Catch 22: Court allows share transfer by administrator without owner consent - Insolvency/Bankruptcy

This week's TGIF considers In the matter of Habibi Waverton (in liquidation) (administrator appointed) [2021] NSWSC 1443, a recent decision of the Supreme Court of NSW in which the Court opted to use its general powers to allow a voluntary administrator to transfer shares without the owner's consent to implement a DOCA.

Key Takeaways

Where an approved Deed of Company Arrangement (DOCA) proposal is conditional on a voluntary administrator taking steps only available to a deed administrator, the Court may use its general powers to make those steps available earlier in order to overcome 'sequencing problems'.
In doing so, the Court will consider whether the proposed course will ensure either the company's continued existence or a better return for creditors, and whether it involves any unfair prejudice to members of the company.
While a company shareholder may seek leave to intervene in such an application as an 'interested person', they should be mindful of costs consequences if their involvement causes unnecessary costs.

What happened?

A voluntary liquidator was appointed to arrange the sale of a company after its two shareholders ended their working relationship but were unable to agree who would buy the other's shares. A subsequent review of the company's finances revealed considerable tax debts, as well as debts to other creditors, and the company's liquidator was appointed administrator.

Both shareholders submitted DOCA proposals which would see them gain full ownership of the company. One of the proposals, ultimately recommended by the administrator and approved by creditors, was conditional on the other shareholder's shares being transferred for A$1. However, the administrator was not empowered to make the share transfer, as powers to do so were only available to the administrator of a DOCA after implementation.

As such, the administrator applied to the Court for:

an order under section 447A of the Corporations Act 2001 (Cth) (the Act), varying the operation of Part 5.3 of the Act such that section 444GA applied to a voluntary administrator (rather than an administrator of a DOCA only); and
leave under section 444GA to make the required share transfer without consent of the shareholder, to allow the administrator to implement a DOCA approved by creditors.

The decision

Rees J made the orders sought. With respect to section 444GA, it was noted that the parties had been unable to identify any previous instance of the section being used in the manner proposed. However, her Honour observed there was nothing in the provisions or explanatory materials to suggest the proposed course was not available.

Notwithstanding this, her Honour noted the Court must still be satisfied that there would be no unfair prejudice to the owner of the shares (at [52]-[53]):

"...Accepting that making an order in the terms sought will increase the administrator's ability to transfer a shareholder's asset without their consent, the expansion of the power is not as wide as suggested where the Court must otherwise be satisfied that the transfer will not unfairly prejudice the interests of members of the company.

"It seems to me that the touchstone must necessarily remain what the aims of section 444GA and Part 5.3A endeavour to achieve, which is to maximise the chances of a company either continuing in existence or, if that is not possible, ensuring the best return to creditors."

Having been satisfied that the administrator was acting to achieve those objectives, and that the DOCA proposal was not unreasonable in the circumstances, her Honour considered it appropriate to make the orders sought.

Rees J also concluded that it was appropriate that only the exiting shareholder, who had appeared in the application, pay the costs of the administrator. Her Honour observed that even if the application had not been opposed, the administrator would have been required to bring an application before the Court (and satisfy the Court that the exiting shareholder would not be unfairly prejudiced). As such, the exiting shareholder's involvement resulted in unnecessary complication, time and costs.

Comment

This decision serves as a helpful reminder to insolvency practitioners that the Court may be prepared to use its general powers to overcome 'sequencing problems'. In doing so, the Court will consider whether the proposed course will help to ensure the company's continued existence or a better return for creditors and, in any similar scenario, whether it involves any unfair prejudice to members of the company.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.