Expansion of the statutory moratorium for companies in administration to include an international arbitration: Naidenov, in the matter of Quoterite Pty Ltd (administrators appointed) [2023] FCA 1169

This proceeding was an application before Yates J of the Federal Court to, in effect, stay an international arbitration in Colorado because the respondent company to that arbitration was in voluntary administration in Australia.

Section 440D, located in Pt 5.3A of the Corporations Act (Cth), provides a moratorium against proceedings ‘in a court’ against a company in administration. The policy of the moratorium is to avoid disruption to and distraction of administrators from performing their functions and duties as administrators during the relatively short period available to them, and provide breathing space for the company, until the creditors make a decision about the company’s future. Its policy is also to avoid expenditure of an insolvent company’s limited resources in the defence of claims which, in the likely outcomes of an administration, will sooner or later be stayed.

Section 440D has been construed to not encompass arbitration (see Auburn Council v Austin Australia Pty Ltd (2004) 22 ACLC 766 and Lardken Pty Ltd v Lloyd Energy Systems Pty Ltd (2011) 285 ALR 207) and it is unlikely to apply to statutory adjudication also.

Section 447A(1) of the Corporations Act has been construed so as to permit modification of Part 5.3A within which s 440D is located. Brereton J, in the decision of In the matter of THO Services Ltd [2016] NSWSC 509 (THO), modified s 440D for the purpose of the THO proceeding so that it applied to an arbitration, on the basis that the policy that informs the existence of the moratorium suggested that it would be appropriate to apply it to that private arbitration (‘particularly of the scale and scope in question’). There, Brereton J also noted the presumably unintended discrepancies between the various statutory moratoria, some of which include ‘a court’ (ss 440D and 471B) and others that are broader and apply to an ‘action or other civil proceeding’ (ss 500(2) and 444E), and suggested this was ripe for reform.

In Naidenov, Yates J noted the hearing of the arbitration was imminent and it was a practical certainty that the company would not be represented given its lack of resources, which might result in a substantial award against it on an undefended basis in circumstances where the claims were strongly denied. Yates J, following Brereton J in THO, considered that this might well have the effect of giving one possible creditor a preferred position over others, which would be contrary to the policy of Pt 5.3A.

Yates J noted the prejudice would be the disruption of the arbitration hearing, but this would have occurred if there was a proceeding in a Court. Also, Yates J considered other factors balanced against the prejudice including (a) the stay would be short given the short period for administration, (b) the modification would permit the claimants in the arbitration to move for leave of the Court under s 440D to continue the arbitration, and (c) there would be liberty to apply. In those circumstances, Yates J made the modification order that s 440D applied to the relevant arbitration proceeding in Colorado.

The take-home message is that s 447A(1) Corporations Act is a powerful tool for administrators to enable expansion of the moratorium under s 440D to include arbitration proceedings. It is also likely to be useful for other non-court proceedings, such as statutory adjudications. In the latter context, even if an adjudication were permitted to occur, it would not be possible to enforce a statutory adjudication by obtaining a court order for a debt, unless leave were granted by a Court under s 440D (see Belmadar Constructions Pty Ltd v Environmental Solutions International Ltd [2005] VSC 24; 23 ACLC 337 and Modcol v National Buildplan Group [2013] NSWSC 380; 93 ACSR 598).

Andrew Downie

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