Federal Court approves administrators’ entry into funding deed to trade company pending sale

Section 90-15 of the Insolvency Practice Schedule (the IPS) confers on Courts wide powers to adjust rights related to companies in external administration. Here, the administrators of a mining group obtained orders approving their entry into a deed to fund the ongoing operation of the group pending sale and limiting their liability under the deed to the company’s assets. The Court accepted the administrators’ evidence that this funding was urgently required to continue the Group’s operations pending a sale, the prospects of which were thereby maximised.

Background

The Adaman Group (the Group) operates the Kirkolocka Gold Project at Mt Magnet, WA. The applicants were the Group’s administrators (the Administrators).

The Administrators were appointed on 1 May 2021. They quickly formed the view that continuing to trade the Group would maximise the value to be achieved for the assets and return to creditors. They also concluded that significant funding was urgently required to do so. It was evident that approximately $1million in additional funding would be required on 8 June 2021. The Administrators identified a source of funding, being Rivet Finco Pty Ltd (the Lender). They informed the Court that no other viable source of funding was available in the timeframe. On 28 May 2021, the Administrators entered into a funding deed with the Lender (the Deed).

The Deed provided for funding of $20million at 13% per annum, secured by all present and after-acquired property under a PPSA-registered security interest and the Administrators’ right of indemnity and lien under sections 443D, 443E and 443F the Corporations Act 2001 (Cth) (the Act).

Under section 443A(1) of the Act, the Administrators were liable for debts incurred in performance or exercise of any of their functions and powers, including the repayment of moneys and interest borrowed and borrowing costs. They would therefore be liable for the $20million principal and the interest at 13%, as well as costs of $400,000.

The Administrators sought orders under section 447A of the Act and section 90-15 of the IPS limiting their liability under the Deed to the assets of the Group under section 443D of the Act.

Due to the urgency of the application, notice was not provided to all interested parties (although it was provided to the Lender amongst others).

The Lender, and those other interested parties that did express a view and did not oppose the Administrators’ entry into the Deed.

Judgment

The Court noted that it has wide powers to make orders under section 447A of the Act and section 90-15 of the IPS, but such orders must be made in pursuit of the objects of Part 5.3A of the Act as set out in section 435A of the Act.

Section 435A provides that the objects of Part 5.3A are to administer the business, property and affairs of the company in a way that:

1. 1. Maximises the chances of the company, or as much of its business as possible, continuing in existence; or
   2. If that is not possible, results in a better return to creditors and members than would result from an immediate winding up.

The Court also noted that it is well established that Courts have power under section 447A of the Act to limit an administrator’s liability under section 443A. The principles governing the granting of an application are:

1. 1. The proposed arrangements are (a) in the interests of the company’s creditors; and (b) consistent with the objectives of part 5.3A of the Act;
   2. Usually, the arrangement proposed is to enable the company’s business to continue to trade for the benefit of the company’s creditors;
   3. The creditors of the company:
      1. Are not prejudiced or disadvantaged by the types of orders sought; and
      2. Stand to benefit from the administrators entering into the arrangements; and
   4. Notice has been given to those who may be affected by the order, except to the extent that urgent circumstances make this impractical.

The Court was satisfied that the Administrators entering into the Deed was in the interests of the Group’s creditors, for several reasons:

1. 1. The Deed would allow the Group to continue to trade. Her Honour accepted the Administrators’ evidence that this would maximise the value of the Group for sale and would require funding not otherwise available except through the Deed;
   2. There was unlikely to be any prejudice to the Group’s creditors if the Administrators’ liability was limited as sought, because the Administrators could not be expected to continue to trade and incur debts personally and without the limitation sought, they would not do so; and
   3. Notice had been given to the Lender (the party most impacted by the Deed) and it did not oppose the application. Her Honour held that in the urgent circumstances of the application, it was appropriate to act on the evidence of the Administrators and have regard to the absence of any opposition. To protect other interested parties, the Court made orders allowing them an opportunity to be heard in relation to the orders.

The Court was also satisfied that the Administrators had made full disclosure of all relevant facts and circumstances to the Court.

The Court accordingly made the orders sought by the Administrators.

Key takeaway

Administrators can use the wide powers to adjust rights related to companies in administration under section 90-15 of the IPS to mould orders that maximise the chances of the company or its business continuing in existence or a better return for creditors than would result from immediate winding up.

If you found this insight article useful and you would like to subscribe to Gadens’ updates, click here.

Authored by: 

Scott Couper, Partner
Craig Melrose, Associate