The personal liability arising under Division 9 of Part 5.3 A of the Corporations Act 2001 (Cth) (Act) often provides one of the greatest risks facing administrators on accepting an appointment. These risks can limit restructuring options available through a voluntary administration as an administrator is unlikely to want to continue to trade on a company without funding if trading on the company will expose them to personal liabilities for goods and services acquired, rent and other costs which cannot be covered by the available income and assets of the company.
Crosbie IMO Godfreys Group Pty Ltd [2024] FCA 60 (Godfreys Case) is a recent example from a growing line of cases in which courts have made orders limiting voluntary administrators’ liabilities. This case illustrates the primary factors considered by the Court and the principles applied when granting relief to vary the personal liability of administrators.
General Principles
Division 9 of Part 5.3A of the Act makes administrators personally liable for certain transactions they cause a company to enter into following their appointment. Section 443B can make administrators personally liable for rent where they cause a company to continue to use leased property after 5 business days of their appointment. The Act attempts to mitigate this risk by providing the administrators with a first-ranking lien over the assets of the company to discharge their personal liabilities they have accrued over the administration. Whilst that works where the assets are substantial, their indemnity can ring hollow where there are insufficient assets in the insolvent estate or when there is a secured creditor who has a priority claim against the company’s non-circulating assets.
Over the last two years, a number of administrators have made applications under section 447A of the Act for the operation of Part 5.3A to be modified so they are even given an extension of time to make an election under section 443B or otherwise freed of personal liability. Two of the most high profile recent examples include Strawbridge, in the matter of Virgin Australia Holdings Ltd (Administrators Appointed) [2020] FCA 571 and Algeri, in the matter of WBHO Australia Pty Ltd (Administrators Appointed) [2022] FCA 169.
When an administrator makes an application under section 447A of the Act, the Court has a discretion as to whether to make orders limiting the administrator’s liability. The Court’s discretion will be judiciously exercised to align with the goals of the voluntary administration process with the relevant decisions being made by administrators on a case-by-case basis.
The general principles guiding the court’s decision-making regarding applications by administrators for relief from liability are set out in Re Mentha (in their capacities as joint and several administrators of the Griffin Coal Mining Company Pty Ltd) (Admins Apptd) [2010] FCA 1469 at [30], being:
- whether the proposed arrangement is in the interests of the company’s creditors;
- whether the proposed arrangement enables the company’s business to continue to trade for the benefit of the company’s creditors;
- whether the creditors of the company are prejudiced or disadvantaged by the types of orders sought and whether creditors stand to benefit from the administrators entering into the arrangement; and
- whether notice has been given to those who may be affected by the order.
Godfreys Case
Facts
Godfreys Group Pty Ltd and its subsidiaries in Australia and New Zealand (Godfreys) is a well-known vacuum retailer. Godfreys entered into voluntary administration on 30 January 2024.
On 5 February 2024, the administrators sought orders from the Federal Court of Australia that, among other things, the administrators be relieved from personal liability with respect to any property leased, any pre-appointment employment contracts and an additional funding arrangement with an existing company creditor. These orders were sought to enable the administrators to continue to operate Godfreys’ business for a limited duration as well as to facilitate Godfreys’ restructuring and eventually sale as a going concern.
Administrators relieved of personal liability for leased premises
Under sections 443B(2) and 443B(3) of the Act, an administrator has 5 business days to give notice to a landlord that the company does not propose to exercise rights in relation to the property in order to avoid personal liability under the lease. However, a Court may extend the 5 business days period if it is satisfied that the administrator has had insufficient time to conduct the necessary investigations to decide whether he or she thinks it best to retain or give up possession of a leased property.[1]
In the Godfreys Case, despite the administrators closing 49 stores upon their appointment, the companies still maintained over 100 leases, including 15 premises that operated as franchisee stores. These premises were leased by a Godfreys’ subsidiary from various landlords, with the franchisees subsequently entering into licence agreements to occupy the premises and conduct their franchise business. This structure added complexity for the administrators, who were required to engage with multiple parties in order to manage the closure of these stores. The administrators argued that they were not in a position to decide whether the company needed all of the leased premises within the 5 business days period required under sections 443B(2) and 443B(3) of the Act.
The Court was satisfied that the Godfreys’ administrators had not had sufficient time to confer with relevant counterparties and to conduct thorough investigations regarding potential additional store closures. The Court referred to the significant number of leases and number of counterparties involved in forming this view. Therefore, the Court made an order limiting the personal liability of the administrators for expenses and liabilities related to properties leased, used or occupied by Godfreys during the administration period.
Administrators relieved of personal liability for employment benefits
Godfreys employed approximately 500 employees across various states and territories in Australia, most of whom were subject to three different employment awards. Given the limited time since their appointment, the administrators argued they had not had sufficient time to independently review and assess the circumstances of each employee to determine whether the employee had been receiving accurate wages and entitlements. Consequently, the administrators sought orders to limit their personal liabilities concerning expenses and liabilities related to the continued employment of Godfreys’ employees under pre-appointment employment contracts and payment of employees under pre-appointment payroll practices.
The Court found that:
- it was in the best interest of creditors to continue to trade on Godfreys’ business while implementing a restructure, as selling the business as a going concern is likely to yield the highest returns for creditors;
- it was impractical for the administrators to conduct comprehensive review of employees’ entitlement during the trade on period given the size and complexity of the employment arrangements;
- retaining employees was essential for ongoing business operations; and
- limiting administrators’ personal liability would ensure the employees could continue to work at Godfreys. The alternative was that the administrators would let the employees go and cease trading the business.
As a result, the Court granted the order sought by the administrators.
Administrators relieved of personal liability for external finance
Under section 443(A)(d) of the Act, the administrator is personally liable for the debts incurred when a company borrows money during the administration period. Administrators commonly seek orders under section 447A of the Act to limit such liability if the funds propose to borrow is to support a company’s ongoing trade during administration. The Court may exclude administrators’ liability in the circumstances that the continued trade is for the benefit of creditors.
In the Godfreys Case, Godfreys’ administrators concluded that they were unable to continue to trade the companies without urgent additional funding. As a result, the administrators negotiated a proposed funding deed with 1918 Finance, the major secured creditor of the companies. Under the proposed deed, 1918 Finance was to provide up to $4 million in order to cover the costs and expenses to sustain the companies’ business.
The administrators then sought court orders to obtain relief from personal liability under section 443A of the Act regarding debts incurred by the administrators in conducting business and arising from the funding arrangement with 1918 Finance. The administrators argued that securing funding from 1918 Finance was essential to protect the best interests of Godfreys’ creditors because the funding would enable the administrators to preserve and operate the business as a going concern.
The Court agreed with the administrators and recognised that the additional finance was necessary for the uninterrupted operation of the company. The Court acknowledged that without this urgent funding, the administrators would be unable to sustain Godfreys’ operations, potentially depriving creditors of beneficial outcomes. Furthermore, the Court was satisfied that the rights of secured and unsecured creditors would not be adversely affected by the company entering into such a funding arrangement. Additionally, the Court also noted that the sole entity that may have been prejudiced and have been affected by the order, 1918 Finance, had agreed and supported the order. Based on these considerations, the Court granted the relief order.
Key Takeaways
Section 447A of the Act provides the Court with a broad power varying administrators’ personal liability as it thinks appropriate, but the power must be exercised consistently with the purposes of the voluntary administration process. Administrators seeking such orders must convince the Court that their commercial judgement serves the best interest of the company while the creditors in general will not suffer any unreasonable prejudice. Additionally, the business proposal submitted to the Court must advance the primary objective of the voluntary administration process, namely, the preservation of the company’s existence and its business.
These applications are becoming more conventional and a bit like applications to extend the convening period under section 439A of the Act. This is not to say that the availability of this relief should be taken for granted. As the jurisprudence around section 439A applications show, each case needs to be prepared carefully, and it only takes an application to be opposed for the Court to scrutinise an application closely and potentially refuse relief.
If you would like to discuss this article with us, please contact David Greenberg, Partner, or Mengting Wang, Associate on (02) 9261 5900.
[1] Strawbridge (Administrator), in the matter of CBCH Group Pty Ltd (Administrators Appointed) (No 2) [2020] FCA 472 at [39].