Voluntary administrators' personal liability for rent - is relief available?

Rent relief.  It is an issue which has been at the core of the discussions concerning reforms which could limit the commercial and economic impact of the COVID–19 pandemic.

Is it available to administrators?  

It was concluded in Strawbridge (Administrator), in the matter of CBCH Group Pty Ltd (Administrators Appointed) (No 2) [2020] FCA 472 (Colette Group) that it could be made available in the circumstances of that case, as to do so would promote the objects of the voluntary administration regime.

Background

Colette Group concerned the administration of a group of companies which operated a chain of stores from leased premises in Australia and New Zealand.  Voluntary Administrators had been appointed to those companies prior to the commencement of the COVID–19 pandemic.  They had identified and closed those stores in the chain which were unprofitable and had commenced a campaign to sell the balance of the business when the pandemic struck.  Its impact was profound.

The Administrators considered that there was a number of options available to respond to that impact.  In essence, though, they were:

• immediate closure of the business and a fire sale; or
• “mothballing” the business with a view to recommencing its operations after the pandemic and pursuing the possibilities of recapitalising it, selling it or winding it down in an orderly way.

It was the view of the Administrators, to the extent that it was possible to form a view in a highly uncertain and complex environment, that the best option was “mothballing” the business.  Rent relief was sought for the fortnight which it would require to make the arrangements necessary for that purpose.

Relevant principles

Under section 443A of the Corporations Act 2001 (Cth) (Act), voluntary administrators are liable for debts they incur in the exercise of their functions and powers.  Section 443B imposes personal liability on administrators for rent payable on leases undertaken before the administration commenced where the company continues to occupy the premises for more than 5 business days after the administration began. 

In Colette Group the Federal Court considered whether section 447A(1) of the Act could be invoked to make orders to vary the operation of sections 443A(1)(c) and 443B(2) so as to relieve the Administrators of personal liability for rent due under the leases for the premises which the group continued to occupy. 

The Court accepted that it is well established that it has the power under that section to make orders limiting an administrator's personal liability. 

The principles applicable to making an order of this kind were summarised in Mentha, in the matter of Griffin Coal Mining Company Pty Ltd (administrators appointed) [2010] FCA 1469; (2010) 82 ACSR 142 at [30] as follows: 

"(a) the proposed arrangements are in the interests of the company’s creditors and consistent with the objectives of Pt 5.3A of the Corporations Act.


(b) typically the arrangements proposed are to enable the company’s business to continue to trade for the benefit of the company’s creditors.

(c) the creditors of the company are not prejudiced or disadvantaged by the types of orders sought and stand to benefit from the administrators entering into the arrangement.

(d) notice has been given to those who may be affected by the order."

Application of relevant principles

It was in the context of the Background described above that the Administrators sought relief from their personal liability under sections 443A and 443B of the Act for a two week period in order to permit them, in an orderly way, to “mothball” the business of the group.  On the basis of these principles and the circumstances of the case, the Court concluded that: 

"the proposed arrangements varying the Administrators’ personal liability for rent under the Leases for a two week period, while the effect of the COVID-19 pandemic on the physical, legal and economic landscape continues to evolve, is in the interests of the Colette Group’s creditors as a whole and consistent with the objectives of Pt 5.3A of the Act…[and] may at a future point in time enable the Colette Group's business to trade for the benefit of its creditors” (at [46]).

That conclusion was reached having regard to the following considerations:

1. Whilst the Administrators were unable to express any opinion with certainty regarding the timeframe for economic recovery from the pandemic or its ultimate effect on the prospects for sale or recapitalisation of the group's business, they did form the opinion that "the alternative of “mothballing” followed by a period of trading and then a sale is likely to realise the most value for the group’s business and is thus in the interests of creditors as a whole” (at [47]).

2. “Mothballing” also has the benefit of preserving the pre COVID-19 pandemic alternatives of a managed wind down of the business or re-engaging with interested parties to facilitate a sale or recapitalisation through a Deed of Company Arrangement and avoids the less desirable alternative of [shutting the business] (at [47]).

3. There would be no prejudice or disadvantage to the creditors if the orders were made. 

4. The detriment to the landlords, being the relevant group of creditors who would be affected if the orders sought by the administrators were made, was weighed against the following factors (at [52]): 

"(1) no rental payments are in fact due during the two week period during which the orders sought by the Administrators will operate;

(2) the effect of the orders sought by the Administrators is to give them further time to assess what is best for creditors as a whole given the ever-changing physical, legal and economic impacts of the COVID-19 pandemic; and

(3) making the orders sought by the Administrators may ultimately enable the Administrators to pursue one of the alternative courses they have modelled which do not involve an immediate shut down i.e. a wind down or a period of trading followed by a sale.  At least in the sale scenario there is potential for the Landlords to maintain tenanted stores and any outstanding amounts could form part of lease renewal negotiations."

5. Additionally, so far as the landlords were concerned:

• If the relief sought by the Administrators was not granted, they would vacate the stores immediately and proceed to shut the group’s business. The Court concluded that the landlords were not likely to be in a worse position if the orders were made, than the position they would be in if the stores were vacated immediately; and
• Whilst there was no certainty that the landlords' position would be improved, the Court noted there was at least the potential for it to be improved if the relief sought by the Administrators was granted.

Post script – An application for directions

The Administrators also sought directions that they were justified in causing the group not to pay the rent due for the two weeks in respect of which they were seeking relief.

It has often been said that the Court will not give directions to voluntary administrators where the issue concerns a commercial decision to be taken by them.  However, where, as was the case in Colette Group, the circumstances are uncertain and complex, it is appropriate for the court to protect them from “unforshadowed but foreseeable claims” by giving directions even though the proposed course of action; not paying rent, involved a commercial decision.

As the Court said (at [64]): 

"While the Administrators’ proposed course not to pay rent is an unusual one and, I accept, will jeopardise the Colette Group’s tenancies, it is, as the Administrators submitted, the preferable course, taking into account the creditors’ interests as a whole in the maximisation of the value of the Colette Group’s business and the current commercial environment in which that business operates."  

Author: Richard Fisher AM, Consultant and Iman Barr, Graduate.