Asset Sales Prior to the First Meeting of Creditors: The Benefits of an Early Restructure

Introduction

In a recent case, the early restructuring was proven as a useful tool for practitioners in circumstances where there is value in moving quickly to affect the restructure prior to the first meeting of creditors.

Case Analysis: Re Richstone Plumbing Pty Ltd (Administrators Appointed) [2023] VSC 112

Facts

Richstone Group was a large plumbing contractor, who, due to matters including the economic conditions of the construction industry, earlier this year sought to implement a restructure to continue trading.

Administrators were appointed in March 2023 to the seven companies in the Richstone Group. As at the date of their appointment, the Richstone Group had 150 employees and owed significant debt to the ATO, secured creditors, and multiple leases / purchases on finance of motor vehicles, plant, machinery and equipment.

Shortly after their appointment, an offer was put to the administrators for their consideration which proposed a sale before the first meeting of creditors. The offer involved a purchase of all of the Richstone Group’s trade debtors, work in progress, material contracts, plant and equipment, motor vehicles, stock, intellectual property, goodwill and business records. The purchase price included assumption of liabilities and an additional cash payment.

On 10 March 2023, the administrators executed a series of asset sale agreements, each of which had a precondition that the Court grant the judicial directions sought by the administrators. The Supreme Court granted the directions sought the same day.

 

Decision

The administrators sought directions pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations) that they were justified and otherwise acting reasonably in disposing of the Group’s assets in accordance with the sale transaction.

The Court noted that the only alternative available to the administrators, in circumstances where they are without sufficient funds to continue to trade the business, is to immediately cease trading and terminate the employment of Richstone Group’s 150 employees. They stated that the potential loss of employment was an important consideration in support of providing the direction sought.

The Court granted the directions sought and held that the sale was consistent with the interests of creditors as a whole and the objectives of s 435A of the Corporations Act 2001 (Cth) (Corporations Act).

The administrators also sought orders limited their personal liability under Pt 5.3A of the Corporations Act. The Court agreed that these orders were appropriate, stating that while the asset sale agreement was “clearly in the best interests of the creditors,” the Court confirmed that the administrators shouldn’t be exposed to liability for debts outside their control.

 

Conclusion

This case has a number of key takeaways:

1. Where administrators seek judicial approval for a transaction that is likely to preserve employment, it is more likely to be met with the Court’s approval.

1. The situations in which the Court will limit an administrators’ liability under Pt 5.3A of the Corporations Act are not restricted to circumstances where the administrators are themselves seeking to trade the company’s business.
2. The judgment stands as useful guidance to the circumstances where the Courts may support an asset sale by administrators which is subject to time imperatives.

 

*This article was prepared with the assistance of Annabel Randall