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 critical of the evidence relied on to support the proposed DOCA, particularly the administrator’s reference to a $100,000 payment received into the trust account of the director’s legal representatives. The administrator referred to confirmation that the funds were available to “meet obligations as voluntary administrator if required,” and submitted that this demonstrated the director’s capacity to fund the proposed DOCA, or at least provided some comfort in that regard. The court rejected that inference, finding that the payment did not support any real capacity to meet the proposed contributions.

Instead, the court viewed the payment as indicative of a broader and “disturbing characteristic” often seen in similar applications: namely, that deed proponents contribute funds likely to ensure payment of administrators’ fees and disbursements, but not in amounts sufficient to suggest any meaningful return to creditors. In this case, the court found no credible basis to conclude that creditors, including unsecured creditors, would receive a significant distribution under the DOCA. It ultimately determined that continuing the administration 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.