By Jacob Reardon a Solicitor of Matthews Folbigg, in our Insolvency, Restructuring and Debt Recovery Group.
Section 447A of the Corporations Act 2001 (Cth) (“the Act”) enables the Court to make such orders as it thinks appropriate as to the operation of Part 5.3A of the Act. Since its introduction, the Courts have adopted an expansive construction of the provision and have liberally applied the power in a variety of contexts. Accordingly, the provision has become something of a panacea for multiple ills in the context of voluntary administration and has been used in various instances among others to:
- Validate defective appointments;
- Extend the statutory convening period;
- Terminate administrations and deeds of company arrangements; and
- Amend notice requirements under the Act.
Personal liability of administrators
Under section 443A of the Act, a voluntary administrator is personally liable for any debts or liabilities which are incurred in the performance of the administrator’s statutory functions. The personal liability of the administrator affords protection to those creditors or suppliers who continue to deal with the company in administration post-appointment.
While an administrator holds a statutory right to be indemnified against the assets of the administration pursuant to section 443D of the Act, instances arise where the assets of the administration are insufficient to cover liabilities incurred by the administrator. In such circumstances, an administrator would be obliged to meet the shortfall personally.
In certain circumstances, however, administrators can seek orders from the Court pursuant to section 447A of the Act to limit their liability in respect of certain transactions or agreements, even before entering into them.
Hill, in the matter of Ovato Limited (Administrators Appointed) [2022] FCA 903 (“Ovato”) concerned a large group comprising some 59 companies which were all placed into administration. The administrators were optimistic as to the potential of sale of the group’s business and had formed the view that a going concern sale would maximise the prospects of a successful sale. Any such sale was expected to generate greater returns to creditors than if the companies were simply wound up.
However, at the time of the administrators’ appointment the group had very limited reserves of cash. This restricted the administrators’ willingness to continue to trade, given their personal exposure to any shortfalls. To this end, the administrators entered into negotiations with the group’s pre-appointment secured creditor to extend a further line of credit for working capital purposes. Although the specific amount was not identified the additional credit was said to be a considerable sum and the Court noted that the administrators were understandably not prepared to be personally liable to repay the facility, should the assets in the group prove to be insufficient.
Judgment
The Court ultimately granted the relief sought and limited the administrators’ liability to the secured creditor for the following reasons:
- The administrators’ professional opinion continuing to trade the group’s business was in the best interests of creditors;
- The fact that the additional funding would enable the continuation of the group’s businesses and maximise the prospects of a successful sale;
- The fact that a direction would offer the administrators a level of protection in respect of their decision to source funding whilst the sale of the business continued to be explored for the benefit of creditors;
- The limited nature of the relief from personal liability – this was only sought against the secured creditor (who had agreed to the administrators seeking such an order) and no other post-appointment creditors would be prejudiced by the granting of the relief.
At [22], Justice Stewart said that:
In the circumstances, I am satisfied that the principal relief that the administrators seek is justified as being in the best interests of creditors because it maximises the chances of the group, or its business, continuing in existence which will likely result in a better return to creditors.
Ovato is another example of where Courts have used the discretionary power under section 447A of the Act to limit the liability of Administrators. Like in other types of applications pursuant to section 447A the interests of the administration’s creditors and general objects of part 5.3A are the yardstick by which the Court will determine the appropriateness of the Orders sought.
Read the decision here.
If you would like more information or advice in relation to Insolvency, Restructuring or Debt Recovery law, please contact a Principal of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group:
Jeffrey Brown on (02) 9806 7446 or jeffreyb@matthewsfolbigg.com.au
Stephen Mullette on (02) 9806 7459 or stephenm@matthewsfolbigg.com.au
