Perils of a complex corporate collapse: administrators conduct justified and personal liability is limited. - Insolvency/Bankruptcy

This week's TGIF considers the decision of Currie, in the Matter of The Country Wellness Group [2018] FCA 1455, where the administrators approached the Court for orders to justify their continuation of inter- company loans and to limit any personal liability.

WHAT HAPPENED?

On 27 August 2018, administrators were appointed to a number of companies which operated as a corporate group.

The administrators initial investigations revealed a complex web of inter-company loan arrangements whereby the more profitable companies provided financial support to those less profitable pursuant to various loan agreements.

Shortly following their appointment, the administrators applied to the Court for orders under s 447D of the Corporations Act 2001 (Cth) (the Act) that:

they would be justified and acting properly & reasonably by extending particular loans to certain borrowing entities during the administration period; and
any personal liability from the continuation of these loans be limited to the value of the borrowing company's assets (so as to allow the administrators to rely upon their indemnity against those assets to satisfy that liability).

Additional time was also sought for the administrators to determine whether to allow certain companies to continue to incur rent and other liabilities which, under s443B(2) of the Act, would begin to accrue five business days after the administration began.

WAS IT APPROPRIATE TO EXTEND THE INTER-COMPANY LOANS?

The Court agreed that, in the circumstances, the administrators were justified in extending the loans in the manner they had outlined.

The following factors were relevant in guiding the Court's discretion to make the order sought:

the corporate group had historically operated in the way the administrators intended to continue such that an order in terms described ensured consistency with the ordinary financial position;
the proposed lending was for limited purposes (essential & recurring business expenses) and required for those less profitable companies to survive pending a sale;
the order was for a limited duration (a period of three weeks) to allow trading to continue thus preserving value; and
the order would not prejudice creditors and, on the evidence adduced, was likely to promote a better outcome than an immediate liquidation.

SHOULD THE ADMINISTRATORS BE RELIEVED FROM PERSONAL LIABILITY?

Under s 443A(1)(d)-(f) of the Act, administrators will be personally liable for the repayment of money borrowed. The Court considered that, in the circumstances, it should limit the administrators from any personal liability by extending the inter-company loans.

By reference to the principles laid out by Gilmour J in Re Mentha¹, it was held that the limitation was appropriate given the uninterrupted flow of funds would enable the business to trade, avoid a premature liquidation and give the administrators the best opportunity to realise the highest value possible for the group.

EXTENSIONS OF TIME UNDER S 443B

Section 443B(3) of the Act requires an administrator to make an election, within 5 business days after the beginning of the administration, whether to continue to incur liabilities with respect to property of which someone else is the owner or lessor. If the notice required to be given is not provided within the timeframe specified, the administrator will be liable for rent or other amounts payable by the company under the relevant agreement.

In this instance, the evidence before the Court led to a conclusion that it was appropriate to extend, for a period of three weeks, the time for the making of an election under s 433B(3) which relieved the administrators of any liabilities under various leases.

In the Court's view, the attempts by the administrators to resolve issues concerning these liabilities in the time available (for example, the time spent identifying the lessors of all equipment leased by the various entities and negotiating with real property lessors), was sufficient to justify the making of the order sought and permit rational decisions to be made regarding the various leases.

COMMENTS

When faced with a complex appointment, across multiple companies in a corporate group, administrators can encounter a wide range of challenging issues and competing interests. Many of these issues must be dealt with within the strict time periods stipulated by the Act and often in circumstances where administrators may be personally liable for debts incurred.

This case serves as a useful reminder of the utility of approaching the Court for guidance, seeking approval with respect to a proposed decision and limiting personal liability if the course of action put forward is in the interests of creditors and consistent with the objectives of Part 5.3A of the Act.

Footnote

¹(2010) 82 ACSR 142

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