17 Apr 2014

Administrator's ability to approach a court about business decisions: elucidating the discretion

by Nick Poole, Peter Bowden, Amel Masinovic

The NSW Supreme Court says it can provide directions on an administrator's commercial decision on the basis of the liability assumed by administrators and their partners.

The fine line between the issues that an administrator may approach a court for directions on and those issues that are relegated to internal decision-making is becoming clearer. In the recent NSW Supreme Court decision in the matter of AWA Ltd (Administrators Appointed) (Receivers and Managers Appointed) [2014] NSWSC 249, Justice Brereton held that a court may provide directions on commercial or business decisions where the administrators have assumed personal liability, guaranteed by the administrators' partners, for the ultimate benefit of creditors.

Administrators that seek directions pursuant to section 447D of the Corporations Act must consider if their query raises some issue of law or legal procedure, or of the power, propriety or reasonableness of the proposed commercial decision.

The administrators trying to sell the business as a going concern

The administrators of AWA Ltd (Administrator Appointed) sought to borrow funds from a commercial lender to pay out AWA's primary secured creditor and retire the receivers appointed by it. The administrators decided that a sale of the business as a going concern would be in the creditors' best interests and there were a number of parties which expressed interest in the sale. They considered however that the ongoing appointment of the receivers was frustrating the sale process.

The efforts to sell the business as a going concern were hindered by the appointment of receivers because of:

  • the receivers' obligations under s420A of the Act in exercising a power of sale;
  • the receivers accruing costs of $200,000-$250,000 a week; and
  • the receivers' proposal to make approximately 70 employees redundant.

In light of the above, the administrators decided that it was in the best interests of the creditors that the secured creditor be paid out and the receivers retire. The administrators conducted a competitive process for a loan and were prepared to provide the lender with access to both the administrators' personal liability and indemnity, a lien over AWA's assets and, importantly, guarantees from the administrators' partners.

Accordingly, the administrators applied to the court for a direction under section 447D of the Act that the administrators were justified in entering into the loan.

Why the court decided directions were appropriate

Justice Brereton was eventually persuaded to provide directions on the basis of:

  • the existence of competing offers for the loan; and
  • the extent of liability undertaken by the administrators and their partners for the benefit of the creditors.

Justice Brereton made it clear that courts were not prepared to give administrators reassurance about business decisions absent a question of law or procedure, of power, propriety or reasonableness. It is not sufficient that an administrator approaches a court about a decision that creates a feeling of apprehension or a risk that it will later be criticised.

Nevertheless, the administrators faced a choice between two loans after the conclusion of the competitive process, one of which had been introduced to the administrators by an associate of AWA. Justice Brereton recognised that the administrators, seeking to minimise the costs of the receivership by acting quickly on the loan, faced a risk of subsequent allegations that they had improperly obtained a suboptimal loan.

The critical factor to Justice Brereton's decision was that the administrators had undertaken substantial personal liability (subject to the right of indemnity), including guarantees from their partners, to obtain the loan. There was a question of propriety that could be addressed by a court in relation to the loan which was ultimately for the benefit of AWA's creditors. On this basis, Justice Brereton allowed the application.

What will this mean for administrators?

This case counters the traditional view that courts are generally not concerned with daily business decisions and implementation. Where an administrator might later be criticised due to, for example, the crystallisation of a legal or procedural risk, the court may provide directions intended to facilitate the administrator's functions.

Administrators contemplating an application for directions will need to outline to the court why the primary concern about the decision is grounded in a question of law, procedure, power, propriety or reasonableness rather than an uncertainty about its consequences.

Interestingly, Justice Brereton was swayed by the level of risk to be accepted by the administrators in an effort to maximise the return to creditors of AWA. On this point it appears that, notwithstanding the administrator's right of indemnity, a court will hear a proposal which puts the administrator in a position where the propriety of the proposed transaction is a reasonable concern with significant consequences.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.