TGIF 13 December 2024 – Administrators limit personal liability while obtaining external funding

This week’s TGIF considers a recent decision of the Federal Court of Australia (Tucker (Administrator), in the matter of True North Copper Limited (Administrators Appointed) [2024] FCA 1329). In the decision, Justice Banks-Smith approved the administrators’ entry into a loan agreement with an existing secured creditor to allow the companies to continue to operate during a dual-track sale and recapitalisation process.

Key takeaways

• For companies’ administrators, it is crucial to promptly consider whether borrowing monies to continue business operations could provide time for appropriate sale, restructure or recapitalisation processes that would improve creditors’ positions.
  
  
• Although administrators are not under any obligation to ‘expose themselves to substantial personal liabilities’, the Court must carefully consider any limitations on an administrator’s prospective personal liability and any approval to enter into funding agreements, considering the overarching objectives of the Corporations Act.
  
  
• Where urgent Court approval is sought by administrators, it may not be necessary for the administrators to seek the views of all of the companies’ creditors prior to the hearing.

Background

Mr Tucker and Mr Miskiewicz (the Administrators) were appointed administrators of True North Copper Limited (Administrators Appointed) (TNC) and its subsidiaries on 21 October 2024. A deed of company arrangement proposal had already been received and there was potential for further offers. However, the Administrators urgently required funds to continue to trade whilst a sale and recapitalisation process occurred. In the absence of funding, the companies would need to cease to operate, with the consequence of unemployment for the companies’ employees and reduction in the potential realisable value of the companies’ assets.

TNC’s secured creditor, Nebari Natural Resources Credit Fund II, LP (Nebari), offered to provide US$1.65 million to the Administrators pursuant to a Loan Agreement, provided the funds were used for:

• financing liabilities, costs and expenses incurred by the Administrators in the course of their duties;
  
  
• payment of costs and expenses in the companies’ share and asset sales or a recapitalisation process;
  
  
• payment of remuneration and disbursements of the Administrators; and
  
  
• general corporate payments for the companies.

It was a condition precedent that the Administrators seek judicial approval to enter into the Loan Agreement, particularly considering the limit on the Administrators’ prospective personal liability. The limitation on personal liability meant that if there were insufficient company assets to satisfy the loan repayments, the Administrators would not be personally liable.

The Administrators’ provided evidence that:

• the funding would facilitate the continuation of the companies’ business, at least in the short term, and potentially increase the pool of funds available for creditors;
  
  
• in the absence of funding, the companies’ would likely need to cease to operate and potentially tip into liquidation;
  
  
• the funding provided time for the Administrators to run an appropriate sale, recapitalisation or restructure process maximising return for creditors;
  
  
• the funding also provided for continued employment for at least some of the companies’ employees;
  
  
• it was highly unlikely the Administrators could ascertain alternative funding on better terms; and
  
  
• entry into the Loan Agreement would not materially prejudice creditors.

Decision

Justice Banks-Smith considered the Administrators justified in bringing the urgent application in circumstances where:

• there was an urgent need for funding to maximise the potential sale, restructure or recapitalisation of the companies; and
  
  
• the corporate structure of the companies included an ASX listed parent and its subsidiaries, with mining assets held across the group.

It is a well-established principle that administrators are not under any obligation to ‘expose themselves to substantial personal liabilities’ and that the Court has power to limit an administrator’s exposure. However, the Court must carefully consider any limitations on an administrator’s prospective personal liability and any approval to enter into agreements when considering the overall objectives of the Corporations Act to:

• maximise the chance of the businesses continuing to exist;
  
  
• maximise returns to creditors if the businesses cannot continue to exist; and
  
  
• ensure consistent regulation of external administrators to give greater control to creditors.

This was particularly so where Nebari would be entitled to the Administrators’ statutory priority and statutory lien in priority to other creditors in relation to amounts drawn under the Loan Agreement.

On the evidence presented, Justice Banks-Smith was satisfied that the Administrators’ entry into the Loan Agreement and subsequent drawdown of funding was consistent with the overarching objectives of the Corporation Act because:

• there was insufficient cash to meet liabilities and the Administrators could not be expected to continue to trade;
  
  
• the prospect of selling the companies’ assets or recapitalisation were enhanced if the companies continued to trade, increasing the likelihood of a better return for creditors;
  
  
• there was a lack of material prejudice to creditors; and
  
  
• although the entitlements of employees (as unsecured creditors) would rank below repayments under the Loan Agreement, the Administrators proposed to use a proportion of the loan funds to pay employees. Further, for some employees, the continuation in trade facilitated continued employment.

Given the urgency, Justice Banks-Smith accepted that it was not practical for the Administrators to notify and seek the views of all creditors. Justice Banks-Smith factored in that the Australian Securities and Investments Commission had been informed of the application, coupled with the extensive information provided in the report to creditors. Notwithstanding this, to ensure appropriate protections, Justice Banks-Smith made orders for creditors and other interested parties to be heard on three days’ notice if they objected to the orders made.

Comments

Whilst remaining cognisant of maximising creditor returns, it is prudent for administrators to promptly assess whether it is commercially sensible and consistent with the overarching purpose of the Corporations Act to borrow monies while running an appropriate sale, restructure or recapitalisation process. Aggrieved creditors ought to carefully assess the commercial viability of any proposed loan agreement and limitations on liability to determine whether to challenge the proposal.