Limiting liability

What can an administrator do?

When voluntary administrations occur it’s not uncommon for administrators to obtain funding for the purpose of paying costs (operating costs, employees’ wages, etc) associated with ensuring the company in administration is able to continue trading.

Usually a loan agreement will be executed by the administrator(s) with the funder(s). Conditions are sometimes included in the loan agreement that limit the administrator’s liability, and they also have other options with respect to limiting liability and obtaining a right of indemnity. Before discussing those, let’s first look at the relevant legislation.

Provisions of the Corporations Act 2001 (Cth)

The administrator has personal liability imposed on them by Division 9 of Part 5.3A of the Corporations Act 2001 (Cth) (the Act) – sections 443A and 443B in particular.

The administrator is liable for the debts they incur in the performance or exercise of any of their functions and powers. This includes debts for services rendered, goods bought, property hired, leased, used or occupied and for the repayment of monies borrowed, interest and borrowing costs.

An administrator cannot contract out of liability for monies loaned in the course of an administration. The provisions of the Act will apply despite any loan arrangement entered into.

An administrator will therefore be restricted in their ability to perform any of their functions unless they’re able to apply to the Court to modify the provisions of Part 5.3A of the Act.

Applying to limit liability under the Act  

Pursuant to sections 447A and 447D of the Act, an administrator can apply to the Court to modify the effect of sections 443A (2). If successful, an administrator’s liability under section 443A (1) can be limited to the company’s available assets, out of which the administrator is entitled to be indemnified pursuant to section 443D.

Section 443F of the Act provides the administrator with a lien over the company’s assets to secure the indemnity under section 443D. In Mentha, Re Spyglass Management Group Pty Ltd (administrators appointed) [2004] FCA 1469 at [30], the Court summarised the principles governing the granting of an application under section 447A. It held that in order for an applicant to be successful they must show that:

 

  • The proposed arrangements are in the interests of the company’s creditors and consistent with the objectives of Part 5.3A of the Corporations Act
  • Typically the arrangements proposed are to enable the company’s business to continue to trade for the benefit of the company’s creditors.
  • The creditors of the company are not prejudiced or disadvantaged by the types of orders sought and stand to benefit from the administrators entering into the arrangement.
  • Notice has been given to those who may be affected by the order.

 

In Re Saker as joint and several voluntary administrators of Conquest Crop Protection Pty Ltd (administrators appointed) and Farmworks Merchandise Services Pty Ltd (administrators appointed) [2012] WASC 473, the administrators entered into a loan arrangement with two companies on a limited-recourse basis to enable the two companies in administration to continue to trade.

The loan was limited to the assets available to the companies. The loan arrangement contained conditions to allow the administrators to modify the effect of section 443A (2) in accordance with the process described above.

The Court held that, “To the extent this alteration is affected by the loan agreement, s 443A(2) of the [Corporations] Act would also have to be altered to permit ‘contracting out’ of the full extent of liability which would be imposed by s 443A of the Act.”

It was accepted by the Court that to “exclude an agreement from the operation of [s443A (2) was] an alteration of the operation of that subsection which s 447A of the Act permits”. Matters that were considered by the Master in making his order were:

  • The lender under the loan arrangement had consented to the administrators making the application to the Court;
  • The administrators were in their early stages and had not yet formed a final view as to the appropriate outcome for the companies;
  • The loan would be used for the purpose of paying operating costs and employees’ wages;
  • The loan would enable the companies to continue to trade;
  • The affairs of the companies in the meantime could be properly examined by the administrators;
  • The creditors’ interests were not affected in the matter at hand and if anything, they stood to benefit if the loan arrangement went ahead; See Mentha, Re Spyglass Management Group Pty Ltd (administrators appointed) [2004] FCA 1469.

As the lender had consented to the arrangement, there was really no reason for the Court not to make the order to modify the operation of section 443A (2).

Where limiting liability might not be appropriate

Re Cook Cove Pty Ltd (administrators appointed) [2009] NSWSC 620 was a case that involved the administrators entering into various post-appointment construction-related contracts.

Orders were made to limit the administrators’ potentially significant personal liability under the post-appointment contracts, to the extent that they were able to be satisfied out of the property of the company. Austin J, at [37] said:

“One can envisage cases in which it would not be appropriate to make an order limiting the normal liability of an administrator under Pt 5.3A for post-appointment debts: for example, where the administrator proposes to enter into many business transactions in the course of carrying on the company’s business, contracting with suppliers and service providers for relatively small amounts in circumstances where those with whom the administrator contracts would not be aware of the court’s order and would be entitled to assume that the normal liability provisions of Pt 5.3A were applicable.”

Loan arrangements can include an administrator’s entitlement to a right of indemnity

In Secatore, Re Fletcher Jones & Staff Pty Ltd [2011] FCA 1493 Gordon J considered the consequences of an administrator obtaining indemnity under a funding deed which fell within the provisions of s 443A. It was held that:

 

  • The administrators will have a right of indemnity in respect of those liabilities out of the Company’s property (s 443D(a)) secured by a lien on the Company’s property (s 443F(1));
  • In a non-liquidation situation, that right of indemnity will take priority over all other unsecured debts (s 443E(1)(a));
  • In a liquidation scenario, that right of indemnity will rank higher than unsecured debts (s 556(1)(c)); and
  • In a deed of company arrangement scenario, that right of indemnity is likely to rank higher than unsecured debts under the provisions prescribed by s 444A(5) by virtue of the incorporation of s 556 (except if the deed otherwise provides): Re Ansett Australia (No 1) at [27].”

 

 

For more information, please contact:
Joe DeRuvo

Joe DeRuvo
Director
p.  +61 8 8124 1872
e.  Email me

This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this article, or what it means for you, your business or your clients' businesses, please feel free to contact us.

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