A prudent approach to reducing the risk of personal liability

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By Dean Brayley, Lawyer

On 20 December 2016, the Federal Court of Australia handed down its decision in Intergen Energy Holdings (Australia) Pty Ltd (Administrators Appointed) (Receivers and Managers Appointed) [2016] FCA 1585.  The case serves as a reminder to administrators who have – or are contemplating – entering into funding arrangements during a company’s administration to consider obtaining orders from the Court to limit their personal liability under the proposed funding arrangement.

Intergen Energy Holdings (Australia) Pty Ltd, IG Power Holdings Limited, IG Power Marketing Pty Ltd and IG Power (Callide) Ltd (the Companies) were placed into administration.  During the course of the administration, a related entity agreed to loan $270 million to the Companies to allow them to continue to trade during the administration period (Loan Agreement).  It was a term of the Loan Agreement that the administrators’ personal liability under section 443A(1) of the Corporations Act 2001 (Cth) (Act) would be excluded, or otherwise limited.

However, pursuant to section 443A(2) of the Act, an administrator cannot contract out of his/her liabilities incurred during the course of the administration.  Any agreement that purports to limit an administrator’s liability is ineffective, and he/she will remain personally liable for any debts that they have incurred.

In the Intergen Energy case, in order to overcome the effect of section 443A(2) (and to ensure that the contractual clause in the Loan Agreement was enforceable so as to limit the administrators’ liability), the administrators made an application under sections 447A and 447D seeking orders to modify the effect of section 443A(2) to allow them to enter into the Loan Agreement without incurring the personal liability which would otherwise arise pursuant to section 443A(1)(d) of the Act.

The Court granted the orders sought in circumstances where:

  1. the loan was in the interests of the Companies’ creditors and consistent with the objectives of Part 5.3A of the Act, as it would allow the Companies to continue to trade for the benefit of their creditors;
  2. the creditors would not be prejudiced by the orders (in contrast, they would stand to benefit);
  3. notice had been given to those who may be affected by the orders, and the orders were not opposed;
  4. the administrators were not willing to proceed with the Loan Agreement unless orders were made limiting their liability; and
  5. the relevant contracting parties to the Loan Agreement had agreed to limit the personal liability of the administrators.

The Court also made a direction under section 447D of the Act that the administrators were justified in entering into the Loan Agreement.  The purpose of such direction is to provide the administrators with protection against claims that he or she acted inappropriately or unreasonably in entering into, and performing, the agreement.

The Court is only prepared to make directions of this kind under section 447D in exceptional circumstances.  For instance, where the administrator has to assess complex issues involving classes of creditors, the decision of the administrators to enter into the agreement gives rise to some legal controversy or there is some question about the propriety or reasonableness of the decision.

Take away points

Administrators cannot contract out of their liabilities incurred under section 443A of the Act, and they will remain liable for any debts that they incur in the course of an administration despite any agreement to the contrary.

Why risk it?  In our view, the prudent approach for administrators is to seek orders from the Court to modify the effect of section 443A(2) to either exclude liability or otherwise limit liability at least to the extent of the administrator’s entitlement to be indemnified from the assets of the company.

It is important to seek this protection to limit personal liability in the event the company’s asset realisations do not go to plan or a proposed deed of company arrangement does not come to fruition.

These orders should be sought in circumstances where the administrator either proposes to/or has already entered into a funding agreement (for example a loan or debtor financing agreement) that allows for the company to continue to trade during the administration period with the intention of maximising the outcome for creditors and achieving the objectives of Part 5.3A of the Act.

Such applications are usually straightforward and are an effective way to ensure that an administrator’s personal liability is limited to the extent agreed as between contracting parties.

If you wish to discuss our recent experience with applications of this kind then please feel free to contact us.

For further information, please do not hesitate to contact us.

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