The ‘Magic’ of s447A

Introduction

On 1 September 2022, in Re Lord, Invigor Group Ltd (admins apptd) [2022] FCA 1064, the Federal Court of Australia relieved administrators from liability in respect of a funding agreement with a secured creditor to trade on a business.

Background

Invigor Group Ltd (admins apptd) (“Invigor“) is an ASX-listed company operating a B2B data analytics business from its base in Sydney.  Like most businesses in this industry, Invigor’s main assets are customer contracts.

On 24 August 2022, Brett Lord and Marcus Ayres of Kroll were appointed administrators of Invigor.  Invigor, as at 31 July 2022, had debts totalling just over $3.5 million owed to 40 known creditors, secured and unsecured.  The major secured creditor was Allectus Capital Ltd (“Allectus“), which owed some $1.4 million.

Following discussions with creditors, including Allectus, it became apparent that it would be beneficial to Invigor’s creditors to trade-on the business.  Indeed, a cessation of trade would have caused the eventual termination of the customer contracts, destroying most of the value in Invigor and, consequently, the return to creditors in any winding up.

Accordingly:

• the administrators calculated that, to trade on, funding of $859,199 would be required for trade creditor and wage-related expenses; and
• Allectus agreed to provide that funding to cover trading costs while a DOCA (or an alternative) was developed (“Funding Agreement“).

Funding Agreement Issues

The Funding Agreement entered into between Invigor’s administrators and Allectus was conditional on the administrators obtaining an order under section 447A (the so-called ‘magic provision’) of the Corporations Act 2001 (Cth) (“Act“) relieving them from liability under section 443A of the Act.  The clause provided that:

The obligations of [Invigor] and any obligations of the [administrators] under or by reference to this Deed are subject to and conditional upon the making of an Order pursuant to section 447A of the [Act] to the effect that they are not personally liable under or in connection with this Deed or in respect of [Invigor’s] receipt of any of the Funding Amount.

Section 443A(1) of the Act provides that administrators are liable for debts incurred in the performance or exercise of any functions and powers as administrators for services rendered, goods bought, property used, repayment of borrowed money and interest accruing.  Naturally, this would encompass any funds advanced under the Funding Agreement.

Problematically, it is not possible to exclude, by agreement alone, the operation of section 443A(1).  Section 443A(2) provides that the section operates despite any agreement to the contrary.  Accordingly, an application to the Court modifying the operation of section 443A is necessary.

Application

The administrators successfully sought:

1. orders under section 447A of the Act and section 90-15 of the Insolvency Practice Schedule (“IPS“) that section 443A would operate as if the administrators’ liabilities under the Funding Agreement would be limited; and
2. a direction pursuant to section 90-15 of the IPS that they were justified in causing Invigor to enter into the Funding Agreement and in drawing down funds pursuant to the Funding Agreement.

As Yates J observed at [22] of his judgment:

It has become common for relief to be sought, and granted, in relation to modifying the operation of s 443A to relieve administrators from liability in respect of funding obtained to facilitate trading in the administration period. It is not expected that administrators should expose themselves to substantial personal liabilities on account of such funding.

Key to the success of the administrators’ application were the facts (most of which were deposed in the administrators’ supporting affidavit) that:

1. it was unlikely better funding could be obtained;
2. the funding would enable the administrators to trade-on:
   • until a decision was made on a DOCA to be proposed by Allectus (or an alternative to a DOCA);
   • allowing for an increased pool of funds to be made available to creditors in the event of winding up;
   • maximising the business’ value, increasing the likelihood that Invigor (or part of it) could continue in business;
   • allowing continued employment for Invigor’s employees, avoiding the crystallisation of employment termination entitlements; and
   • avoiding the crystallisation of claims under the customer contracts;
3. the rights of creditors would not, in the administrators’ opinion, be adversely affected by Invigor obtaining funding under the Funding Agreement; and
4. there was a clear urgent need for funding.

Additionally, it was important that the administrators kept secured creditors and ASIC informed of the application.

Comment

The case provides a useful, up-to-date summary of the law that courts will apply when considering applications for personal relief against liability for administration debts.  It is clear the courts’ focus remains on the effect that funding will have on a company’s creditors.

Administrators should remain vigilant, when trading on, in protecting against exposure to liability. Depending on the complexity of the business, it may be necessary to seek relief in respect of multiple types of liability-incurring agreements at various stages of an administration.  This is perhaps best illustrated recently by the Virgin Group administration in April 2020 (see Re Strawbridge, Virgin Australia Holdings Ltd (Admins Apptd) (No 2) [2020] FCA 717 at [84] and [101]-[111] (Middleton J)).