APPLICATION FOR ORDERS UNDER SECTION 447A
14 Section 443A of the Act provides:
(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.
15 Section 443C of the Act provides:
The administrator of a company under administration is not liable for the company's debts except under this Subdivision.
16 Section 447A of the Act provides:
General power to make orders
(1) The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company.
(2) For example, if the Court is satisfied that the administration of a company should end:
(a) because the company is solvent; or
(b) because provisions of this Part are being abused; or
(c) for some other reason;
the Court may order under subsection (1) that the administration is to end.
(3) An order may be made subject to conditions.
(4) An order may be made on the application of:
…
(c) in the case of a company under administration - the administrator of the company…
17 The exercise of power under s 447A of the Act must be consistent with the object of Pt 5.3A as set out in s 435A:
The object of this Part 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.
18 In Re Ansett Australia (No 1) (2002) 115 FCR 376, Goldberg J made orders under s 447A which were designed to ensure that retrenched employees would receive their entitlements in a timely manner rather than having to wait until assets were realised by the administrators over time. His Honour concluded (at [49]) as follows:
The purpose of the advances is to assist a substantial body of the creditors of the Ansett Group who would otherwise suffer great hardship if the advances were not made as soon as is practicable. The administrators consider that it is in the interests of the Ansett Group and its creditors that the transaction under the scheme be entered into, and it does not appear that they have taken into account matters irrelevant in relation to the administration of the Ansett Group. I am satisfied that the aims which the administrators are seeking to achieve fall within the object of Pt 5.3A, expressed in s 435A of the Act …
19 In Re Carter; SFM Australasia Pty Ltd (Administrators Appointed) [2009] FCA 360, administrators obtained orders modifying their personal liability under an agreement to obtain funding to trade on a company's business and also sought directions that they were justified in entering into the agreement. Justice Mansfield made the orders sought in relation to the initial drawdown under the relevant loan facility, notwithstanding that it was at least possible that the directions might be detrimental to unsecured creditors. At [28], his Honour noted that this would be so if it transpired that:
the agreement and acceptance of the monies advanced under it is imprudent and causes loss or dilution of the assets of [the company] available for the unsecured creditors. That may obviously prejudice the unsecured creditors. They would have no recourse to the administrators, and would have their debts subordinated to the financier by reason of s 443D of the Act.
20 In Re Mentha (2010) 82 ACSR 142, Gilmour J took into account, in considering an application for orders under s 447A to vary the liability of administrators under s 443A, whether the creditors of the company were prejudiced or disadvantaged by the types of orders sought, and whether they stood to benefit from the administrators entering into the arrangement.
21 In Re Nexus Energy Ltd [2014] NSWSC 1041 at [14], Black J stated:
The next issue which arises is the limiting of the administrators' liability under s 443A of the Corporations Act so far as the borrowings under the funding agreement are concerned. The administrators' submissions draw attention to the case law in this area, including the often-cited decision in Mentha Re Griffin Coal Mining Company Pty Ltd (admin apptd) [2010] FCA 1469: (2010) 82 ACSR 142 at [30] which set out the relevant principles, in a summary which has been followed frequently both in the Federal Court and this Court, and which I followed in Systems Advisers Group Pty Ltd (admin apptd) above. Turning to the relevant factors in this case, it seems to me that the proposed arrangements to limit the administrators' liability are necessary to the proposed funding arrangements, because they could not be expected to personally accept liability for a substantial borrowing in these circumstances, and the borrowing itself is in creditors' interests and consistent with the objectives of Pt 5.3A of the Corporations Act so far as it seeks to maximise the recoveries that are likely to be made from the sale of the Company's assets, and indeed preserve an opportunity to sell those assets which might otherwise be lost to the Company. It does not seem to me that there is significant prejudice or disadvantage to creditors of the Company from entry into the arrangement. The secured lender obtains security, as might be expected, for the additional moneys that are advanced, but that does not give rise to prejudice to other creditors, so long as those moneys are likely to generate at least the value which is the subject of that security, as is established in the present case so far as they preserve an opportunity for the sale of the Company's assets. It seems to me that notice has been given to those who are affected by the order, both by drawing attention to it at the first creditors' meeting and by a subsequent release to Australian Securities Exchange Ltd, albeit that notice has been given shortly prior to this application, given the urgency of the application. In any event, the administrators have indicated that they have no objection to the Court making an order reserving liberty to other interested persons to apply.
(emphasis added)
22 The administrators seek orders pursuant to s 447A of the Act that Pt 5.3A of the Act operate in relation to the Companies as if s 443A of the Act is modified so that the administrators will not be personally liable for loans between Companies in the group after the appointment date in course of trading the Companies.
23 One of the administrators has deposed to the potential creation of liabilities through the continued trading of the Companies as a single group or single business. In order to continue to operate the business of the group as a going concern, it has been necessary for the administrators to continue the group's pre-existing practice of using the cash resources of one company to pay the debts of another company in the group. Continuation of that practice is likely to be regarded as the administrator causing the second company to borrow money from the first. Administrators are personally liable for money borrowed pursuant to s 443A(1)(d) of the Act.
24 The administrators make the following submissions:
Unless Part 5.3A of the Act is modified as sought, the administrators may be exposed to personal liability where there is no practical way to determine whether there is an asset against which they can seek indemnity. The difficulty in making that determination arises because the inter-group loan accounts do not reflect a division of all revenue and expenses amongst the individual companies in the group. Several large groups of expenses - fuel, employees and certain plant and equipment such as trucks - are particularly problematic. Many companies in the group have benefitted from the incurring of those expenses, but have not contributed to the payment of the expenses. Nor have the loan accounts reflected the extent to which particular companies have benefitted derived from expenses paid by other companies.
So, for example:
(a) Fuel cards and accounts are held in one entity (Entity 1) but paid by another entity (Entity 2). This payment is recorded as a loan in the administrators' records of both Entity 1 and Entity 2. The actual fuel however, may be used by a number of other entities. This is not recorded and would be extremely difficult (likely impossible) to trace accurately to the correct entity that used the fuel.
(b) Employees are employed by Entity A (an employing-only entity), but the wages are paid by Entity B (a trading entity). This payment is recorded as a loan in the administrators' records of both Entity A and Entity B. Entity A however, may supply the workforce for a number of entities (not just Entity B), and this could change week to week as employees are used on different contracts, which are in different trading entities' names. This level of detail is not recorded and would be extremely difficult (likely impossible) to trace accurately on an employee by employee basis as to who worked on which project in each week and which trading entity held the project contract.
(c) Lease payments on truck leases held by Entity X are paid by Entity Y. This loan is recorded in the administrators' records. The trucks may be utilised by a number of trading entities (not just Entity Y) and this part is not recorded and would be extremely difficult (if not impossible) to trace.
If each company is wound up separately, and there is no order pooling the assets and liabilities of the companies, a considerable amount of work will be necessary to determine the precise assets available for creditors of each company in the group. That is because the loan accounts between each company will need to be reviewed and reconstructed so that all expenses are properly apportioned among the companies in the group that benefitted from the expenses.
25 The administrators could avoid the above risks by ceasing to trade. But this is likely to have a detrimental effect on creditors (particularly employees) and will not maximize the chance of the business continuing to exist.
26 In my opinion, it would not be reasonable for the administrators in the present case to accept the personal risk for the trading of the Companies in the group. The situation confronting the administrators is one brought about by the way in which the Companies operated prior to their appointment, including the limitations on the Companies' bookkeeping, records and systems.
27 Obviously, there is some risk that some unsecured creditors might be disadvantaged by the continued trade and the administrators' being freed of personal liability for inter-group borrowing. However, this risk is outweighed by the adverse consequences of the Companies ceasing to trade, including for creditors as a whole.
28 I accept the submissions of the administrators that an individual creditor will only be prejudiced in the unlikely event that:
(a) the company that owes the creditor (company A) lends money during the administration to meet expenses incurred by other Companies in the group;
(b) company A is wound up;
(c) no order for pooling is made;
(d) the cost incurred by the liquidators in reconstructing the loan accounts of each company in the group does not exhaust company A's assets that would otherwise have been available to meet the debt owed to the creditor;
(e) the other Companies in the group are not able to repay to company A the amount of money borrowed from it during the administration; and
(f) the dividend paid to the creditor is less than the dividend that would have been paid if company A had been wound up at the time the group was put into liquidation.
29 In respect of an order made under s 447A relieving the administrators of personal liability for some debts under s 443A, disadvantage or prejudice to creditors is an important discretionary consideration, but it is not a decisive factor. An inflexible approach (such as being satisfied that there must be absolutely no disadvantage or prejudice to creditors) may limit the potential for Pt 5.3A to achieve its stated objectives.
30 In any event, I observe that Stephen Robert Dixon in his affidavit sworn on 23 March 2016 deposed:
The Administrators believe that creditors are likely to receive a greater return under a DOCA rather than if the Companies are wound up, given that:
(a) this would enable an orderly realisation of the plant and equipment, as the DOCA is likely to allow a period of time for the sale of the plant and equipment thereby avoiding the saturation of the market with over 200 items of similar nature;
(b) a winding up would jeopardise receipt of payments in the immediate future and will have a major impact on debtor collections; and
(c) a winding up would affect the ability to obtain future trading contributions.
31 Finally, I observe that the orders will grant liberty to any person who can demonstrate sufficient interest to modify or discharge the orders. That will enable any unsecured creditor who believes that he or she is disadvantaged by the orders to have them varied or discharged.
32 The orders sought relieving the administrators from personal liability are appropriate in the particular circumstances of this application.
I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Middleton.