The recent Federal Court of Australia (Court) decision in KASH Aboriginal Corporation ICN 108 (Administrators Appointed) No 2 [2012] FCA 789 confirms that an administrator of a company who acts honestly and reasonably may be protected from personal liability for any debts incurred while carrying out an administration.

Background

KASH Aboriginal Corporation (corporation)operated a facility to help indigenous persons recover from alcoholism and drug addiction.  In May 2012, the corporation went into voluntary administration. 

The administrators commissioned a Work Place Health and Safety Report, which found that the facility urgently needed repairs to its sewerage treatment system.  In order to carry out the repairs the corporation needed to obtain finance.

The administrators considered that the corporation was not in a position to obtain finance on the open market and so they proposed that the corporation enter into loan and mortgage agreements with the company of which the administrators were partners.  The administrators argued that such an arrangement would allow the sewerage treatment system to be repaired quickly.

The administrators sought orders declaring that they had authority to implement the proposal, and that they would not be personally liable for the debt.

Decision

The Court granted both orders.

The Court acknowledged the general position that an administrator will be held personally liable for any debts incurred during the course of administration.  But the Court noted that an administrator may apply to the Court for any order that the Court thinks appropriate in the circumstances.

The Court stressed that in making such order, the Court will not speak upon the commercial prudence of any proposal, nor will a Court make administrators’ decisions for them.  Even so, the Court decided that the orders sought by the administrators in this case were appropriate.

Regarding the authority to implement the administrators’ proposal, the Court considered the necessity and urgency of the expenditure, the fact that the land over which the mortgage would be claimed would be sufficient to realise the debt, and the fact that the application was unopposed.

Regarding the administrators’ personal liability, the Court noted that the corporation’s poor future financial position meant that the administrators would not benefit from their right of indemnity against the corporation’s assets.  In those circumstances, the Court determined that the administrators were entitled to protection from personal liability.

Comment

This decision suggests that administrators can have a degree of confidence that a Court will protect them from personal liability where the conduct engaged in is reasonably necessary, and where the assets of the corporation under administration are such that the right to be indemnified from the corporation’s assets will likely be illusory.