A financier’s rights when an Insolvency Practitioner is appointed
As a general principle, secured creditor’s rights will survive any form of insolvency appointment, as long as the security was validly obtained and is properly registered. Registration was discussed in the first part of this article. But these rights may be temporarily adjusted under certain types of appointments – under provisions specifically set out in the relevant Acts.
The Corporations Act attempts to provide an administrator with sufficient time to determine whether the company can be saved. To do so, it limits the opportunity for secured creditors to exercise their securities. The rights of a secured creditors are not affected by the appointment of a voluntary administrator if:
(a) The charge or charges cover the whole or substantially the whole of the assets of the company; and
(b) The secured creditor commenced action before the appointment of the administrator, or during the ‘decision period’.
The “decision period” is the period beginning on the day when notice is given to the secured creditor or when the administration begins and ending at the end of the thirteenth business day after that day. That is, these restrictions end when the administration or receivership ends.
If the secured creditor does not take action, commence or proceed with any enforcement action before the end of the decision period, they will have to seek the administrator’s consent or obtain leave of the Court before taking any action. Many secured creditors seek the administrator’s consent during the initial 13 business day period allowing them to take action at a later time if they decide to do so.
What about financiers who have provided asset finance by way of leases and similar contracts, as opposed to lending money under a fixed and floating security?
Lessors and creditors that have supplied loans to purchase specific assets (and have obtained security over those assets) have very similar rights. Their interaction with insolvency practitioners can be generally put into one of two groups:
(1) Voluntary Administrators and Receivers
(2) Liquidators and Bankruptcy Trustees
The Corporations Act has two very similar provisions – section 443B dealing with voluntary administrations and section 419A dealing with receiverships. Both place financial obligations on the relevant practitioner when they continue to use or occupy assets that are financed under an ‘agreement’. Both make the practitioner liable to pay rental or other amounts payable by the company when they continue to use or occupy premises or equipment during that that period.
This liability starts after a short period that allows the practitioner to decide whether they need possession or use of the equipment, and ends when the appointment or possession or use of that property ends. None of these provisions affect the company’s liability under the agreement, just the personal liability of the practitioner.
Liquidators or bankruptcy trustees may disclaim onerous property – sections 568 & 568A for liquidators and section 133 for trustees. Onerous property is property that is not required for the conduct of the estate and will not advantage the estate in any manner. Generally practitioners will not attract any personal liability.
However section 568(8) does not allow a liquidator to disclaim property after a notice has been given requiring them to decide whether to disclaim or not, and they do not disclaim within the required time period. If the liquidator does not disclaim the property, they will then be taken to have adopted the contract and attract personal liability. Similar provisions are set out in section 133(6) of the Bankruptcy Act.
Next month: Some suggestions for financiers on getting the best result out of an Insolvency appointment