Court uses statutory powers to protect administrators from full liability

David McIntosh, Partner, Sydney
Emma Colantonio, Solicitor, Sydney



Case review: Strawbridge, in the matter of Retail Adventures Pty Limited (Administrators Appointed) v Retail Adventures Pty Limited (Administrators Appointed) (No 2) [2012] FCA 1368


The Federal Court has utilised its discretionary power under section 447A of the Corporations Act 2001 (Cth) (Act) to limit the scope of an administrator’s general liability for debts incurred in the course of the administration arising under section 443A(1) of the Act.

Background to the administrators’ application

The administrators of Retail Adventures Pty Ltd (Company), one of Australia’s largest discount variety operators, entered into a licence agreement under which they had authorised a related entity of the Company, DSG Holdings Australia (DSG), to continue trading the business.  The parties subsequently agreed to amend their agreement in order to limit the personal liability of the administrators to DSG under the licence agreement.  It was the intention of the parties that the administrators would not incur personal liability to any party under the licence agreement.

The administrators made an application to the Court under section 447A of the Act for an order reflecting the terms of the limitation of liability under the licence agreement to amounts in respect of which the administrators were entitled to be indemnified out of the assets of the Company, and actually indemnified out of the assets of the Company.

Administrators’ liability under the Act

Section 447A(1) of the Act provides the Court with the power to make such orders as it thinks appropriate about how Part 5.3A of the Act is to operate in relation to a particular company.  Under this section, the court has a broad discretionary power to make orders that it thinks appropriate concerning the operation of the administration of a company’s affairs.

Section 443A(1) of the Act provides that an administrator of a company under administration is liable for debts he or she incurs, in the performance or exercise, or purported performance or exercise, of any of his or her functions and powers as administrator, for (amongst other things) goods bought and services rendered.

Reasons for Judgment

When considering whether the Court ought to make the order sought by the administrators under section 447A of the Act, Justice Jagot held that regard should be had to:

1.  the interests of the Company’s creditors,

2.  the objectives of Part 5.3A of the Act;

3.  whether the creditors of the Company may be prejudiced or disadvantaged
     by the type of orders sought;

4.  whether the arrangements proposed enabled the Company’s business to
     trade for the benefit of the Company’s creditors; and

5.  the giving of notice to those affected by the application.

The administrators’ evidence pointed to the benefits of the continuation of the Company’s business under the licence agreement.  Such benefits included employee retention, maintenance of supplier relationships and preservation of the current value of the business.

In the circumstances, the Court was satisfied on the administrators’ evidence that it was in the best interests of the Company and its creditors that the Court utilise its power pursuant to section 447A of the Act to modify section 443A(1) of the Act to limit the liabilities of the administrators in line with the commercial agreement.

Conclusion

This decision is a useful reminder of the wide power conferred on the courts by section 447A and its utility in various circumstances, provided it is in the interests of the company’s creditors to do so.

Despite the breath of section 447A, the powers under the section are not entirely without limit.  The courts have made it clear that the power must be confined to the furtherance of the objects of Part 5.3A of the Act.  It is not a broad power to make orders to cure defects or to remedy the consequences of some departure from the provisions of Part 5.3A.