In the recent Federal Court decision of Re Brosa Design Pty Ltd (Administrators Appointed),1Justice Banks-Smith considered an urgent application by voluntary administrators for orders that the administrators would be justified in giving effect to an agreement to deal with stock that had been sold but not distributed to customers prior to the company going into administration.
The administrators did not have any funds to deal with the numerous concerned customers or to cover delivery costs up front, and had entered into a sale agreement for the business that included a proposed regime whereby customers who had paid for goods would have to either arrange their own delivery, accept a store credit, or abandon their goods.
Justice Banks-Smith considered the scope of the Court’s power under section 90-15(1) of the Insolvency Practice Schedule (Corporations) (IPS) as well as the interests of the creditors and the third party customers, before granting the orders subject to some variations designed to protect the interests of the third party customers.
Brosa Design Pty Ltd (Administrators Appointed) (Brosa) is a furniture retailer primarily located in New South Wales and Victoria. It commenced business in 2014 but experienced financial difficulties in 2021 and was placed into voluntary administration on 14 December 2022.
The administrators continued to trade the business after their appointment, but it became quickly apparent that the company had no funding to continue operations. The administrators conducted an urgent sale process and accepted an offer to buy the business from Kogan Australia Pty Ltd (Kogan) on 18 December 2022. The administrators accepted the offer as they considered that it was the best offer received, it related to all assets of the business, it was from a party that appeared to have the capacity to transact on an urgent basis, and it also included a solution for ensuring that customers who had paid for but not received goods (Relevant Customers) could receive those goods (Relevant Goods).
The administrators were of the view that title in the Relevant Goods had passed to the Relevant Customers. Importantly, the secured creditors of Brosa shared this view.
In terms of the regime re the Relevant Customers, it was proposed that:
- Kogan would take possession of the Relevant Goods;
- Kogan and the administrators would then issue notices to the Relevant Customers inviting them to make an election between having the Relevant Goods delivered (which could require the payment of a small fee), or accepting store credit with Kogan in an amount equal to the purchase price of the Relevant Goods; and
- if a Relevant Customer failed to make an election within a specified timeframe, the related Relevant Goods would be treated as abandoned, Kogan would credit 50% of the purchase price to Brosa, and Brosa would cover Kogan’s costs of dealing with the abandoned Relevant Goods up to a capped amount.
The agreement with Kogan was contingent on the administrators obtaining Court approval, and the administrators duly commenced proceedings under section 447A of the Corporations Act 2001 (Cth) (Act) and section 90-15(1) of the IPS on 21 December 2022 for orders that they would be justified in giving effect to the agreement.
It is worth noting a number of the key arguments put by the administrators in making the application, which were as follows:
- it was appropriate that the application be dealt with on an urgent basis because of the extent of the liabilities being incurred in continuing Brosa’s operations;
- if the orders are not made, then Brosa would most likely have to go into liquidation as the costs of dealing with the Relevant Goods would be a substantial cost in the administration and would exceed the likely benefit to creditors;
- there was a low risk that Relevant Customers would end up abandoning their Relevant Goods given the choice between having the goods delivered or receiving a store credit, and the risk was likely to be limited to the Relevant Customers who (for whatever reason) do not receive the notice or fail to act in time; and
- the secured creditors had no objections to the orders sought, and there were numerous Relevant Customers who had written to the administrators noting that they were keen to take possession of their Relevant Goods.
Section 90-15(1) of the IPS
In framing her decision, Justice Banks-Smith set out a number of important principles in relation to section 90-15(1) of the IPS:
- section 90-15 of the IPS confers power to make orders modifying the operation of the IPS and the Insolvency Practice Rules (Corporations) 2016 (Cth) and generally to give directions to external administrators;
- it is well established that section 90-15 has broader operation and effect than its predecessor provisions, being sections 447D, 479(3) and 511(1)(a) of the Act;
- the ambit of section 90-15 has not yet been fully considered in the authorities;
- the power under section 90-15 accommodates the determination of substantive rights;
- while the courts generally refrain from making directions relating to a liquidator’s or administrator’s business or commercial decisions, it may give directions relating to issues such as a legal issue of substance or procedure, or an issue of power, propriety or reasonableness; and
- there is authority to the effect that it is appropriate to seek directions where the external administrator could be exposed to the risk of ‘allegations of acting unreasonably’.
Justice Banks-Smith was ultimately satisfied that the application should be granted.
Her Honour had a number of reservations including that:
- there had not been any real notice to interested parties. The business had been sold and steps taken in relation to that sale before creditors had any real information about the administration or their likely position;
- the orders as sought did not provide for a stay to allow interested parties to consider the orders and to take any steps they considered necessary; and
- the proposed regime in relation to the Relevant Goods involved Kogan having responsibility for dealing with and distributing the Relevant Goods, where Kogan would not have the same access to the Court for directions that the administrators would have.
However, Her Honour felt that these factors were outweighed by the following matters:
- the agreement provided/secured benefits for the creditors and provided certainty to the Relevant Customers;
- if the orders were not made, there was a very real risk that the Relevant Goods would be disclaimed and Brosa would be would up;
- the agreement provided Relevant Customers with a clear and efficient (and simple) pathway to take delivery of the Relevant Goods;
- the regime avoided the cost burden of dealing with Relevant Customers and the markets being borne by the creditors;
- the sale process, while truncated, had involved considerable testing of the market;
- there was no real risk in Kogan having responsibility for dealing with the regime given its size and the records available re the Relevant Goods; and
- the risk of Relevant Customers losing their Relevant Goods due to inaction should not be ignored, but the regime appeared to provide for Relevant Customers having ample notice/knowledge of their options.
Justice Banks-Smith therefore granted the orders on the basis that it was just and beneficial to do so, subject to short stay to protect the rights of interested parties to consider and challenge the orders if they wished to do so.
This case demonstrates the breadth and versality of section 90-15 of the IPS, and confirms that the Courts will be prepared to make an order under section 90-15 where an external administrator may be exposed to allegations that they acted unreasonably.
If you have any questions about this case or about the operation of section 90-15 of the IPS, the experienced Lavan team is ready to help.
Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.