Funding during voluntary administration – right of indemnity and liens
23 October 2025
Introduction
External funding may be required to support the continued operation of a company's business in circumstances where a voluntary administrator has been appointed. That funding may be provided by way of loans. The voluntary administrators have the power to operate the company's business; s437A(1)(b), Corporations Act ("CA") and the power to borrow for the purpose of funding its operation; s437A(1)(b), CA. Moreover, subject to obtaining orders under s447A, CA limiting their obligation, voluntary administrators are personally liable to repay both any loans they take in the course of their administration of a company as well as the interest on those loans and any other borrowing costs; s443A(1)(d), (e) and (f), CA.
The funder to an administrator will want to ensure its funding will be afforded priority over pre-appointment unsecured creditors and existing lenders. The funder might seek to achieve this by relying on the administrators' statutory right of indemnity and lien or equitable lien.
Statutory Right of Indemnity and Statutory Lien
Voluntary administrators may be indemnified out of the assets of the company for the purpose of satisfying those liabilities; s443D(a), CA.
Where circulating assets of the company are subject to a circulating security interest and that security interest has not been enforced prior to the appointment of the voluntary administrators, the voluntary administrators are entitled to an indemnity out of those assets; ss 443D, CA and 443E(4), CA. However, the right of indemnity is not available in respect of the liability of the voluntary administrators on account of loans obtained by them, interest and any associated borrowing costs; s443E(5), CA.
That statutory right of indemnity is supported by a lien over the company's property; 443F, CA.
Subject to the limitation in s443E(5), CA, the statutory right of indemnity and lien is available to voluntary administrators to satisfy their personal liability on account of any funds borrowed in the course of an administration as well as on account of any borrowing costs.
Where, however, a security has been validly granted over a company's assets prior to the appointment of voluntary administrators that security, provided that it has been registered, will take priority under the CA over the statutory indemnity and statutory lien available to voluntary administrators in respect of amounts borrowed (including interest and borrowing costs).
Equitable Right of Indemnity and Equitable Lien
To the extent that the voluntary administrators, in the course of their conduct of the company's business and affairs, incur costs and expenses in caring for, preserving or realising charged property, then, under what is called the "salvage principle", the voluntary administrators will have an equitable right of indemnification out of that property in respect of those costs and expenses as well as an equitable lien over them to support that right of indemnification; Coad v Wellness Pursuit Pty Ltd [2009] WASCA 68 ("Wellness Pursuit"). That right of indemnification was described at [99] in Wellness Pursuit as being available in respect of the voluntary administrators' "proper remuneration, and … properly incurred costs and expenses, attributable to work done exclusively in caring for, preserving and realising the assets under administration" and did not require the voluntary administrators to have "done something 'above and beyond [their] duties as an administrator' as a necessary condition" for the availability of that right of indemnification.
The principle that has been applied by cases is that a secured creditor (both in respect of circulating and non-circulating security interests) should not be allowed to assert priority over secured property ahead of an administrator in respect of costs and expenses incurred by the administrator in the care, preservation and realisation of property. The administrator would be afforded priority either on the basis that it would be unconscientious for the secured creditor to take the benefit of the administrator's work and at the same time assert priority over the administrator; or because the secured creditor, by some act, has ceded priority to the administrator.
Accordingly, to the extent the voluntary administrators borrow funds which are applied to pay the costs and expenses incurred by them in caring for, preserving or realising property of the company which are subject to a security interest, they should be entitled under the "salvage principle" to be indemnified out of those assets for the purposes repaying those loans.
Depending upon the circumstances, one option available to voluntary administrators to create greater certainty regarding the right of indemnification might be to:
- (a) seek the secured creditor's consent to them continuing the operation of the company's business as well as the ongoing use of its other charged assets; and
- (b) to covenant with the those lenders not to apply the loans made to the company other than for the purpose of caring for, preserving and realising those assets.
The voluntary administrators could also consider granting security over their right of indemnification and equitable lien to a lender providing funds to the voluntary administrators. If available, such security would likely be registerable under the Personal Property Securities Act.
What amounts to "caring for, preserving and realising assets"?
In 13 Coromandel Place Pty Ltd v C L Custodians Pty Ltd. (1999) 30 ACSR 377 (which was a case involving the liquidator of a company which was the trustee of a trust) the court said (at 385):
"these cases establish, clearly enough in my opinion, that provided a liquidator is acting reasonably he is entitled to be indemnified out of trust assets for all his costs and expenses in carrying out the following activities: identifying or attempting to identify trust assets; recovering or attempting to recover trust assets; realising or attempting to realise trust assets; protecting or attempting to protect trust assets; distributing trust assets to the persons beneficially entitled to them.
The position is a little more involved as regards work done and expenses incurred in what might be described as general liquidation matters. If that work is unrelated to the beneficiaries and their claims it is difficult to see how the cost could be charged against their assets. In the case of a company that is carrying on the business of trustee it might be that much of the work involved in liquidation is chargeable against trust assets if it can be shown that a liquidation is necessary for the proper administration of the trust."
The identification of a company's assets can involve work done in both establishing the company's title to assets in its possession as well as establishing whether any of those assets are subject to the interests of a secured creditor or some other third party; Hamilton v Donovan Oates Hannaford Mortgage Corporation Ltd [2007] NSWSC 10; ("Donovan Oates") and Re Arcabi Pty Ltd; ex parte Theobald (2014) 288 FLR 236 ("Arcabi").
The protection of assets can include making arrangements for insuring them; Donovan Oates and Arcabi, as well as for their storage and security; Arcabi.
Beyond the activities of that kind the right of equitable indemnification and an equitable lien can be available where voluntary administrators have continued the operation of the company's business. The activities which might be required to be undertaken by voluntary administrators in that respect will be as varied as the businesses operated by the companies to which they are appointed; see Wellness Pursuit (a fitness company) and Willmott Forests Ltd v Primary Securities Ltd [2015] VSC 138; Thackray v Gunns Plantations [2011] 85 ACSR 144 and Re Gunns Plantations Ltd (No 1) [2012] VSC 655 (all of which cases involved the continued operation of farming businesses) and Quinlan, IMO Halifax Investment Services Pty Ltd (No 3) [2019] FCA 124 (which involved the continued operation of an investment trust).
In any event in relation to the continued operation of a company's business where that business was the subject of a charge to a secured creditor, it was held in Wellness Pursuit that the voluntary administrators were entitled to their proper remuneration and properly incurred costs and expenses for the work done by them exclusively in caring for, preserving and realising the company's business and its related assets. In that regard, the court in Wellness Pursuit said (at [103]):
"In my opinion, it would be unconscientious for the [secured creditor] to have the benefit of the [voluntary administrator's] work done exclusively in caring for, preserving and realising the relevant assets without his proper remuneration, and properly incurred costs and expenses, for that work being discharged in priority to [the secured creditor's] claim … . My reasons for that conclusion are as follows:
(a) at all material times, the [secured creditor] had knowledge of the [voluntary administrator's] appointment as voluntary administrator and of his intention to care for, preserve and realise the company's business and related assets;
(b) at all material times, the [secured creditor] was entitled to, but chose not to, appoint a receiving manager under its charge;
(c) the [secured creditor] consented to (or, at least acquiesced in) the [voluntary administrator] caring for, preserving and realising the company's business and related assets;
(d) if the [voluntary administrator] had not carried out the requisite work, it would have been necessary for that work to have been performed by another person (presumably, a receiver and manager appointed by one of the charge holders or a liquidator); and
(e) if the requisite work had been performed by another person, the cost of the work would have been discharged out of the proceeds of realisation in priority to the [secured creditor's] claim."
As an aside, it is also worthwhile noting that any funding provided to an administrator that is used to fund employee entitlements with also receive a priority in any subsequent liquidation of the company equivalent to that available to employees when proving in a liquidation. That priority will only apply to the proceeds of realising circulating assets as against the entitlements of an existing secured creditor.
Takeaways
Whilst the administrator's statutory lien will provide priority to a funder over unsecured creditors, it will not result in priority over secured debts, absent secured creditor consent or, potentially, specific relief.
However, funding that is provided for use in the care, preservation or realisation of property of a company in respect of which the administrators have borrowed new money and applied the funds for those purposes, may be afforded priority ahead of existing secured creditors for such amounts pursuant to the administrators' right of indemnity and equitable lien.
Where there is doubt, funders should consider requiring the administrators to seek specific relief that could aid in clarifying that priority by recognising the basis on which funds are being borrowed. Although, we consider it unlikely that a Court will pre-emptively recognise priority of new funds ahead of the entitlements of an existing secured creditor, until an assessment can be made as to how the funds have been applied and the effect on the company's priority.
