Don’t make it personal – relief from liability under sections 419A and 443B

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By Ariel Borland, Partner, and Alex Myers, Senior Associate

The severe restrictions imposed by State and Federal Governments on large gatherings due to the COVID-19 pandemic are inhibiting, and in some cases preventing, businesses from trading. Although the present circumstances may necessitate administration or lead to receivership for some businesses, many practitioners are wary of accepting an appointment where there is an inability to trade as a going concern, thereby preserving value and maximising sale prospects.

Receivers’ and administrators’ exposure to personal liability for pre-appointment contracts relating to the use or occupation of property only adds to these concerns.

Fortunately, as the recent decision of the Supreme Court of Victoria in Atlas CTL Pty Ltd (in liq) and PJM Fleet Management Pty Ltd (in liq) [2019] VSC 866 demonstrates:

  1. the Courts have recognised practitioners may find themselves exposed to personal liability for company contracts in circumstances where the property in question is not being used to generate revenue or derive a benefit, but there is a reluctance to irreversibly disclaim it; and
  2. circumstances such as these may justify an appointee being excused by Court order from personal liability for a period of time, in accordance with section 419A(7) (for receivers) or section 443B(8) (for administrators) of the Corporations Act 2001 (Cth) (Act).

Background

Mills Oakley acts for receivers appointed to Atlas C.T.L. Pty Ltd (Atlas) by Nissan Financial Services Australia Pty Ltd (Nissan).

Atlas operated as part of a corporate group that included a company with the same director, P J M Fleet Management Pty Ltd (PJM). Together, PJM, Atlas, and other entities in the group operated a car and truck rental business.

To obtain the vehicles necessary to operate the business, PJM obtained finance from or entered into leases with numerous financiers, including Nissan. In 2012, PJM began on-leasing the vehicles it acquired to Atlas, which Atlas then hired or leased to customers, including Uber drivers. The vast majority of vehicles that PJM acquired were provided to Atlas under long term leases.

In October 2019, PJM and Atlas each appointed administrators, which was followed by various financiers appointing receivers over one or both entities. By that time, PJM had over 2,600 motor vehicles on finance or via leases, with payments on these leases exceeding $20,000 per day. A majority of these vehicles were on-leased to Atlas at the time of the administrators’ appointment.

Nissan appointed receivers to Atlas. The receivers did not trade Atlas’ business but took steps to secure as many vehicles in the possession of Atlas as possible whilst the entitlement to these vehicles was being ascertained.

Section 419A of the Act provides that a controller (which includes a receiver) is liable for so much of the rent or other amounts that are payable by the company under an agreement made prior to the controller’s appointment for as long as the controller exercises, or purports to exercise, rights in relation to the property the subject of the contract.

Although there were advantages to Nissan’s receivers securing the vehicles, maintaining possession of them exposed the receivers to potential personal liability under section 419A for lease payments due by Atlas to PJM.

Notwithstanding the potential for personal exposure, Nissan’s receivers were reluctant to issue notices indicating that they did not intend to exercise rights in relation to the motor vehicles PJM had leased to Atlas to avoid liability (as section 419A(3) permits), as doing so permit other financiers to collect and realise motor vehicles without regard to Nissan’s claims to these vehicles.

Orders sought to excuse Nissan’s receivers from personal liability

Nissan’s receivers therefore applied to the Court for orders under section 419A(7) of the Act, which provides that the Court may excuse a controller from liability. An order was sought excusing Nissan’s receivers from rental and related payments due by Atlas to PJM in respect of the vehicles PJM had leased to Atlas until 2 February 2020 (being a period of two months), which would provide time for:

  1. the investigation of the priority entitlement to the vehicles; and
  2. agreements to be reached with the other financiers for a cooperative sale of motor vehicles, with the proceeds held in escrow, pending determination of the competing claims (as once the vehicles were sold, liability for rental payments to PJM would cease).

One of the key grounds for the application was that the receivers were not utilising the motor vehicles to generate revenue, and that no benefit was being derived from maintaining possession of them. In addition, it was contended that the vehicles were not being used in any active way, or within the scope of what was intended by the original leases (in contrast to the circumstances in Nardell Coal Corporation (in liq) v Hunter Valley Coal Processing (2003) NSWSC 642).

Justice Sifris (at [27] to [32]) accepted these matters as key reasons for granting the orders sought, and excusing the receivers from personal liability incurred between 3 December 2019 and 2 February 2020.

Takeaway points

Section 419A(7) of the Act provides receivers with an avenue to seek to maintain possession of assets that are not actively being used, without being exposed to personal liability.

It is likely that section 443B(8) of the Act will be applied in a similar way (given the crossover in authorities considering each of the two sections) and therefore that administrators could also seek to avail themselves of the same benefits.

In both instances, the powers have broad application, but they can be utilised to preserve the value of a business, by ensuring that the key assets required to operate it are secured for use once any restrictions that are inhibiting or preventing trading (whether they be due to the COVID-19 pandemic or otherwise) are lifted.

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

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