A recent decision handed down in the Supreme Court of New South Wales has shed some light on which creditors’ interests will be given greater weight when considering an adjournment of a winding up application.
Section 440A(2) of the Corporations Act 2001 (Cth) provides that the Court is to adjourn the hearing of an application for an order to wind up a company if the company is under administration and the Court is satisfied that it is in the best interests of the company’s creditors for the company to continue under administration rather than be wound up (Section 440A(2)).
The case of Mono Constructions Pty Limited ACN 107 404 679 v Cresco Opus Fund No 4 Pty Limited (Administrators Appointed) ACN 169 864 000  NSWSC 941 concerned a company (Cresco) which entered into a construction contract with a special purpose company (Mono) to develop properties that it had purchased for development. Cresco had also entered into subscription agreements with investors who contributed funds to the development. Mono however commenced action under the security of payment regime to recover debts owing to it by Cresco and commenced these proceedings to wind up Cresco.
A voluntary administrator was appointed for Cresco and a Deed of Company Arrangement (DOCA) was accordingly proposed, following which the voluntary administrator sought to adjourn the hearing of the winding up application until after the second meeting of the creditors in accordance with Section 440A(2).
While several creditors of Cresco (including the abovementioned investors and other creditors of Cresco that were related creditors) would vote in favour of the proposed DOCA, Mono opposed this request for adjournment and sought orders to wind up Cresco.
The Court was now required to consider whether “all creditors must be treated equally or whether all creditors are equal, but some are more equal than others.” Justice Rees stated that the onus was on the administrator to show that it is in the best interests of Cresco’s creditors that the administration continue, meaning that Cresco’s creditors would “get more by way of payment of their debts” through the administration than from liquidation.
In the end, the Court held that the “best interests of the creditors” in Section 440A(2) refers strictly to the interests in recovering what is owed to them as opposed to any other unrelated interests (such as “family, relationships or emotional attachment”). The Court accordingly gave less weight to the interests of the related party creditors, as it did not appear that they would receive any benefit under the proposed DOCA, and made an order in favour of Mono (the principal creditor) to wind up Cresco in insolvency.