Optimising voluntary administration: In the matter of Merchant Overseas Logistics Pty Ltd [2022] VSC 154 opens the door for expediated creditor returns through secondary voluntary administration.

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.

Background

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:

• the parent entity, Dos Equis Pty Ltd (Dos Equis), who loaned to the Company the value of $734,600; and
• the National Australia Bank Limited (NAB), who loaned the Company $1.07 million.

It was estimated that unsecured creditors would receive 15 cents to the dollar at this time.

The first DOCA

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.

The liquidation

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.

Teetering on the edge

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:

1. The appointment of the Plaintiffs as administrators for a second term;
2. The general operation of the secondary voluntary administration, including appropriate meetings and documentation; and,
3. The stay and termination of the liquidation.

Appointment of the administrators

The Plaintiffs required leave of the Court under both:

1. s 436B of the Corporations Act 2001 (Cth) (the Act), which requires the Court’s leave to be appointed as administrators; and,
2. s 448C of the Act, which requires leave to be appointed as administrators where the Plaintiffs are otherwise officers of the Company.

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.

General orders

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:

• there be no requirement for a first meeting of creditors;
• there be no requirement for Directors to assist the administrators in accordance with s 438B of the Act;
• meetings required under s 439A of the Act ay be convened and held at any time during the convening period;
• amended procedures for notices be followed, including email production;
• meetings may be held via telephone or audio-visual link; and,
• the administrators be able to accept as proof of debt in the administration any proof of debt submitted in the course of the liquidation without adjustment for interest.

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.

Termination of the liquidation

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.

Key takeaway

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.

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Authored by:
Taylor Green, Solicitor