Restructuring proposal takes the bite out of winding up application

A recent case from the New South Wales Supreme Court has found that an application to adjourn a winding up application on the basis of the company being subject to a restructuring proposal can be successful even when the application is made on the day of hearing the winding up application.

Key takeaways

1. Section 453Q of the Corporations Act 2001 (Cth) (the Act) should be interpreted similarly to section 440A of the Act.
2. A Court will exercise caution when an application to adjourn a winding up application is brought on short notice or where the restructuring practitioner is appointed after the winding up proceeding has commenced, but delay is not, of itself, a determinative factor.
3. Creditors’ interests for the purpose of section 453Q are not limited to financial benefits under the proposed restructuring plan. The autonomy of creditors should also be considered.

Background

Approximately two weeks after a proceeding to wind up Redback Engineering & Sales Pty Ltd (Redback) was commenced, Redback appointed a restructuring practitioner.

The restructuring practitioner provided the directors of Redback with a restructuring proposal, five days prior to the first hearing of the winding up application.  At that first hearing, Redback applied for an adjournment of the hearing under section 453Q of the Act.

Section 453Q of the Act provides:

The Court is to adjourn the hearing of an application for an order to wind up a company if the company is under restructuring and the Court is satisfied that it is in the interest of the company’s creditors for the company to continue under restructuring rather than be wound up.

Section 453Q requires the Court to adjourn the hearing if the matters contained in the section can be satisfied.[1]  The obligation was on Redback to show that it is in the interest of creditors for Redback to continue under restructuring rather than be wound up.

The evidence before the Court included:

1. a well-advanced restructuring proposal;
2. limited assets would be available in a winding up;
3. the anticipated return to creditors under the restructuring proposal would be 16.8 cents in the dollar;
4. the restructuring practitioner’s fees would be $9,000, whereas the estimated fees for a liquidation would be between $73,800 and $129,600;
5. the investigations performed by the restructuring practitioner;
6. confirmation from the restructuring practitioner that reasonable enquiries and steps had been taken to verify Redback’s business, property, affairs and financial circumstances;
7. steps taken by Redback to ensure its eligibility for restructuring, including certain payments made to key suppliers with the restructuring practitioner’s consent; and
8. that a related company had obtained approval to borrow $80,000 to be paid to creditors of Redback subject to the restructuring plan being accepted.

Relevant factors

The Court noted that section 453Q of the Act should be interpreted similarly to section 440A, which addresses the equivalent scenario when a company is under voluntary administration.  As noted above, the Court:

1. indicated that a degree of caution will be exercised when considering an application to adjourn a winding up that is brought relatively late; and
2. noted that whilst the satisfaction of section 453Q is said to be closely related to the financial benefit that is to come from the restructuring proposal, consideration of that issue also includes the autonomy of creditors.

In respect of (2) above, the Court noted that for the purposes of section 453Q, the autonomy of creditors ought to be respected by providing them with the opportunity to consider and determine for themselves whether to approve the well-advanced restructuring proposal.  Declining an order for an adjournment would take that decision out of the creditors’ hands, at the behest of a single creditor.  That creditor, in this instance, was a substantial but not the largest creditor of Redback.

Additional issues considered by the Court were:

1. the restructuring practitioner’s analysis of Redback, which indicated that a restructuring would be of greater benefit to creditors than liquidation;
2. potential liquidation recoveries may be frustrated if no funding for such recoveries is provided, which was likely given the size of individual creditor claims when compared to such funding costs;
3. by contrast to previous cases , the restructuring proposal was well-advanced and was accompanied by a certification that the necessary enquiries had been made as well as a view as to the benefits of the proposal; and
4. the proposed adjournment was short, such that it would not deprive the Plaintiff of the ability to proceed with its winding up application if the restructuring proposal was rejected by creditors of Redback.

Decision

Having regard to the relevant factors, the Court was satisfied that it was in the interests of the creditors of Redback for the restructuring to continue.  The winding up application was adjourned for a period of 10 days after the deadline for the creditors of Redback to vote on the restructuring proposal.

---

[1] Re Fitzgerald Housing Ltd (Restructuring Practitioner Apptd) [2023] NSWSC 1481.

This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.