NEWS & INSIGHTS
SPOTLIGHT ON LAW – COURT PROVIDES ASSISTANCE WITH ADMINISTRATION QUESTIONS
Speedbump ahead: In a recent Queensland Case, the Court turned its attention to the terms of a Voluntary Administration funding deed, along with Committee of Inspection formation and representation, showing how the Court can assist in ensuring there is flexibility in difficult, multi stakeholder situations. There are clear and positive messages for Administrators:
It is usual practice in insolvency administrations that, where the business in question is of value, but there is insufficient liquidity to continue trading, that Voluntary Administrators seek funding from either established funders, key creditors, or other stakeholders with an interest in the outcome. This is particularly so, in difficult situations where the business operates in the public interest, and where there are multiple financial and other stakeholders.
It is important in these cases that the terms of the arrangement are clear, and that the risks are well managed and the counterparties are appropriately managed and represented. Sometimes, help is genuinely needed from the Courts to ensure the actions taken are balanced between (a) consistency with the Legislation, and the objects of the Act and (b) good commercial practice.
These issues were considered in a recent case decided in Queensland, that concerned an Independent School based in Canberra: The Case is linked here: Marsden, in the matter of Brindabella Christian Education Limited (Administrators Appointed) [2025] FCA 456.
Background
Brindabella Christian Education Limited (the School) operated an Independent School in the ACT, which had around 1,000 students across two campuses. The ATO claims were around $8m, secured debts were $9M, and there were working capital issues effecting wage payments to around 50 staff, along with regulatory concerns. Administrators were appointed on 5 March 2025.
At the time of appointment there was a significant funding need and no immediate cash resources The Administrators sought further funding (a Section 560 Loan and a further funding Loan) from the existing secured creditor, to ensure continued operations, and to pay employee entitlements (where records were inaccurate) until other revenue sources were available. There was also funding provided by Government.
Creditors voted in favour of a Committee of Inspection at the first meeting of Creditors, but resolved to determine the constitution of the Committee by a subsequent ballot, which concluded a week later.
Orders sought
The Administrators sought Orders relating to, inter alia:
- Justification in entering into various Funding Arrangements pursuant to Section 90-15 of the Insolvency Practice Schedule;
- That Section 447A of the Act operate such that Section 443A and 443D provide that the Administrators are not personally liable to repay debts incurred under the Funding Arrangements to the extent the indemnity is insufficient;
- Where wage records might be incorrect, that the Administrators were justified in paying wages on a fortnightly basis until an investigation was completed, pursuant to Section 90-15 of the Insolvency Practice Schedule;
- Justification in appointing a Committee of Inspection by proposing and receiving nominations, following a ballot process, rather than at the first meeting, as required by section 436E(1) of the Act.
The Decision
Derrington J gave judicial advice, to the effect that the voluntary administrators were justified in entering into the Funding Arrangements, making the wage payments (even though the records were incomplete), forming a Committee of Inspection by ballot, and including on the Committee a Lender who might derive a profit or advantage from the company’s external administration.
| Point | Detail |
| Approval of the Loans | No criticism could be made of the administrators entering into the agreements almost immediately after their appointment and seeking judicial advice ex post facto. The only realistic alternative to these measures was to close the school, which would adversely affect both the creditors and the education of the students. The Judgement included at paragraph 38: It is said by the Administrators that the considerations canvassed above apply equally to the funding provided by the ACT and federal governments. That submission can be accepted – those funds provide further support to allow the school to continue to operate which, in turn, improves the chances of a better return to creditors. |
| Payment of the Wages | Despite the concern that staff were being underpaid and the unreliability of the financial records of the School, the Administrators were justified in continuing to pay the wages of the employees, that they had previously been paid, while investigating allegations of underpayment. The judgement included at Paragraph 28:
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| Formation of the Committee by ballot | It was determined this was a mere technical disregard of the Act, and that the expediency to which the administrators constituted the COI meant no criticism could levelled at them. The Judgement included at Paragraph 33 and 34: The relief sought is, in effect, to obviate any criticism of the Administrators as to that approach. It is true that the aforementioned course derogates from the procedural conditions imposed by s 436E(1)(b) and, in some sense, the need for the efficient carriage of administrations that underlies Part 5.3A of the Act: … That approach is said to ensure (a) the ordered and considered operation of the administration; and (b) the equitable representation of different classes of creditors in the committee, which, necessarily, inheres to the benefit of the Company and its creditors (and, indeed, to those persons with a direct interest in the continued operation of the School, including parents, staff and, perhaps most importantly, students). So much can be accepted and given the expediency with which the Administrators have sought to constitute the COI, the only available conclusion is that they have acted properly and in accordance with the express objects of Part 5.3 of the Act: see s 435A of the Act. No criticism can be levelled at the Administrators for their technical disregard of s 436E(1)(b) of the Act and it is appropriate that the orders sought under s 90-15 of the IPS now be made. |
| Inclusion of the Lender on Committee | Although the lender was entitled to be represented given that it held in excess of 10% of the value of all creditors, its participation was in potential breach of s 80-55(1) of the Insolvency Practice Schedule (IPS), which prevents participants from “directly or indirectly deriving any profit or advantage from the external administration of the Company”. The Judgement included at paragraph 44: Here, the NAB is an important stakeholder in the administration. It is a counterparty to several agreements which, on any view, are necessary for the continued trade and operation of the Company. It is also the largest secured creditor of the Company and, in turn, entitled to representation upon the COI: s 80-20(1) of the IPS. If the NAB were to be excluded from the COI, it would not have its interests reflected in that forum. Indeed, such a result might also impact its willingness to continue to fund the operation of the school (and with it, the Company). It is unlikely that the NAB’s presence on the COI would operate to the prejudice of creditors; in fact, it is more likely that its presence will enhance the potential return for the creditors. That is at least the broad view adopted in the Marsden Affidavit, which is unopposed |
This case is a useful reminder to Administrators, that there will be occasions where the Court will assist weight up important practical considerations, against technical non-compliance with the Act, where that is in the broader interests of Administration.
Conclusions
Wexted notes the following:
- Where urgent funding to preserve a company as a going concern is required, there will be circumstances where an application to the Court after the fact (obtain the court’s imprimatur and to seek relief from personal liability) is justified;
- Taking a practical approach to the formation of a Committee of Inspection, (in this case, a ballot process rather than formation at the first meeting) can be justified, despite the requirements of the Act;
- The proper formation of the Committee can include a creditor who might derive a profit or advantage from the external administration, and indeed it may be appropriate for such a creditor to be involved.
Published 30th May 2025
By Wexted