Australia: Personal Liability...Limited!

A recent order by the Supreme Court of WA acts as a timely reminder of the breadth of power conferred on the Court by section 447A of the Corporations Act 2001 (Cth) (Act), and the flexibility that the provision can provide in the conduct of any administration.

The approach taken by the Court in this matter is significant as it demonstrates the considerable flexibility that section 447A of the Act affords to the Court in assisting administrators to restructure the affairs of distressed entities and to achieve the objects of Part 5.3A of the Act.

Recent orders were received from the Supreme Court of Western Australia pursuant to section 447A of the in connection with the external administration of View Resources Limited (Subject to Deed of Company Arrangement), View Nickel Pty Ltd (Subject to Deed of Company Arrangement) and View Gold Pty Ltd (Subject to Deed of Company Arrangement) (View Group).

During the course of the voluntary administration of the View Group, the administrators entered into several significant loan agreements (Loan Agreements). The purpose of the loan agreements was the refinancing of certain debts owed by the View Group to a third party secured creditor, and, retiring the receivers and managers that the secured creditor had appointed to two of the entities within the View Group. The Loan Agreements, which were entered into with a view to facilitating the restructure or recapitalisation of the View Group, aimed to protect the administrators position by providing that their liability, in agreeance with the Loan Agreements, would be limited to the extent to which it could be satisfied out of the administrators' rights of indemnity, and to the extent that the administrators were actually indemnified for those liabilities out of their rights of indemnity.

Personal liability for money borrowed

The application in question related to the operation of section 443A of the Act in respect of the View Group. Section 443A(1) of the Act provides that an administrator of a company 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:

1. services rendered;
2. goods bought;
3. property hired, leased, used or occupied;
4. the repayment of money borrowed;
5. interest in respect of money borrowed; or
6. borrowing costs.

Section 443A(2) of the Act provides, amongst other things, that the liability of an administrator pursuant to section 443A(1) of the Act cannot be excluded by any agreement to the contrary.

Section 443D of the Act provides that the administrator of a company is entitled to be indemnified out of the company's property for, amongst other things, debts for which the administrator is liable, pursuant to section 443A(1) of the Act. Section 443E of the Act outlines the priority enjoyed by that right of indemnity and section 443F of the Act provides that the right of indemnity is secured by a statutory lien on the company's property (which has priority over a charge only in so far as the right of indemnity under section 443D has priority over debts secured by the charge).

The combined effect of sections 443A(1) and 443A(2) of the Act, in relation to the View Group Loan Agreements, was to make the administrators liable for the repayment of all of the moneys borrowed in relation to the Loan Agreements, as well as any interest and costs payable in connection with those borrowings. This was despite the agreement by the parties to limit the liability of the administrators. In the event that the liability of the administrators was not fully satisfied by the administrators' right of indemnity under section 443D, the administrators would continue to be personally liable for the remaining debt.

Section 447A of the Act

On behalf of the deed administrators of the View Group (and during the course of the deed administration of the View Group), Minter Ellison's Insolvency and Reconstruction team applied to the Court for orders pursuant to section 447A(1) of the Act, that the administrators' liabilities, pursuant to the Loan Agreements, be limited to the extent to which those liabilities could be satisfied out of the administrators' rights of indemnity, and to the extent that the administrators were actually indemnified for those liabilities pursuant to their rights of indemnity.

Section 447A(1) of the Act provides that the Court may make such orders, as it thinks appropriate, about the operation of Part 5.3A in relation to a particular company. In granting orders in the terms requested, the Court confirmed that:

1. section 447A(1) of the Act has been used widely by the Courts, in a variety of contexts, and a broad operation of the provision has been endorsed by the High Court of Australia;
2. 1. it is open to the Court to make orders in the terms requested in circumstances where the Court is satisfied that:
      the administrator entered into the loan agreement or, other arrangements, to enable the company's business to continue to trade or where the arrangements were otherwise for the benefit of the company's creditors;
   2. the creditors of the company will not be prejudiced or disadvantaged by the orders proposed; and
   3. the creditors of the company actually stood to benefit from the transactions that were entered into, and in relation to which, the section 447A orders are sought.

The orders made

In granting orders in the terms sought by the deed administrators, Master Sanderson (of the Supreme Court of Western Australia) noted that it was appropriate to make those orders pursuant to section 447A of the Act on the basis that:

A copy of the decision is available at http://www.austlii.edu.au/au/cases/wa/WASC/2008/241.html.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.