Traditionally, the courts have been reluctant, if not unwilling, to give directions to administrators and liquidators on purely commercial decisions.
A recent decision of the Supreme Court of New South Wales in the matter of AWA Limited (Administrators Appointed) (Receivers and Managers Appointed) (ACN 111 674 661)  NSWSC 249 (AWA Application) affirms that notwithstanding the traditional approach to giving directions, the courts will be alive to the commercial realities of the situation.
In February 2014, the Directors of AWA Limited (AWA) resolved under section 426A of the Corporations Act 2001 (Cth) (Corporations Act) that AWA was, or was likely to become, insolvent and appointed three joint and several voluntary administrators (Administrators).
As a result of the investigations conducted by the Administrators, they considered that the best commercial outcome for AWA and its creditors was to maximise the recovery of outstanding debtors and to sell AWA’s business as a going concern. Accordingly, the Administrators conducted an extensive sale campaign which concluded on 1 March 2014.
In or around February 2014, Moneytech (one of AWA’s secured creditors), pursuant to its security, appointed receivers and managers to all of AWA’s assets and undertakings (Receivers). This had the obvious affect of removing the Administrators’ control of the sale of business process.
The Administrators formed that view that it was not in the best interests of the creditors and AWA for the Receivers to conduct the sale process as the Receivers:
The Administrators determined to obtain funding to repay Moneytech and after a competitive tender process, two potential financiers were identified. After discussions with those financiers, the Administrators determined Woolley GAL II Pty Ltd (Woolley) to be the preferred lender. It is important to note that the funding that was to be obtained from Woolley was subject to Woolley having access to the Administrators’ personal liability and indemnity. In addition, the partners of the firm of the Administrators, guaranteed repayment of the funding.
The Administrators sought and obtained, the non objection of the creditors of AWA and the approval of Moneytech, to enter into the Woolley proposal.
The Administrators brought an application under section 447D of the Corporations Act in the Supreme Court of New South Wales seeking a direction from the Court that they were justified in accepting the proposal put forward by Woolley and borrowing funds to repay Moneytech and accordingly, retire the Receivers.
The Court held that the application of AWA’s administrators for directions was unusual as:
[n]o question of power arose; no question of law or legal procedure was involved; and there was no suggestion of impropriety. The matter rose no higher than possible apprehension on the part of the administrators that their expedition in entering into this proposed transaction without further testing of the market might later be criticised.
Notwithstanding the unusual circumstances in which the Administrators sought directions, Brereton J held:
what to my mind tilts 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 (albeit with a right of indemnity against the company’s assets), 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 seems to me not unreasonable that the administrators should wish the propriety of the proposed transaction to, so far as possible, be put beyond all doubt.
In addition, the Court held that the directions in this case were appropriate because:
Lavan Legal comment
The decision of the Court in the AWA Application reflects the Court’s willingness to consider the commercial and factual realities of an administration when it is approached to give directions. In addition, notwithstanding the traditional circumstances in which an administrator or liquidator would approach the Court for directions, the Court in the AWA Application showed a willingness to give directions on what was a prima facie commercial decision.