The Supreme Court of Victoria has considered the viability of allowing a company to enter a second voluntary administration after going into liquidation following a failed DOCA. The Court considered that rather than maintain a state of liquidation, the secondary voluntary administration process would better serve the best interests of creditors and optimise the efficiency of the restructuring process. The decision serves as a useful guide to the considerations and orders appropriate for successfully arguing a company out of liquidation.
Merchant Overseas Logistics Pty Ltd (the Company) was in the business of shipping and transport, initially focusing on international freight forwarding from its inception in 4 May 2004. In 2009, the Company transitioned towards moving mineral concentrates from Western Australia through direct shipping as an attempt to capitalise on the ‘mining-boom’. By 2015, the mining industry began to decrease in profitability, adversely affecting the Company.
On 31 October 2017, the Company entered its first voluntary administration process. The Plaintiffs in this matter, Andrew Schwarz and Jon Howarth, were appointed as administrators. At that time there were two secured creditors:
It was estimated that unsecured creditors would receive 15 cents to the dollar at this time.
On 6 March 2018, Dos Equis and NAB agreed to execute a deed of company arrangement (DOCA) whereby a Deed Fund of $1.55 million was to be established by 28 February 2020. This deadline was later extended to 28 August 2020.
However, the parties were unable to meet this deadline with Dos Equis failing to contribute the necessary funds by 28 August 2020.
By failing to meet the necessary deadlines, the Company automatically went into liquidation with the first DOCA being terminated. The Plaintiffs were appointed as liquidators.
The liquidation failed to progress between 28 August 2020 and July 2021. Primarily, the liquidators continued to be without funds and Dos Equis could not achieve any ‘material progress’ with realising the remaining property of the Company. It was submitted to the Court by the Plaintiffs, that if the liquidation were to continue, unsecured creditors would not receive a return.
On 28 September 2021, the Plaintiffs received a revised DOCA proposing a secondary term of voluntary administration. This DOCA revised the proposed value of the Deed Fund down to just $450,000, a reduction of $1.1 million. However, as part of this proposal, Dos Equis submitted that they would provide an upfront payment of $300,000. By virtue of this payment, it remained that unsecured creditors would likely receive approximately 15 cents to the dollar.
In allowing the return from liquidation to voluntary administration, the Court was primarily concerned with three matters:
The Plaintiffs required leave of the Court under both:
Ultimately, the Court granted leave for the Plaintiffs to be appointed as administrators giving due regard to the best interests of creditors. Central to this consideration was that the Plaintiffs had already gained extensive and ‘in-depth understanding of the Company’s affairs and the New DOCA Proposal, given substantial work undertaken in their previous roles as voluntary administrators and their current role as plaintiffs’ (paragraph 30). The Plaintiffs also submitted, with regard given by the Court, that their appointment would reduce costs and save time; factors in the best interests of the creditors.
As a second tier, the Plaintiffs attempted to sway the Court in favour of a secondary voluntary administration by offering time saving procedural changes. These requests included an application for Orders pursuant to s 447 of the Act, being the Court’s general power to make orders, that:
The Court was agreeable to the terms with the view that they facilitated the efficient administration of the Company. Consideration to the efficiency of the process was viewed as particularly important given the Company had been in liquidation for nearly five years.
Finally, to revert the Company back to a state of administration, it was required that the liquidation be stayed and terminated pursuant to s 482 of the Act. Primarily, the Plaintiffs successfully argued that if the New DOCA was to be effected, the Company may become solvent again. The Court noted that this would not be at the risk of the public or creditors with the interested parties having been notified and evidence that if leave was granted, the Company would not be used for active trading.
Ultimately, the Plaintiffs were successful in tendering evidence that the termination of the liquidation was in the creditors’ best interests and without argument for its continuation.
If the best interests of creditors would be most satisfied by the reversion from liquidation to a secondary voluntary administration, the Court may be favourable of Orders that facilitate that process.
If you found this insight article useful and you would like to subscribe to Gadens’ updates, click here.
Taylor Green, Solicitor