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8 Oct 2020

HHG Legal Group’s Corporate and Commercial law Director, Murray Thornhill and Lawyer, Kai Yuin Yeo provide a practical case study on priority of payment for rent and related expenses where a business continues to trade while under voluntary administration.

20201008 Voluntary admin In article

Temporary changes to Australian insolvency laws in response to the COVID-19 pandemic have allowed for greater opportunity for directors to try and trade companies out of insolvency. Amidst all of this though, a recent case has considered the situation where voluntary administrators have been appointed and attempted to avoid debts incurred while continuing to trade the relevant business as usual. The following case study illustrates why now, more than ever, creditors must stay alert to signs of cash flow difficulties and know their rights if they seek to recover outstanding debts

Voluntary administration is a process that is an alternative to liquidation, that some businesses choose to enter as a means of maximising their chances of rescuing their business or providing the best return possible to creditors. It is therefore not surprising that the administrators for the PAS Group Limited (PAS), an Australian-based fashion group with 161 retail stores in Australia and New Zealand, decided to carry on PAS’ business as normal during its administration. In doing so, the administrators caused PAS to continue to occupy and lease all their retail and non-retail premises. They traded from all but 8 retail premises and generated a significant amount of revenue.

Was rent payable during PAS’ administration?

Having received a Court order extending the statutory ‘no personal liability’ period under section 443B(2) of the Corporations Act 2001 (Cth) (Standstill Period), the administrators sought a declaration that any rent or expenses incurred by PAS during the Standstill Period (Debt) did not have priority under section 556(1) of the Act.[1] They argued that:

  • as the Debt was incurred during the Standstill Period and the administrators were not personally liable for rent and other expenses incurred under a pre-appointment lease, the Debt was simply an unsecured debt; and
  • by reason of section 443B, the administrators did not ‘elect’ to retain the property.

The Court rejected those arguments and found that the administrators’ reliance on section 443B was misconceived as that section had no bearing on the determination of priority under section 556. The Court held that by actively deciding to trade the business as usual to try and create the best returns to creditors, the administrators had elected to cause PAS to occupy the leased premises for the purpose of the administration. Therefore, the Debt constituted expenses ‘properly incurred by a relevant authority in … carrying on the company’s business’ within the meaning of section 556(1)(a). The Debt must be paid in priority to all other unsecured debts and claims.

Beneficial occupation

This decision is consistent with the Lundy Granite principle which can be stated as follows:

where an administrator (or liquidator) elects to cause the company to continue in occupation of leased premises for the purposes of the administration (or liquidation), referred to in some cases as the period of “beneficial occupation”, the rent is payable as an expense of the administration or liquidation properly incurred in carrying on the company’s business within the relevant governing provisions’.[2]

This serves to remind administrators that if they decide to trade the relevant business as usual to rescue the business or maximise returns to creditors, they can’t occupy leased premises for this purpose without paying the rent and related expenses in priority to other debts. Such occupation constitutes ‘beneficial occupation’ and ‘common sense and ordinary justice require the court to see that the landlord is paid’.[3]

Therefore, administrators should consider the impact of rent and related expenses being paid in priority to all other unsecured debts when proposing any deeds of company arrangement or considering liquidation, as this can significantly affect the return to other creditors.

How HHG Legal Group Can assist

HHG Legal Group has been proudly serving Western Australian businesses, families, local governments and individuals for over 100 years and we are committed to supporting the communities in which we operate. Our commercial litigation and dispute resolution team can provide practical insolvency advice and representation for businesses as well as company directors.

Make an enquiry online or book a telephone, video or safely distanced meeting by calling +61 8 9322 1966.

 

[1] Ford (Administrator), in the matter of The PAS Group Limited (Administrators Appointed) v Scentre Management Limited [2020] FCA 1023.
[2] Ibid [33].
[3] Ibid [43] quoting Jervis v Pillar Denton Ltd [2015] Ch 87 at 115 [82] (Lewison LJ).

*This is general information only, and does not constitute specific legal advice. Please consult one of our experienced Legal Team for specific advice relevant to your situation.

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