The New Prohibition on the Intermingling of Funds in the External Administration of Corporate Groups
On 1 September 2017, the remaining parts of the new Insolvency Practice Schedule (IPS) introduced by the Insolvency Law Reform Act 2016 (Cth) as Schedule 2 of the Corporations Act 2001 (Cth) (Corporations Act) commenced operation, including the provisions relating to "funds handling" contained in Division 65 of the IPS. These provisions apply to all "external administrations"1. including those that commenced prior to 1 September 20172.
The "funds handling" provisions comprise a strict set of rules relating to the receipt and payment of money in external administrations. They are clearly aimed at ensuring that an external administrator takes steps to separate the funds received in relation to a particular external administration and only pays money out of those funds for the purposes of the external administration.
The funds handling provisions require particular consideration for anyone appointed as an external administrator of a corporate group where, prior to their appointment, only one company in the group operated any bank accounts on behalf of the group (i.e. acting in a treasury function, as may be the case where the companies in the group have entered into deeds of cross guarantee). In those circumstances, the external administrator will need to consider whether to:
- open and operate bank accounts in the name of each company in the group that is in external administration; or
- as occurred in the recent Network Ten administration, seek directions from the Court to enable the external administrator to continue the pre-existing treasury function arrangements.
What do the funds handling provisions require?
The effect of the "funds handling" provisions is that without a direction from the Court to the contrary, an external administrator must:
- open and maintain a bank account for each company he or she is appointed to, or if he or she is a liquidator of a pooled group of companies, at least one bank account for the pooled group. This account is called an "administration account";
- pay all money received on behalf of or in relation to the company (or companies in the pooled group) into the administration account;
- only pay money into the administration account that is received on behalf of or in relation to the company (or companies in the pooled group); and
- only pay money out of the administration account for the purposes of the external administration of the company (or the pooled group) or in accordance with the Corporations Act.
Personal liability for a breach of the funds handling provisions
A failure to comply with any of the fund handling provisions exposes the external administrator to personal liability:
- it constitutes a strict liability offence which has a prescribed penalty of 50 penalty units (which at the date of this note equates to $10,500); and
- results in the external administrator being liable to pay penalty interest on any amounts over $50 not dealt with in accordance with these requirements at the rate of 20% per annum to the Commonwealth for so long as the relevant obligations in Division 65 were not met. The external administrator is personally liable for these payments and is not entitled to be reimbursed out of the property of the company.
Court directions required to act contrary to the funds handling provisions
The Court is empowered to make directions regarding the payment of money to or by an external administrator and which are inconsistent with the obligations outlined above pursuant to s 65-45 of the IPS.
This section was considered and applied in the recent decision of Justice Markovic of the Federal Court of Australia in Re Ten Network Holdings Limited (Administrators Appointed) (Receivers & Managers Appointed)  FCA 1144.
This decision arose from an application made on 30 August 2017 by Mark Korda, Jarrod Villani and Jenny Nettleton of KordaMentha (Administrators) as the Administrators of the Ten Network group of companies comprising fourteen companies in administration (Ten Group), seeking directions pursuant to s 65-45 of the IPS that would have the effect of permitting the Administrators to:
- operate as administration accounts for the group, bank accounts that were held only in the name of the company that had operated the treasury function for the group
- make payments into and out of that account regardless of which company in the group the payment or receipt related to so long as it related to one of the companies in the group.
In considering the application, her Honour accepted the Administrators' submissions that an application under s 65-45 of the IPS should be approached in a similar way to an application under s 447A of the Corporations Act to modify the operation of Part 5.3A in relation to a particular administration. In the circumstances, her Honour considered it was appropriate to give the directions sought by the Administrators for the following reasons:
- the companies under administration were all part of the same corporate group and one of those companies had historically acted as the treasury company for that group;
- the Administrators had continued to operate the group with that company as the treasury company. In doing so, they had kept records of all payments made or received by that treasury company on behalf of the other companies in the group so that a reconciliation could be prepared at any time;
- three of the companies in the Ten Group were dormant and had no assets. The other companies in the Ten Group (including the treasury company) were all party to a deed of cross guarantee. There was therefore no risk that creditors of a particular company in the Ten Group would be prejudiced by the intermingling of funds in the administration account;
- apart from the treasury company, none of the other companies in the Ten Group had any funds and a strict compliance with Division 65 would require the Administrators to take steps that would lead to additional costs being incurred and a potential loss of efficiency in circumstances where it would not necessarily improve the record keeping of the group; and
- the administrations were only expected to continue for a relatively short time and therefore the need for relief from the operation of Division 65 only arose for a short period of time.
Justice Markovic considered that the directions sought would not prejudice any creditor of the Ten Group, that it was in the interests of creditors that the directions be made and that the directions were consistent with the objects of Division 65.
We acted for the Administrators in the application before Justice Markovic; counsel for the Administrators were Ian Jackman SC and Tiffany Wong.