The recent decision of Black J in Renex Holdings (Dandenong) 1 Pty Ltd (Administrators Appointed) & Ors  2003 is a good illustration of the Courts exercising the broad power bestowed by section 447A of the Corporations Act 2001 (Cth) to assist administrators in meeting the commercial objectives of Part 5.3A. In particular, it is a useful example of how the Courts can use those powers to assist administrators in overcoming difficulties faced throughout the administration process for the benefit of the company’s creditors and members.
Section 447A of the Act provides that “the Court may make such orders as it thinks appropriate about how this Part is to operate in relation to a particular company”. The Courts have historically applied a broad interpretation to the section and have permitted section 447A orders to be used not only to alter the procedural requirements of Part 5.3A but to change the substantive operation of Part 5.3A.
Facts of the Case
In this case, the joint administrators of a group of companies were faced with the following situation:
- A secured creditor had already advanced to the companies $1.5 million during the course of the administration to continue operations. That secured creditor also proposed to advance further funds for the same purpose so that the companies could be sold as a going concern;
- It was accepted that a sale as a going concern would result in a better return than if the companies proceeded to liquidation and assets were sold during the course of the winding up; and
- The administrators’ concern was that if they proceeded with the borrowing and the sale as a going concern did not result in a sufficient return to discharge the companies’ debts, they would be personally liable for the amounts outstanding pursuant to section 443A of the Act.
The administrators applied to the Court for orders that Part 5.3A operate, in respect of those companies, such that, if the indemnity available to the administrators out of the companies’ assets pursuant to section 443D of the Act was insufficient to meet the amounts for which they may be personally liable in respect of the proposed borrowings from the secured creditor, they would not be personally liable for the borrowings to the extent of that insufficiency.
In essence, the administrators sought the benefit of the borrowings from the secured creditor without attracting the potential personal liability that could accompany it so that the companies could be sold for a better return.
In determining whether to make the orders sought, Justice Black considered the following factors relevant to the application of section 447A in the manner requested by the administrators:
- Whether the proposed arrangements were in the best interests of the companies’ creditors and consistent with the operation and objects of Part 5.3A of the Act;
- Whether the proposed arrangement would enable the companies to continue to trade for the benefit of creditors; and
- Whether or not creditors were prejudiced or disadvantaged and stood to benefit from the proposed arrangement.
His Honour found that it would be appropriate to grant the orders sought.
His Honour accepted that the sale price of the companies would be maximised if sold as a going concern. He also considered that if the orders were not granted, the second borrowing would not take place and the companies would, in all likelihood, be wound up. There was a significant risk that, in those circumstances, the likely proceeds from an asset sale would be substantially less than if the companies were sold as a going concern during the administration.
Interestingly, the only class of creditors who stood to benefit from the proposed arrangement were the companies’ secured creditors. His Honour noted however that the proposed arrangement was not disadvantageous to other creditors because they were not likely to receive a distribution even if the companies were wound up.
His Honour placed significance on the fact that there would be a significant benefit to the companies’ 21 employees who would maintain their employment whilst the companies continued to trade and that those employees’ prospects of continuing employment following the sale as a going concern would be significantly increased if the proposed arrangement proceeded. His Honour considered this to be a significant matter not only for the employees individually, but also for the community at large as it was in the interests of the community to maximise the prospect that its members may retain employment.
Ultimately his Honour conducted a balancing exercise and determined that the proposed arrangement was justified in the circumstances.
What can be taken from the decision?
The decision demonstrates the difficulty often faced by administrators in managing the conflict between their desire to take advantage of a commercial situation with a potential real benefit to a class of creditors and their reluctance to do so to the extent that it exposes them to a personal liability. The decision is a useful example that section 447A can be used by administrators in these circumstances to implement bespoke arrangements that would otherwise be unavailable to them under Part 5.3A.
The balancing exercise undertaken by Justice Black is a reminder that the Courts are willing to exercise commercial judgment in the application of section 447A with a view to achieving the underlying objectives of Part 5.3A.
This article has been prepared by Greg Lewis, Partner and Alexander Johnson, Associate.