A recent decision of the NSW Supreme Court highlights the flexibility of Part 5.3A of the Corporations Act and the ability of administrators to seek orders protecting their interests and facilitating restructures, and was the first stage of what promises to be a novel and challenging administration (In the matter of Nexus Energy Ltd  NSWSC 1041).
Background to the administration
Immediately before the administrators were appointed on 12 June 2014, the shareholders of Nexus Energy Ltd (Subject to Deed of Company Arrangement) voted down a proposed scheme of arrangement that would have facilitated a restructure of Nexus. The failure of the scheme resulted in a bridge financing facility, that had been made available to Nexus for the purposes of the implementation of the scheme, being cancelled by its financier, Network Investment Holdings Pty Ltd. The cancellation of this facility was the catalyst for the appointment of the administrators by the directors of Nexus.
Clayton Utz acted (and continues to act) for the administrators and deed administrators of Nexus.
Nexus and its subsidiaries were structured such that Nexus, as head entity, funded the obligations of its subsidiaries in respect of various projects which generated income for the whole group. The administrators were appointed to Nexus only. The subsidiaries remained in the control of their directors so that the value of the Nexus group could be preserved.
The Nexus group had serious liquidity issues as a result of the cancellation of its existing facilities following the appointment of the administrators and the impending crystallisation of significant liabilities on 30 June 2014.
The proposed facility
In the light of Nexus' circumstances, the administrators negotiated additional funding arrangements with Nexus' financier in the form of a short-term $30 million facility. The facility was to be available to Nexus, with part of the funds to be on-lent to Nexus' subsidiaries to fund certain operational expenditure.
The administrators' position
The administrators submitted that, if the facility was not entered into, the Nexus group was at risk of failing to satisfy certain obligations that could trigger events of default under existing contractual arrangements. From the administrators' perspective, this would reduce the value of Nexus' assets. The entry into the facility was also desirable because, absent the additional funding, the relevant subsidiaries were at risk of also being placed into administration.
Thus, in the administrators' view, the entry into the facility was in the best interests of the creditors of Nexus, as it would enable the Nexus group to continue trading and maximise the return to creditors.
The three issues for the NSW Supreme Court
On 27 June 2014, the (then) administrators of Nexus sought orders on an urgent basis under sections 439A, 447A and 447D of the Corporations Act 2001 (Cth) in relation to the administration of Nexus. The orders broadly fell into three categories:
- a direction that the administrators would be justified in procuring Nexus to enter into, and draw down under, the facility (as described above) and enter into various other related documents;
- a limitation on the administrators' personal liability in respect of the facility to the extent of the available assets of Nexus; and
- an extension of the convening period for the second meeting of Nexus' creditors.
Entry into the facility
Section 447D of the Act allows an administrator to apply to a court for directions about a matter arising in connection with the performance or exercise of the administrator's functions and powers. In relation to Nexus, the Court identified that there were recognised limitations on the circumstances in which such directions may be given, citing the well-known decision of Justice Goldberg in Re Ansett Australia Ltd and Korda (No 3) (2002) 115 FCR 409.
In this case, Justice Black noted that, in Ansett, Justice Goldberg observed that something more than the making of a business or commercial decision is required before the court will give directions to, or approve, the administrator's decision. Further, Justice Black made it clear that a court giving a direction under section 447D of the Corporations Act in respect of arrangements of the kind sought in relation to Nexus will be the exception, not the rule.
However, his Honour was satisfied that the complexity of the issues required to be addressed by the administrators, and the extent to which the borrowings were required in order to preserve value in the Nexus subsidiaries, warranted the giving of such a direction in the circumstances.
The administrators' liability
Administrators are personally liable for debts they incur in the performance of their functions and powers as administrators (section 443A of the Corporations Act), although they have a right to be indemnified out of the assets of the company to which they are appointed (section 443D of the Corporations Act). Accordingly, by entry into the facility, the administrators incurred the relevant debts personally, and sought to limit their liability to the extent of the available assets of Nexus.
Justice Black considered that the proposed limitation of the administrators' liability was necessary for three reasons.
First, the administrators could not be expected to personally accept liability for such substantial borrowing.
Secondly, the funding arrangement was in creditors' interests and was consistent with the objectives of Pt 5.3A of the Act insofar as it sought to maximise the recoveries that were likely to be made from a sale of the Nexus Group's assets.
Finally, no affected parties had objected.
Extension to the convening period
Lastly, the administrators sought an extension to the convening period of 21 business days, or 31 calendar days, which was a condition precedent to the first drawdown under the facility and which the administrators considered necessary in order to allow for a sale process in relation to the Nexus group assets to be undertaken. In Justice Black's view, the extension sought was a relatively modest one in the circumstances, and he was satisfied that the extension was warranted.
The first step in a major administration
The Nexus case demonstrates that, where the proposed funding is to be used directly to advance an agenda consistent with the objects of Part 5.3A of the Corporations Act, a court will be minded to facilitate such borrowing by limiting the relevant administrator's liability.
It is also worth noting that, where the borrowing is substantial, courts will not necessarily expect administrators to take on such significant personal liability themselves.
Further, where a convening period extension is reasonable, there appear to be few impediments to the court granting such extension in order to allow for an appropriate sale and marketing campaign to be undertaken.
This is not the end of the Nexus story. We will keep you up-to-date on what happens in this fascinating administration, and the lessons to be drawn from it.