Kogan, in the matter of Insitec Pty Ltd (Administrators Appointed) [2024] FCA 672

B. background 3 The background which I now set out is taken from the affidavits of Mr Barry Kogan, one of the administrators, made on 17 and 20 June 2024, which were read on the application. 4 The companies are part of a broader corporate group that has four business divisions and which designs, builds and maintains critical information technology infrastructure and communications systems. The third plaintiff is the ultimate parent company of the group. The second plaintiff is a direct subsidiary of the third plaintiff and the intermediate holding company of all other members of the group. The second plaintiff has approximately 72 employees and approximately 50 contractors. 5 The companies' creditors include: (1) a secured lender, Gemini, which is owed $25.3 million and which (through a security trustee arrangement) has security over the assets of the companies. The security trustee has not enforced its security interest in the administration; (2) trade and statutory creditors (including the Australian Taxation Office) which are owed approximately $11.3 million by the second plaintiff; (3) creditors described as being creditors in relation to earn-out arrangements from previous acquisitions which are owed approximately $4.2 million by the second plaintiff; (4) unsecured noteholders which are owed $7.8 million by the third plaintiff; and (5) employees with respect to leave entitlements of approximately $1.3 million. 6 In anticipation of their potential appointment as administrators of the companies, the administrators prepared a cash-flow forecast, which indicated that there would be a cash-flow deficit of more than $1 million within the first six weeks of an appointment of administrators if the companies were to continue trading on a "business as usual" basis (after accounting for administrators' fees and costs). 7 The administrators subsequently had discussions with Gemini, which culminated in the facility agreement. 8 Mr Kogan explained that the administrators did not have the opportunity to fully explore funding alternatives with other potential lenders however it is his belief, based upon his considerable experience as an insolvency practitioner, that it was most unlikely that alternative funding could have been obtained on better terms from anyone other than Gemini in an appropriate timeframe, in circumstances where Gemini was a secured creditor owed over $25 million and able to enforce its security within the "decision period" in accordance with section 441A of the Act. 9 Based on their initial review of the business and operations of the companies, the administrators formed the preliminary view that pursuing a sale or restructure of the companies (including the assets and the business carried on by them) is most likely to result in the best outcome for creditors of each of the companies and also most likely to result in the companies, or as much as possible of the business, continuing in existence. The administrators have also received a draft Deed of Company Arrangement term sheet from Gemini to facilitate the recapitalisation of the business, the continued employment of staff (including the honouring of all employee entitlements) and engagement of contractors, and a return to unsecured creditors. 10 The administrators consider that to pursue a sale of the business or recapitalisation of the companies, it is essential that the companies continue to trade on a "business as usual" basis. This is so as to avoid the termination of contracts by counterparties, the loss of customers and the resignation of employees, all of which would be destructive to the value of the companies. 11 As noted earlier, the facility agreement was entered into on 4 June 2024. Pursuant to that agreement: (1) Gemini made available funds in the order of $2 million for trading costs of the administrations, including general working capital of each of the companies (as well as the administrators' costs, expenses and fees), with interest payable on the funds drawn down at 15 per cent per annum; and (2) Gemini agreed that the liability of the administrators is limited to their right of indemnity out of the assets of the companies and consented to the administrators seeking and obtaining orders by a Court limiting their liability in that way. 12 The administrators have caused the companies to draw down on the facility and have used the funds drawn down to provide working capital in order to trade the business of the companies during the administration. 13 The administrators do not consider that unsecured creditors of the companies are prejudiced by the facility agreement, or would be prejudiced by the making of the orders sought limiting their personal liability, because if the facility had not been obtained then it is likely (or at least very possible) that the business would have needed to have been wound down due to the cash shortfall which would have arisen from the continued trading. 14 Further, because of the priority position of Gemini, as secured creditor, and the level of its claim, the administrators' preliminary view is that without a sale or recapitalisation of the business it is unlikely that there would be any return to unsecured creditors (subject to voidable transactions and other recoveries that may be available to a liquidator). Thus, the administrators consider it is in the best interests of creditors for the administrators to trade the business while they consider any Deed of Company Arrangement proposals and otherwise explore a sale or recapitalisation of the companies. 15 The administrators provided notice of the making of the present application to creditors of the companies at the first meetings of creditors held on 14 June 2024, and by circulars and emails to creditors which provided access to the originating process and Mr Kogan's first affidavit. The administrators have received no communications from creditors concerning the application. 16 I have also had regard to an affidavit affirmed today by Mr Stephen Lloyd, the solicitor for the administrators. Mr Lloyd's affidavit establishes that both the Australian Securities and Investments Commission and Gemini have been provided with notice of the hearing of the application; and that Gemini has no objection to the proposed orders limiting the liability of the administrators.

C. Consideration 17 Section 443A of the Act, which forms part of Part 5.3A of that Act, relevantly provides that: (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. (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. 18 Section 447A of the Act provides the Court with a broad power to make such orders as it thinks appropriate about how Part 5.3A of the Act is to operate in relation to a particular company. That power is to be exercised consistently with the purpose of Part 5.3A, namely to provide for the business, property and affairs of an insolvent company to be administered in a way that maximises the chances of the company, or as much as possible of its business, continuing in existence, or, if that is not possible, results in a better return for the company's creditors than would result from an immediate winding up of the company (s 435A of the Act). Section 90-15 of the IPS(C) provides the Court with a broad power to make such orders as it thinks fit in relation to the external administration of a company. 19 The principles relevant to the exercise of those powers are, as Mr Krochmalik of counsel acknowledged, well-established. They need not be repeated. See, e.g., Walley, in the matter of PGP Group (Aust) Pty Ltd [2023] FCA 1554 at [15] to [17] and the authorities there cited; Kelly (administrator), in the matter of Lutum Holdings Pty Ltd (administrators appointed) [2024] FCA 554 at [37] to [46] and the authorities there cited (Halley J). 20 I am persuaded that the orders sought should be made for the following reasons. 21 First, the administrators have formed the view that the ongoing trade of the business is in the best interests of creditors. The facility agreement enables the companies to continue to trade, thereby increasing markedly the prospects of preserving the business of the companies with a view to sale or recapitalisation and a greater return to creditors, consistently with the objectives of Part 5.3A of the Act. 22 Secondly, the terms of the facility agreement appear to be commercially reasonable in the circumstances faced by the administrators. 23 Thirdly, in circumstances where the administrators have entered into the facility agreement for the purpose of securing the ongoing operation of the business so as to preserve that business for the benefit of the creditors of the companies, it is not reasonable that they be exposed to personal liability with respect to finance obtained for that purpose. 24 Finally, it does not appear that any prejudice would flow from the making of the orders sought. In this regard: (1) as noted earlier, Gemini has consented to the limitation of the administrators' personal liability by including a provision to that effect in the facility agreement, and has indicated that it has no objection to the proposed orders for the limitation of that liability; and (2) the ancillary orders proposed allow for any person (including unsecured creditors) who can demonstrate sufficient interest to apply to the Court to discharge or vary the proposed orders limiting the liability of the administrators.

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Judgment (6 paragraphs)

Legislation Cited (1)

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