TGIF 26 August 2022 – Administrators protected from personal liability and permitted to trade on

This week’s TGIF considers Hill, in the matter of Ovato Limited (Administrators Appointed) [2022] FCA 903 in which the Federal Court approved the administrators’ proposal for the Ovato Group to continue trading in order to maximise the chances of a sale as a going concern. The proposal was dependent on ongoing funding from the Ovato Group’s financier and, in that context, the administrators were able to agree to have their personal liability limited to the assets subject to the financier’s security.  

Key takeaways

• Administrators should investigate third-party funding in an administration when the funding arrangements are properly characterised as being for the benefit of creditors.
  
  
• Personal liability of administrators under section 443A(1) of the Corporations Act 2001 (Cth) can be modified, including to facilitate a trade on, in appropriate circumstances.
  
  
• Non-publication orders regarding the financial details of the company can be obtained to protect competitive advantage and support a robust sale process.

What happened?

Chris Hill, Ross Blakeley and Ben Campbell were appointed as voluntary administrators (VAs) of ASX-listed Ovato Limited (Administrators Appointed) (Ovato) and 58 of its subsidiaries (together, Ovato Group). The Ovato Group runs print and distribution businesses in Australia and New Zealand creating products such as magazines, brochures, custom packaging and other marketing materials. 

The VAs had formed the opinion that a sale of whole or part of the business as a going concern would achieve the best return to creditors. This required the business to continue trading, despite its limited cash reserves. The anticipated funding requirements to trade on for the period of the sale campaign was significant. The Ovato Group already had a facility in place with Scottish Pacific Business Finance Pty Ltd (ScotPac).

The application

The VAs approached the court pursuant to section 90-15(1) of Schedule 2 – Insolvency Practice Rules (Corporations) 2016 (IPS) to the Corporations Act 2001 (Cth) (Act), seeking orders that they are justified in entering into and performing a deed conditionally entered into with ScotPac. The deed contemplates ScotPac extending the Ovato Group’s invoice financing facility, secured against receivables from Ovato Group’s clients and subject to a specified limit which was higher than the anticipated funding need. 

The VAs also relied on section 90-15 of the IPS and section 447A(1) of the Act to ask the Court to modify the operation of section 443A(1) of the Act and depart from the default position, whereby the VAs would otherwise take on personal liability for all debts they incur in the administration.

The agreement was for any liability incurred, arising out of or in connection with the deed or any funds obtained by the Ovato Group from ScotPac, to be restricted to assets over which security had been granted. The agreement was also for ScotPac to waive the right to seek personal recovery from the VAs to the extent the security was insufficient to satisfy the debts and liabilities incurred by the VAs.

The application was unopposed.

Result and reasoning

In the circumstances, Justice Stewart determined it was appropriate for the Court to make the orders sought and identified several relevant factors including that: 

• the VAs had assessed that trading on the business for the duration of the sales campaign would maximise the value of the business and provide a better return to creditors;
  
  
• the impediment to doing so was the limited liquidity in the Ovato Group and the significant external funding required to continue trading for that period;
  
  
• ScotPac is an existing creditor of the Ovato Group and already holds security over bank accounts into which receivables from Ovato Group’s clients are deposited;
  
  
• at the date of appointment, the debt to ScotPac was considerably less than receivables owed to the Ovato Group by its clients;
  
  
• if the sale of the business was to fail, some of the pre-appointment receivables would become unrecoverable as clients claim a set-off of their obligations against damages claims for Ovato Group’s breach of contract with them – therefore trading on would be essential to maximising recovery of pre-appointment invoices;
  
  
• other creditors are not detrimentally affected and ScotPac consented to restricting its ability to recover under the deed; and
  
  
• recent authorities have held that it is reasonable for administrators to seek to avoid personal liability for debts incurred for this purpose, noting that the relief from personal liability in this case is limited to the liability to ScotPac under the deed.

Finally, His Honour made orders under section 37AG(1)(A) of the Federal Court of Australia Act 1976 (Cth), that certain details of the Ovato Group’s financial position and facilities with ScotPac be precluded from publication during the course of the sale process. This was necessary to protect the VAs’ ability to access funding, protect the Ovato Group’s competitiveness and promote a robust sale process. 

Comment

This decision is another example of the current preference of the courts to give administrators ample assistance to facilitate outcomes that maximise return to creditors, instead of forcing premature liquidations. The driving factors are: primacy of creditor interests; reasonableness of the limitation of liability sought by administrators; and the consent of the party whose right to recover is being restricted by the limitation of liability. 

Administrators should be encouraged to consider options to take on third-party funding to facilitate trading on for the duration of the sale process where this is expected to increase the value of the enterprise as a going concern.

Court approval is able to be received prior to the liability being incurred and administrators will be able to proceed with the comfort that their personal liability for the debt is able to be restricted by agreement, as endorsed by the court.