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Administrators take control away from Receivers

CaseFlash 26 March 2014

The recent case of In the matter of AWA Limited (Administrators Appointed)(Receivers and Managers Appointed) confirms that Administrators may apply to the Court seeking directions justifying their entry into loan agreements in order to raise funds to pay out a secured creditor and retire Receivers.

The case involved an application by the Administrators of AWA Limited (‘AWA’) to the Supreme Court seeking directions, pursuant to s447D of the Corporations Act 2001 (Cth)(‘Act’), that they were justified under s443A to enter into a loan agreement with a commercial lender to raise funds in order to pay out a secured creditor. By paying out the major secured creditor, the Administrators would be able to regain control of AWA’s affairs and ensure an expeditious sale of AWA’s business. The Administrators had also sought relief under s447A to extend their personal liability in s443A and consequent right of indemnity under s443D and lien under s443F to the repayment of monies owed, but agreed with Brereton J during the course of the hearing that this relief was not necessary given the amendments made to the Act in 2007 to extend the scope of s443A to include repayment of money borrowed.

Facts

The relevant facts were as follows:

  1. Administrators were appointed to AWA Limited on 25 February 2014.
  2. The Administrators considered that the best commercial outcome would be a sale of AWA’s business as a going concern and took all reasonable steps to source interested parties. Prior to 28 February 2014, some 50 parties had expressed an interest in purchasing AWA’s business.
  3. On 28 February 2014, AWA’s largest secured creditor appointed Receivers and Managers pursuant to its security over its assets, which removed control of the sale process from the Administrators.
  4. The Administrators were of the opinion that the Receivers would be less likely to ensure an expeditious sale; would incur significant additional costs; and would jeopardise any sale by proposing to retrench some employees of AWA.
  5. The Administrators were of the opinion that this was not in the best interests of the creditors as a whole and sought funding to enable the largest secured creditor to be paid out and the Receivers retired.
  6. The lender was prepared to lend on terms that, amongst other things, the partners of the Administrators also be liable to repay the debt.

Evidence

The evidence included that the Receivers were incurring remuneration of $200,000 to $250,000 per week such that it was in the interests of creditors for the secured creditor to be paid and the Receivers be removed. The secured creditor agreed to the proposal because it would be paid out and the general body of unsecured creditors had also been consulted.

Decision – NSW Supreme Court

The court made directions pursuant to s447D of the Act, that the Administrators would be justified in entering into and giving effect to a proposed loan agreement. The Court emphasized that applications for directions should not be made to approve matters which are ordinarily within the scope of the Administrator’s powers relating to a business or commercial decision and not involving a question of law or procedure, of power, propriety or reasonableness.

It was noted that:

“...what tilted the balance in favour of giving directions in this case is the circumstance that not only will the administrators be assuming personal liability to repay the loan, but their partners will also be guaranteeing that liability. In those circumstances, where they and their partners are assuming a substantial liability for the ultimate benefit of the creditors, it is not unreasonable that the administrators should wish the propriety of the proposed transaction to, so far as possible, be put beyond all doubt.”

Lessons Learnt

The decision is interesting because it gave rise to the fairly novel situation where Administrators were able to seize control from Receivers to effect a sale of AWA’s business as a going concern. It also involved the Administrators and their partners assuming personal liability, subject to the Administrators’ indemnity, to repay the moneys borrowed.


Kirsten Farmer, Partner
Sydney

Guy Moloney, Senior Associate
Sydney

CaseFlash 26 March 2014
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