Administrators allowed to sell company assets despite unusual sale process

In Goyal, in the matter of Cape Technologies Pty Ltd (administrators appointed) [2021] FCA 1654, the Federal Court used its discretion to permit the sale of a business in somewhat unique circumstances. The justification was that the sale maximised the chances of the business continuing in existence and resulted in a better return to creditors than an immediate winding up of the company. Whilst that justification is consistent with the object of voluntary administrations as set out in section 435A of the Corporations Act 2001, the sale process remains unusual.

Background

Cape Technology Pty Ltd (the Company) was established to develop a new financial operating system for businesses. The Company’s assets included tangible assets (comprising of cash) and intangible assets (comprising of work-in-progress associated with the development of the financial operating system).

The directors appointed administrators on 18 October 2021 and these administrators subsequently conducted a valuation of the Company. The evidence was that in the absence of any sources of revenue or funding, the administrators had insufficient funds to meet the ongoing operational costs of the Company.  The administrators concluded that unless the business assets were sold, there would be no funds available for distribution to creditors, including employees, on a liquidation of the Company.

Sale of Business

Faced with these difficult circumstances, the administrators began conducting a sale process on a truncated timeline due to the Company’s poor financial situation. They began entering negotiations with two groups of directors and shareholders of the Company. One of these groups, BidCo made an offer that had to be signed before 12 noon on 1 November 2021. The other director had expressed interest, but facing time pressures, the administrators signed a head of agreement with BidCo to meet the deadline.

The first meeting of creditors was held on 4 November 2021 and At this meeting, the administrators informed the creditors inter alia:

  • given financial constraints, the administrators were not able to conduct a traditional sale process;
  • the directors and shareholders were given the opportunity to purchase the business of the Company;
  • a bid had been accepted;
  • they were being financially supported by the successful bidder while the sale process was underway;
  • a court application would be necessary because of the unique circumstances of the sale.

The administrators gave creditors, shareholders and directors notice of the application and the orders being sought.  There was no opposition.

Court’s Consideration

The decision notes that Section 90-15(3)(a) of the Insolvency Practice Schedule confers a broad power on the Court to make “an order determining any question arising in the external administration of the company”. The Court noted that the power in S90-15(3)(a) was “not appropriately exercised where the Court is being asked to do no more than sanction the making and implementation of a business or commercial decision in respect of which no particular legal issue is raised or in respect of which there is no potential to bring into question the propriety or reasonableness of the decision”.

The Court also noted that “courts have been prepared to sanction, by direction (such as now sought), an administrator’s exercise of that power where there is the potential for issues of “propriety or reasonableness” to be raised with respect to the making of the decision”.

The administrators application to the court was made because the administrators were concerned about the sale occurring in circumstances where:

  • they had not publicly advertised the assets for sale;
  • The period in which the assets had been offered for sale was limited;
  • BidCo was a company owned and controlled by two directors of the company;
  • The company’s creditors had not had the opportunity to vote on the sale; and
  • The sale was not proposed as part of a deed of company arrangement.

The administrators were concerned that the circumstances could raise issues about the reasonableness and proprietary of that sale, particularly when there were some matters in dispute with the other director who also bid for the assets.

In addressing the circumstances of the sale, the administrators submitted that:

  • due to the limited financial resources of the Company, there was financial ability for the Company to fund a traditional marketing campaign.
  • while they would have preferred to negotiate with arms-length purchasers, they decided it was better to sell to someone who would appreciate and understand the business;
  • they relied on section 435A of the Corporations Act which stated that an insolvent company’s affairs should be administered in a way that maximises the chances of the company continuing in existence.

 

The court agreed that, in the difficult circumstances, the administrators had taken justifiable and reasonable action to maximise the return to creditors and employees. The Court made orders approving the sale of business assets to BidCo; albeit being a related party.

Take outs

This case highlights a number of points, particulars for external administrators and their advisers:

  • the Court will not usually provide judicial advice or direction where an administrator is making or implementing a commercial decision;
  • the Court may exercise its discretion in appropriate circumstances, particularly where there is the potential for issues of “propriety or reasonableness” to be raised with respect to the making of the decision;
  • the onus will be on the administrator to prove that they have taken all reasonable and justified steps in conducting a sale or process in the circumstances.

The Court also made an order restricting access to certain of the material files as commercially confidential until completion of the sale to prevent prejudice.

by James Conomos Lawyers

Employer v Employee - Super Guarantee Charge

The recent decision of the Trustee For Virdis Family Trust t/a Rickard Heating Pty Ltd [2022] AATA 3 showcases the never-ending debate of who is an employee versus a contractor.  A business was forced to pay a superannuation guarantee charge after a worker was found to be an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992 (Cth) (the Act).

Factual Context

A cornerstone of the Superannuation Guarantee Scheme created under the Act, is that employers, who do not make superannuation contributions for the benefit of an employee (as defined by the Act) are liable to pay a Superannuation Guarantee Charge.  The charge is equal to super contributions that should have been paid.

On 5 November 2019, the employer lodged an objection to the Superannuation Guarantee Charge assessments made by the Commissioner of Taxation for each of the quarters from 1 October 2013 to 31 March 2018.  The charge concerned a sub-contractor named Mr Pirie, who was engaged to do jobs for employer but had not been paid super.

The decision required a determination about whether Mr Pirie was an ‘employee’.  This required a holistic analysis of Mr Pirie’s working relationship with the employer.

Section 12 of the Act defines the terms ‘employer’ and ‘employee’ in wider language than their ‘ordinary meaning’.  The apparent objective is to widen the class of people who are to be treated as employees for the purpose of the Act and for the purpose of making superannuation contributions to these people.

Was Mr Pirie an employee for the purposes of the Act?

Mr Pirie began his employment with the employer on 19 September 2011 and had a letter of engagement that identified him as a sub-contractor/casual plumber. The terms of his employment were the same as those set out in the Plumbing and Fire Sprinklers Award 2010 and applicable legislation.  The AAT Member pointed out that this was odd as awards generally only apply to employees.

There were a number of factors that pointed to Mr Pirie’s relationship being characterised as more of an employee than a contractor in that his letter of engagement clearly outlined obligations to his employer and how he must endeavour to promote and protect the interests of the employer.

In practice, Mr Pirie was told where he was required to work, how many hours he was required to work and if he was unable to work, he would notify the employer and another employee would do the work, he was unable to delegate jobs.  The employer also paid for any materials required for a job and Mr Pirie would often wear a T Shirt containing the name of the employer and for a while his van did have signs advertising the name of the employer.

The employer submitted that Mr Pirie advertised his services as being available to others who may seek his services.  While Mr Pirie acknowledged that he was free to, he rarely did as he was working full time hours for the employer.

When the AAT Member came to decide whether Mr Pirie worked under a contract that is wholly or principally for the labour of the employer, he held that Mr Pirie was an employee for purposes of the Act and therefore, the employer had to pay the superannuation charge.

This case is an important reminder about how tribunals and courts will always look to the conduct of parties rather than necessarily be constrained by the terms of a contract to characterise or determine the real working relationship.

 

by James Conomos Lawyers