Not so business as usual - administrators relieved of personal liability for rent during the COVID-19 pandemic - Litigation, Contracts and Force Majeure

This week's TGIF considers the decision in Strawbridge (Administrator), in the matter of CBCH Group Pty Ltd (Administrators Appointed) (No 2) [2020] FCA 472 where the Federal Court made orders absolving the administrators of retailer Colette from personal liability for rent for a two week period, due to the COVID-19 pandemic.

The circumstances administrators currently face amidst COVID-19 cannot be described as "business as usual". In fact, according to Justice Markovic in Strawbridge (Administrator), in the matter of CBCH Group Pty Ltd (Administrators Appointed) (No 2) [2020] FCA 472, the circumstances are "extraordinary".

In this decision, the Federal Court made orders under s 447A of the Corporations Act 2001 (Cth) (Act) and section 90-15 of the Insolvency Practice Schedule (Corporations) (IPSC) releasing the administrators from personal liability for rent, for a two week period, while the COVID-19 crisis continues to evolve. This demonstrates that in light of the ever-changing COVID-19 landscape, the Court will continue to support administrators acting in the best interests of creditors as a whole and consistently with the objectives of Pt 5.3A of the Act.

Background

The Colette Group (Group) is a mid-market bag, jewellery and accessories retailer, operating 138 stores across Australia and New Zealand, as well as an online store. On 31 January 2020, administrators were appointed over the four companies comprising the Group, and the Group continued to trade.

Prior to March 2020, the administrators were of the view that the best outcome for the Group, and its creditors, was to undergo a sale or recapitalisation process. However, by 16 March 2020, the COVID-19 pandemic was severely affecting the Group's operations.

By 26 March 2020, the administrators had formed the view that in order to protect the health of the Group's employees and their immediate communities, it was critical to close all of the Group's retail stores. Notwithstanding their closure, the administrators remained in possession of the premises for 93 stores. The administrators were unwilling to recommence trading in these stores until it was safe for the Group's employees to do so.

The leases for those stores were held with 17 different landlords. The total monthly rental liability was approximately $1.3 million, excluding outgoings. Absent any relief granted by the Court, the administrators' liability for rent was due to accrue from 1 April 2020. A 100% rent reduction was requested from all the landlords. However, as at 28 March 2020, the administrators had only received a 9% rent reduction across the Australian store portfolio.

The Federal Court Proceedings

The administrators took the view that not paying rent for the leases was the most advantageous course to adopt for the Group's creditors as a whole.

The administrators applied to the Court for an order that Part 5.3A of the Corporations Act 2001 (Cth) (Act) should operate in relation to each of the group companies as if ss 443A(1)(c) and 443B(2) provided that each of the administrators was not personally liable for property leased, used or occupied, nor for the rent or other amounts payable pursuant to any of the leases.

Sections 443A and 443B of the Act respectively concern an administrator's liability for general debts and for payments for property used or occupied by, or in possession of, the company in administration.

Using the framework set out by Gilmour J in Griffin Coal, ¹ Markovic J was satisfied that the relief sought should be granted. Her Honour considered the following:

Would the proposed arrangements be in the interests of the company's creditors and consistent with the objectives of Pt 5.3A of the Corporations Act?
Her Honour concluded that while the effect of the COVID-19 pandemic on the physical, legal and economic landscape would continue to evolve, it was in the interests of the Group's creditors as a whole (and consistent with the objectives of Pt 5.3A of the Act) to vary the administrators' personal liability for rent.

Did the arrangements enable the company's business to continue to trade for the benefit of the company's creditors?
The administrators had modelled five alternate approaches to selling the business, which they had put to the creditors. They had selected a post COVID-19 sale of the business as the option likely to realise the most value for the Group. This approach incorporated a two month "mothballing" period, followed by four weeks of trade.

While the timeframe for economic recovery from COVID-19 cannot be known, her Honour found that the arrangements proposed by the administrators may, at a future point in time, enable the Group to trade for the benefit of its creditors as a whole.

Would the creditors of the company be prejudiced or disadvantaged by the types of orders sought and stand to benefit from the administrators entering into the arrangement?
After balancing the potential prejudice to creditors versus landlords, her Honour was satisfied that there would be no prejudice to creditors in making the order.

No rental payments were due during the two week period during which the orders were to operate, and the orders would give the administrators further time to assess the best interests of the creditors. Ultimately, her Honour found that the landlords would be in no worse position if the order was made, than they would be if the stores were vacated.

The Federal Court also made directions under s 90-15 of the Insolvency Practice Schedule (Corporations), that the administrators were justified in causing the Group to not meet their obligations to pay rent in the context of:

the COVID-19 infection rate in Australia continuing to increase daily so that it is presently unclear when it would be safe to recommence retail operations;
other major jewellery, clothing, footwear, stationery and department store retailers taking action similar to that proposed by them;
the uncertainty about the availability or reach of any stimulus package to underwrite commercial rent or any legislative intervention;
the administrators' largely unsuccessful attempts to negotiate rent reductions with the landlords; and
the fact that notice has been given to the landlords.

The matter returned before Justice Markovic on 15 April 2020, and her Honour extended the orders to 6 May 2020. At the time of drafting this article, her Honour's reasons for extending the duration of the orders have not been published.

Comment

The current government policy about rent relief for commercial tenants and the uncertainty of COVID-19 and its effect on the economy is likely to contribute to more administrators seeking the assistance of the Court during this time.

This judgment may provide insolvency practitioners with some comfort that the Court will support decisions made in the interests of company creditors as a whole and consistently with the objectives of Pt 5.3A of the Corporations Act 2001(Cth), and will provide some relief against personal liability.

Footnote

¹Mentha, in the matter of Griffin Coal Mining Company Pty Ltd (administrators appointed) [2010] FCA 1469; (2010) 82 ACSR 142 [30].

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