In the matter of Systems Advisers Group Pty Ltd (administrators appointed) [2013] NSWSC 826

Judgment - EX TEMPORE 1By application filed on 6 June 2013, the Plaintiffs, Simon Cathro and Philip Campbell-Wilson as joint and several voluntary administrators ("Administrators") of Systems Advisers Group Pty Limited (admins apptd) ("Company") brought an application under s 447A of the Corporations Act 2001 (Cth) to modify the operation of s 443A of the Corporations Act in relation to the Company. The modification sought was to provide that monies advanced by way of a loan to the Company from Systems Advisers Holdings Limited ("SAH") under a Loan Agreement dated 17 May 2013 ("Loan Agreement") be treated as debts incurred by the Administrators in the performance and exercise of their functions and powers as administrators; that the Plaintiffs' liabilities be limited in the manner provided by the Loan Agreement, and the operation of s 443A(2) of the Act be modified accordingly; the operation of s 443A(1) of the Act be modified so that the Administrators would not be personally liable under s 443A(1)(d)-(f) or otherwise in connection with that loan other than in accordance with that Loan Agreement; and, if the Administrators' indemnity under s 443D of the Corporations Act was insufficient to meet the debt, the Administrators not be personally liable to repay that debt to the extent of that insufficiency. 2The Administrators also initially sought, but did not ultimately press, a further direction under s 447D of the Corporations Act that they were justified, and would otherwise be acting reasonably, in causing the Company to enter into the Loan Agreement. It seemed to me, as a matter of first impression, that that was a matter for the Administrators' commercial judgment and not properly the subject of such a direction. On 7 June 2013, I made orders modifying the operation of s 443A of the Act in the form sought by the Administrators. These are my reasons for making those orders. 3The relevant provisions of the Corporations Act 2001 (Cth) are as follows: "435A The object of [Part 5.3A] is to provide for the business, property and affairs of an insolvent company to be administered in a way that: (a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or (b) if it is not possible for the company or its business to continue in existence - results in a better return for the company's creditors and members than would result from an immediate winding up of the company. 443A(1) The administrator of a company under administration is liable for debts he or she incurs, in the performance or exercise or purported performance or exercise, of any of his or her functions and powers as administrator for: ... (d) the repayment of money borrowed; or (e) interest in respect of money borrowed; or (f) borrowing costs. 443A(2) Subsection (1) has effect despite any agreement to the contrary, but without prejudice to the administrator's rights against the company or anyone else. 443D The administrator of a company under administration is entitled to be indemnified out of the company's property (other than any PPSA retention of title property subject to a PPSA security interest that is perfected within the meaning of the Personal Property Securities Act (2009) for: (a) debts for which the administrator is liable under Subdivision A ..." 4Section 447A in turn provides that: "447A(1) The Court may make such order as it thinks appropriate about how this Part [5.3A] is to operate in relation to a particular company." That section confers upon the Court broad powers in the course of a company administration. Orders have frequently been made under this section in broadly the form now sought by the Administrators, so as to limit an administrator's personal liability under s 443A of the Corporations Act. For example, similar orders were also made in Re Spyglass Management Group Pty Ltd (admin apptd) [2004] FCA 1469; (2004) 51 ACSR 432. In Re Great Southern Infrastructure Pty Ltd [2009] WASC 161 at [13], Master Sanderson observed that: "The material consideration on such an application is whether the proposed arrangements are in the interests of the company's creditors and consistent with the objectives of Pt 5.3A of the Act. To put that proposition positively - the question is whether the court is satisfied the proposed arrangements are for the benefit of the company's creditors. To put it negatively - the question is whether the court is satisfied the company's creditors are not disadvantaged or prejudiced by the proposed arrangement. These principles have been confirmed in a large number of cases." 5In Mentha Re Griffin Coal Mining Company Pty Ltd (admins apptd) [2010] FCA 1469; (2010) 82 ACSR 142 at [30], Gilmour J summarised the relevant principles as follows: "The principles governing the granting of an application for orders under s447A to vary the liability of administrators under s443A can be summarised as follows: (a) 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; (b) typically the arrangements proposed are to enable the company's business to continue to trade for the benefit of the company's creditors; (c) 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; (d) notice has been given to those who may be affected by the order." 6This summary was in turn adopted by Gordon J in Secatore, Re Fletcher Jones and Staff Pty Ltd (admins apptd) [2011] FCA 1493 at [24]. In a similar situation to the present case, in Gould Bros & Co Pty Ltd (admins apptd) [2012] FCA 285, an order was made permitting administrators to accept a loan to allow the carrying of a company's business in a short term, on the basis that the administrators were not personally liable to repay that debt if their indemnity under s 443D was insufficient for them to do so, and allowing the lender priority in accordance with ss 556 and 560. 7The Administrators' application is supported by an affidavit of Mr Cathro dated 5 June 2013. By way of background, the Company carried on the business of information technology consulting and the development and sales of software solutions since March 2011. Mr Cathro was approached about 15 May 2013 by the Company's directors concerning its financial position and the prospect of appointing administrators and the Administrators were appointed as joint and several voluntary administrators of the Company on 17 May 2013. Mr Cathro's evidence is that, based on his discussions with the Company's directors and his investigations to date, the Company has debt of approximately $3.5 million to creditors and also owes $150,000 in respect of employee entitlements and has few realisable assets and limited trade creditors. The Company's largest creditor is the Australian Tax Office with a claim of $1,560,000. The Administrators are investing a claim by another creditor in the amount of $1,508,164. 8Mr Cathro expresses the view that it appears the Company is insolvent and a liquidation would result in a nil return to creditors. Mr Cathro has been advised that SAH will propose a Deed of Company Arrangement that would provide a return to unsecured creditors greater than the likely return if the Company was wound up in liquidation. Mr Cathro expresses the view that it is necessary for the Company to continue to trade to preserve its contracts and goodwill until such a Deed of Company Arrangement could be proposed and approved, and the Administrators propose to continue to operate the Company's business for that reason. The Administrators intend to convene a second meeting of creditors on 21 June 2013. 9On the date of their appointment, the Administrators entered into a Loan Agreement with the Company and a related company of the Company, SAH, which is intended to provide sufficient funding for the Administrators to continue to trade the business until a Deed of Company Arrangement can be entered into, if creditors so resolve. Mr Cathro's evidence is that, if the funding under the Loan Agreement is not available, trading the Company until 28 June 2013 would result in a deficit of approximately $164,000 whereas, with the funding provided under the Loan Agreement, a surplus of approximately $35,000 would remain after trading over that period. Mr Cathro's evidence is also that the Administrators would be required to cease trading immediately, if they do not have access to that funding. 10Mr Cathro's evidence is that the Administrators are not prepared to incur personal liability for repayment of funds lent under the Loan Agreement by drawing down the funds without the protection of the limitation to their personal liability under the terms of the Loan Agreement and by the orders sought. Clause 6.1, 6.3 and 6.5 of the Loan Agreement respectively provide that: "6.1 The Administrators will be liable to repay the Loan, and for any costs in connection with the loan: (a) only if and to the extent that the Administrators are indemnified for the same pursuant to section 443D of the Act and that indemnity is given priority as set out in sections 443E and 556(1)(c) of the Act; and (b) only to the extent of the indemnity and priority actually received by the Administrators in respect of the Loan; and (c) only if the Administrators obtain court orders pursuant to section 447A(1) of the Act modifying the operation of section 443A of the Act for the purpose of giving effect to this clause.... 6.3 Limitation on right to enforce payment (a) Except to the extent of the Administrator's liability set out in c[l]ause 6.1, SAH agrees that it is not entitled to repayment of the Loan. (b) SAH agrees not to make any demand or claim against the Administrators personally and irrevocably forbears from doing so. 6.5 Application under s447A(1) of the Act SAH hereby consent[s] to, and agrees to do nothing to prevent, the Administrators obtaining court orders pursuant to section 447A(1) of the Act modifying the operation of section 443A of the Act, or otherwise giving effect to the terms of this clause 6." 11Mr Cathro expresses the view that the interests of the Company's creditors would be best served by the Administrators continuing to trade the Company until a Deed of Company Arrangement proposal could be put and that entry into such the Loan Agreement would be in the best interests of the Company's creditors, to avoid a liquidation resulting in no return to creditors. His evidence is that, in these circumstances: "The Administrators are of the view that the relief sought in the Application is in the best interests of the Company's creditors and consistent with s 435A of the Act because the funds made available under the Loan Agreement allows the Administrators to continue trading the Company until a Deed of Company Arrangement proposal can be put to creditors. Allowing the Company to trade for this limited period is in the best interests of all creditors of the Company. Without the relief sought the Administrators are not prepared to continue trading the Company." Mr Cathro also gives evidence that the creditors of the Company are not prejudiced or disadvantaged by the types of orders sought and stand to benefit from the relief sought, and nothing in the structure of the arrangements suggests any reason to doubt that evidence. 12Mr Assaf, who appears for the Administrators, submits, and I accept, that the relief sought by the Administrators is in the best interests of the Company's creditors to allow the Company access to working capital to allow it to trade and pay all of the Company's post-appointment liabilities to creditors in full until 28 June 2013 so as to preserve the opportunity for creditors to consider the proposed Deed of Company Arrangement as an alternative to placing the Company in liquidation, where the latter course will not provide a return to creditors. That relief therefore promotes the object of maximising the potential recoveries for the benefit of the creditors of the Company consistent with the objectives of Part 5.3A of the Corporations Act. 13The Administrators gave notice of the proposed application in a circular to known creditors of the Company on or about 20 May 2013 to all known creditors, and no opposition to that application was raised by any creditor at the meeting of creditors on 28 May 2013, nor have the Administrators received any correspondence or objection from creditors relating to the application. It seems to me that this was sufficient notice of the application to creditors given its urgency: Re Great Southern Infrastructure Pty Ltd above at [12]. Appropriately, the orders sought by the Administrators preserve creditors' ability to approach the Court on three days' notice and require the Administrators to provide a copy of any orders made to all creditors at the same time the Administrators provide notice to creditors convening a second meeting of creditors. Appropriately, Mr Cathro has also given notice to the Australian Securities and Investments Commission of the application. ASIC did not appear to oppose the application. 14For these reasons. I made orders modifying the operation of s 443A of the Act in the form sought by the Administrators.