Contracting with liquidators and administrators: how to do so effectively and the need to take care

11 March 2019

Key points:

  • When contracting with administrators or liquidators, counterparties need to be careful to ensure such contracts will give them enforceable rights.
  • An administrator can enter into almost any contract and is personally liable for numerous categories of debts they may incur.
  • A liquidator has only limited powers to enter into contracts on behalf of a company, and generally has no personal liability under such contacts.

The ability of an administrator or liquidator to enter into a contract, and whether they are personally liable for performance of that contract, is important to know: not only for the administrator or liquidator, but also for the counterparty wanting to ensure the contract gives them enforceable rights.

As a preliminary observation, administrators have much broader power than liquidators to enter into contracts on behalf of a company, and much greater exposure to personal liability.

Contracting with administrators

While a company is under administration, the administrator has control of the company and may perform any function and exercise any power that the company, or any of its officers, could perform or exercise if the company were not under administration. This may include carrying on, terminating or disposing of the company’s business. It may include managing or selling any of the company’s property.[1]

This means there is little (if any) restriction on the kinds of contact an administrator may enter into on behalf of a company.

Further, an administrator has personal liability for debts he or she incurs for:

  • services rendered
  • goods boug
  • property hired, leased, occupied or used
  • repayment of monies borrowed
  • interest in respect of money borrowed
  • borrowing costs.[2]

Though administrators will often seek to include limitation of liability clauses in such contracts, their personal liability for debts incurred in the above categories is despite agreement to the contrary.[3]

Contracting with liquidators

A liquidator can also enter into contracts on behalf of a company, including purchasing goods and services, but only if it is necessary for the winding up of the company, ie realising its assets and paying its debts.

This may include:

  • selling property of the company
  • carrying on the business of the company so far as necessary for the beneficial disposal or winding up of the company (eg so that the business may be sold as a going concern)
  • doing other things necessary for the winding up

If the term or period of performance of the contract may exceed three months, the liquidator must obtain the approval of creditors, the committee of inspection or the court.[4]

Notably, unlike administrators, there are no statutory provisions imposing personal liability on liquidators for debts they incur on behalf of the company.

Rather, debts incurred by a liquidator on behalf of the company constitute expenses of the winding-up and (as such) are payable in priority over other debts of the company out of the property of the company recovered in the winding-up.[5]

If insufficient funds are available in the liquidation, the liquidator is required to pay such debts proportionately from such funds that are available (if any) [6] and is personally exposed only to the extent he or she might fail to do so.[7]

Effective contracting with liquidators or administrators

Counterparties entering into contracts with liquidators or administrators therefore need to be careful to ensure that such contracts give them enforceable rights.

When contracting with liquidators, counterparties should always enquire whether the liquidation is in funds to meet the amounts that will become payable under the contract.

This is not necessary when contracting with administrators, provided the amounts fall within the categories of debts discussed above for which administrators are personally liable under the Corporations Act.

It is noted that damages for breach of contract are not considered debts or expenses, and will therefore usually not be claimable against liquidators or administrators, unless they are personally named as parties to the contract. However, it is rare that liquidators or administrators would agree to expose themselves to personal contractual liability in this way, as they are not commercial parties, but statutory officers performing their appointed role under the Corporations Act.

[1] Section 437B of the Corporations Act 2001.

[2] Section 443A(1).

[3] Section 443A(2).

[4] Sections 477 and 506.

[5] Section 556(1)(a).

[6] Section 559.

[7] Subject to the liquidator’s ability to seek to be exonerated in appropriate circumstances under section 1318.