidence relied on in support of the proposed DOCA, including the voluntary administrator conflating a $100,000 payment received by the director’s legal representatives into the legal representative's trust account to be made available to "meet obligations as voluntary administrator if required”, with the director’s capacity to fund the proposed DOCA.

The court viewed the payment with scepticism and highlighted that payments by directors are often made not to demonstrate a genuine capacity to fund a deed for the benefit of creditors, but instead ensure that administrators’ fees and expenses are covered.

The court found that payment did not provide any real assurance that the director could meet the full financial commitments outlined in the proposed DOCA, describing it as a “disturbing characteristic” of similar adjournment applications where limited funds are made available to support the administration process itself, without any meaningful indication that creditors would receive a better return if the company was liquidated. It was determined that allowing the administration to continue would not be in the best interests of creditors.

In a significant move, one of the administrators was ordered to personally bear the costs of the unsuccessful application to adjourn the winding up application, with the court highlighting that the administrator should have recognised the application’s lack of merit and, given the lateness of the appointment, should have also refrained from proceeding with it.

The court was particularly critical that the administrator had no real knowledge of the truth of the factual basis of the application without verifying it, and found there was a degree of unreasonable conduct by the voluntary administrator in bringing the application – which the administrator was not bound to make, but would almost inevitably fail.

Practical takeaways for voluntary administrators 

This decision is a clear reminder that courts will closely scrutinise adjournment applications brought by voluntary administrators, particularly when they are made at the last minute and where there is a deficit of verified information supporting the adjournment application.

Administrators cannot proceed with adjournment applications unless they have a proper evidentiary foundation and a realistic understanding of the company’s financial affairs.

Importantly, the court made clear that the timing of an administrator’s appointment does not excuse a lack of due diligence or justify speculative applications on the part of the voluntary administrator. The personal costs order against the voluntary administrator highlights the professional risks involved in late voluntary administrator appointments and seeking adjournments without credible basis.

For insolvency practitioners, the case reinforces the need to carefully assess the merits of any proposed DOCAs provided in limited timeframes following an appointment and verifying the deed proponents’ ability to meet the contemplated DOCA contributions, before expressing a view that an adjournment of a winding up application is in the interests of creditors.

Courts may be more reluctant to grant an adjournment of a winding up hearing when a voluntary administrator has not had a sufficient opportunity to consider a company’s financial affairs and where the appointment is proximate to a winding up hearing. This is another factor that voluntary administrators ought to take into account when accepting appointments involving winding up applications which are already ‘on foot’ at the time of their appointment, and when considering if an adverse costs indemnity may be necessary on those appointments to insulate voluntary administrators if adjournment of winding up hearings are unsuccessful.

Co-written by Robert Merrillees-Larsen of Pinsent Masons.