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Court protects Administrators from personal liability for post appointment debts

Caseflash 19 February 2016

The recent Supreme Court of NSW decision in Renex Holdings (Dandenong) 1 Pty Ltd (Administrators Appointed) & Ors [2015] NSWSC 2003 confirms that Administrators may be protected from personal liability for post appointment debts.

Background

The Administrators of Renex Holdings (Dandenong) 1 Pty Ltd (Administrators Appointed) and several other companies (Renex Group) applied, using s447A of the Corporations Act (Act), to limit the personal liability imposed on them under s443A of the Act in respect of two sets of borrowings from an existing secured creditor of the Renex Group (Lender).

The first of those borrowings (in the amount of $1.5m) was advanced before the application was made and the second was proposed but had not yet been advanced.

The Administrators gave evidence that:

  • the Renex Group operated a waste treatment and resource recovery facility;
  • its total liabilities were around $90m – owing almost entirely to secured lenders (of which there were several) with little owing to unsecured creditors;
  • the Group had 21 full time employees;
  • the Lender had already advanced $1.5m to allow the Administrators to continue to trade, and proposed to lend further amounts to facilitate the trading and sale of the business as a going concern;
  • selling the business as a going concern would maximise the potential sale proceeds or, conversely, would  avoid the potential discount to the amount received on liquidation after the business had closed;
  • the Group had insufficient assets to indemnify the administrators (under s443D of the Act) for amounts owed to the Lender; and
  • absent the proposed second borrowing from the Lender, the Group would not have sufficient cash to continue to trade – employees would therefore be terminated immediately and the Administrators would likely call a second meeting of creditors and recommend that the companies be placed into liquidation.

Outcome

Justice Black made the orders sought – utilising s447A to alter the operation of s443A such that the Administrators would not be personally liable for the two borrowings. As the first borrowing had already been advanced, the limitation would apply retrospectively to that borrowing. 

In the judgment, Justice Black considered the key authorities which state that the relevant considerations in applications of this kind include whether the proposed arrangements:

  • are in the best interests of the company’s creditors and consistent with objects of Part 5.3A of the Act; and
  • will allow the company to trade for the benefit of creditors.

His Honour noted that the circumstances of this case were slightly unusual given that, while the proposed course would obviously allow the Group to trade and was in the interests of secured creditors, it would have little or no impact on the return to unsecured creditors. In allowing the application, however, his Honour had particular regard to the fact that the arrangements:

  • would allow the company to trade, thereby preserving the employees’ jobs and maximising their prospect of re-employment with the purchaser; and
  • while the class of creditors who would benefit from the arrangement was limited (secured creditors and employees), it would not be disadvantageous to any other interested parties.   

This is a sensible decision which ought to give comfort to Administrators that there are effective mechanisms in place to protect them from personal liability – it also highlights the public interest element in the continuity of trade and support for restructuring.

If you have any queries regarding this CaseFlash or require Commercial Litigation & Insolvency legal advice please do not hesitate to contact Kirsten Farmer, Partner.


Kirsten Farmer, Partner
Sydney

Manit Oberoi, Solicitor
Sydney
 

Caseflash 19 February 2016
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