What protection are the courts prepared to offer?

Many readers would be aware that a voluntary administrator bears the risk of personal liability for debts they incur in exercising their powers in the course of the voluntary administration, most commonly where they continue to trade the company’s business.

There are good reasons for the legislation obligating a personal liability on a voluntary administrator, including protecting parties engaged by a voluntary administrator to continue to deal with the company after the administration has commenced (often while they are out of pocket for pre-administration debts).

While a voluntary administrator is indemnified out of the company assets for debts which they properly incur the decision to incur debts is not taken lightly, particularly where the company’s asset pool is minimal or the potential outcome of the administration (such as a Deed of Company Arrangement) is uncertain. It is difficult to recall in recent history a greater time of uncertainty for business than the current climate. The courts have recognised this uncertainty where voluntary administrators are looking to chart a course that aligns with the voluntary administration’s purpose, and be in the best interest of creditors, however, are otherwise wary of potentially substantial personal exposure.

In Strawbridge (Administrator), in the matter of CBCH Group Pty Ltd (Administrators Appointed) (No 2) [2020] FCA 472, Justice Markovic noted the extraordinary circumstances the administrators faced and granted orders providing a range of relief. These included relief against having personal liability for rent and excusing the administrators from having to cause the company to pay rent, allowing them to undertake a strategy of “mothballing” the business while the physical, legal, and economic landscape continued to evolve in the midst of the COVID-19 pandemic.

The administrators of PAS Group Ltd (a fashion retailer) and its related entities also obtained orders effectively relieving them of personal liability for rent during the administration period. In this case however, the court also ultimately ordered that the rent incurred during the period would be an expense that received priority in the event the group was wound up. This afforded the landlords some protection that otherwise wouldn’t have been available.

It is apparent that given the uncertainty administrators are facing in the current COVID-19 climate, the courts are willing to give orders supporting administrators where they are seeking a strategy in the best interests of creditors and it aligns with the voluntary administration regime’s objectives. These seek to maximise the company’s chances, or as much as possible of its business, continuing in existence; or if it is not possible for the company or its business to continue in existence-results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.

 

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