Ashurst Restructuring Roundup

Limiting Liability of Administrators for Employee Wages

Walley IMO PGP Group (Aust) Pty Ltd [2023] FCA 1554 ("PGP Group") and Crosbie IMO Godfreys Group Pty Ltd [2024] FCA 60 ("Godfreys")

Voluntary administrators have been able to seek orders releasing them from their personal liability for debts incurred by them in the course of conducting a company's business. That relief has been available where it has been necessary to support the continuing operation of that business.

In each of PGP Group and Godfreys orders were made limiting the personal liability of voluntary administrators on account of the ongoing entitlements of the company's employees for wages and the like.

In both cases the administrators wished to continue to operate the company's business. They had not been able to satisfy themselves that the company's payroll system correctly determined the entitlements of its employees under the various awards which applied to them. Moreover, they estimated that it would take them some considerable time to complete the process of verification.

The court in each case made the orders under s 447A of the Corporations Act 2001 and s 90-15 of the Insolvency Practice Schedule limiting the personal liability of the voluntary administrators on account of the employees' entitlements provided that they continued to pay those entitlements consistently with the company's existing payroll system. The court, when making those orders, was satisfied that adequate notice of the application had been given and that:

(a) it was in the interest of the company and its creditors (including its employees) that it continued to trade;

(b) it needed its workforce to continue to trade;

(c) it was not feasible to expect the administrators in the short term to satisfy themselves of the integrity of the company's payroll system; and

(d) in the circumstances, it was unreasonable either to expect the voluntary administrators to assume personal liability on account of the employees' entitlements or, at least, not to put them in a position where they could take commercial decisions uninfluenced by the prospect of personal liability.

Considerations which seem to have informed the exercise of the court's discretion on previous similar applications have been:

• prospective creditors who could be affected by the limitation on the administrator's liability are expressly informed of that limitation and can either elect to not partake in an arrangement with the company or apply to have the order limiting liability varied.
• as a matter of practical or commercial reality, creditors who have a continuing relationship with the company will not be adversely affected.

Of course, in the case of employees, they could elect to resign. Moreover, their ultimate position may not be able to be determined until the terms of any proposed DoCA are known and when they can decide whether to rely on the benefits it confers or seek the liquidation of the company and look to the FEG Scheme to recover any deficiency in the payment of their entitlements.

More generally, the decisions in PEP Group and Godfreys suggest the court, when considering applications to relieve voluntary administrators of personal liability, may be focused on whether it is necessary to promote the primary objective of the voluntary administration regime; namely, the preservation of the company or its business, with less attention on the full impact of granting that relief on particular creditors that are directly affected.

Authors: Richard Fisher, AM, Consultant; and Emanuel Poulos, Partner.