It is not uncommon for an administrator to have to borrow funds to assist him or her in a company’s administration. In entering into a loan arrangement, an administrator will usually attempt to limit liability to the extent of the assets of the company.
However, section 443A(2) of the Corporations Act 2001 (Cth) (Act), provides (in effect), that an administrator cannot contract out of liability for monies loaned in the course of the administration.
To overcome the effect of this section, an administrator can make an application to the Court, pursuant to sections 447A and 447D to modify section 443A(2) of the Act. The effect of this application, if successful, is that the administrator’s liability under section 443A(1) can be limited to the company’s property from which they can be indemnified under section 443D and which can be secured by the lien under section 443F of the Act.
Recently, the administrators of Conquest Crop Protection Pty Ltd (in administration) and FarmWorks Merchandise Services Pty Ltd (in administration) (together the Companies) made this type of application in Re Saker (as joint and several voluntary administrators of Conquest Crop Protection Pty Ltd (admins apptd) and Farmworks Merchandise Services Pty Ltd (admins apptd) [2012] WASC 473.
Background
From the outset of their appointment, the administrators continued to trade the Companies. To assist them with this, they entered into a limited recourse loan agreement with a third party (limited to the assets of the Companies) (Loan Agreement).
A condition subsequent of the Loan Agreement, was that the administrators make an application to the Court, seeking orders to modify the effect of section 443A(2) of the Act.
The administrators maintained in their application, that without the loan, they would be unable to:
continue to trade the Companies;
sell the Companies as a going concern;
adequately investigate the affairs of the Companies; or
adequately consider and explore recovery and reconstruction options for the Companies.
Given the urgency of the application, the administrators were not able to notify the Companies’ creditors of their intention to make this application. To counteract this, the administrators proposed that the creditors be notified after the orders were made and have liberty to apply to set the orders aside.
Decision
In making the orders sought, Master Sanderson “had in mind a number of matters” that he considered relevant. While not exhaustive, “the matters” give some guidance as to what should be included in an application of this nature.
These were, the fact that:
the administrations were in their early stages and the administrators had not yet formed a final view as to the most appropriate outcome for the Companies;
the loan would be used for the purpose of paying the Companies’ operating costs and employee wages, so that the Companies could continue to trade; and
the administrators would be able to properly examine the Companies’ affairs.
Another relevant factor was that the lender under the Loan Agreement had consented to the administrators making this application. In this regard, Master Sanderson referred to the comments of Finkelstein J in Mentha, Re Spyglass as Management Group Pty Ltd (administrators apptd) [2004] FCA 1489.
As the lender has agreed to the order of the kind being sort in this application, there is no reason why the order should not be made. The creditors have no interest in the order because they cannot be disadvantaged by it, on the other hand, they stand to benefit if the loan goes ahead.
In relation to notifying creditors, Master Sanderson stated that:
In an ideal world creditors would have been notified of this application, but it is easy to understand why the matter was urgent. In my view there was no real alternative but for the plaintiffs to make the urgent application, and being satisfied it was proper and appropriate to do so, the court made the orders sought.
Lavan Legal comment
In our experience, the Supreme Court is usually prepared to assist administrators bringing an application of this type. The Court generally takes a commercial and pragmatic approach. Because these types of loans are for the benefit of creditors, the Court will sanction them, provided the creditors are given an opportunity to be heard on the question.
