December 2006

Insolvency and administration: I lose, you pay - last minute adjournments of winding-up applications

It is not unusual for an administrator to be appointed to an insolvent company a few days, or even hours before the final hearing in proceedings to wind-up the company. The often sceptical and frustrated applicant creditor (and any supporting creditors) must then decide whether to seek to press on and contest the inevitable adjournment application which will be made by the company in administration, or consent to the adjournment.

One factor which weighs heavily in the mind of hostile creditors is the costs of the contested adjournment application. The general rule in litigation in most courts is that the loser pays the winner's costs. The risk of not only incurring costs which the insolvent company is unable to reimburse but also of having to pay the insolvent company's costs if the creditor loses the application, has been a significant disincentive to opposition.

Creditors have recently been given comfort by the Supreme Court of NSW that reasonable refusal to concede an adjournment will not be penalised by an adverse costs order even if the adjournment is nonetheless granted. Indeed, Justice Austin in Bridgecorp Finance Limited v Sterling Estates Development Corporation Pty Limited determined that it was the company in administration that should pay the unsuccessful creditor's costs.

The facts of the case:

  • Bridgecorp had been substituted as the plaintiff in the winding-up proceedings;

  • The proceedings were listed for hearing on Tuesday 31 January 2006 after several adjournments;

  • On Monday 30 January 2006 voluntary administrators were appointed to Sterling;

  • On Tuesday 31 January 2006 Bridgecorp sought to proceed on its application to wind up Sterling and the administrators sought to adjourn the proceedings to allow time to consider the potential for a workable deed of company arrangement;

  • The adjournment application was heard before his Honour Justice Campbell on Wednesday 1 February 2006 and the adjournment was granted with costs reserved;

  • A deed of company arrangement was subsequently entered into by Sterling;

  • The administrators consented to an order for the payment by Sterling of Bridgecorp's costs of the winding-up proceedings generally, but did not consent to an order that Sterling pay Bridgecorp's costs of opposing the successful adjournment application.

The judgment

His Honour noted that the decision of Justice Campbell showed that the evidence presented to the court by the administrators was thin and incomplete. The administrators had only been appointed the day before the hearing of the winding-up application despite the prospect of voluntary administration having been raised by Sterling from time to time for some months. Additionally, the position of the administrators for a number of weeks after the adjournment was to oppose the deed of company arrangement proposal being put to creditors because many of its features were uncertain.

His Honour held that the critical question to be determined was whether it was reasonable for Bridgecorp to have opposed the adjournment application in all the circumstances ? not whether Bridgecorp's scepticism of the proposed deed was vindicated by later events.

In seeking the adjournment the administrators were asking for the court's indulgence and had the burden of satisfying the court that it was in the creditor's interests for the company to continue under administration. At the time of the adjournment application the deed proposal was embryonic and, if it had been ultimately rejected by the creditors, the court would in all probability have made an order for costs in favour of Bridgecorp. There was no reason to treat Bridgecorp differently merely because after considerable development and modification the deed was ultimately accepted.

His Honour's view was that the appropriate position was for there to be an order for costs in favour of Bridgecorp, which should include the adjournment application, despite the dismissal of the winding-up proceedings.

Implications of this decision

This decision will encourage material creditors of an insolvent company with little prospect of resuscitation to resist postponement of the inevitable in favour of expensive delays whilst the administration process runs it course. Such delays often serve to merely reduce the assets available to creditors and to put back, sometimes by many months, the commencement of the relation-back period.

It may also provide the courts with the opportunity to scrutinise and identify unfair and inadequate deed proposals at the outset rather than at the conclusion of a long and costly voluntary administration.