Australia: Landlords gain ground in Colorado Group administration

The recent decision of the Supreme Court of Victoria in Re Colorado Group Limited [2011] VSC 552 has clarified the circumstances in which a court will grant leave to a landlord to recover possession of a property from a company in administration under section 440C.

Executive Summary

The decision in Re Colorado Group Limited demonstrates that a Court may grant leave to recover possession where:

• the property represents a minor part of the undertaking of the company in administration;
• by reason of the expiry of the leases, there is no goodwill to pass on to a purchaser under a DOCA (subject to a successful section 444F(4) application);
• the rights of landlords in relation to the property are severely restricted;
• the imposition of the moratorium is the source of clear financial loss to the landlord;
• there will be no dividend payable to unsecured creditors if the company is wound up; and
• the landlords have otherwise acted reasonably.

Administrators seeking to resist similar applications for leave ought ensure that cogent evidence is led of the impact of a grant of leave on the prospects of a successful sale or restructuring of the business, and the commensurate effect on the return to creditors.

Section 440C: an insuperable obstacle?

Courts have in recent years demonstrated a willingness to extend the convening period in an administration, sometimes by considerable periods. The effect of lengthy administrations can be particularly severe for landlords prevented by section 440C of the Corporations Act from recovering possession of property occupied by, or in possession of, a company in administration. While section 440C permits landlords to recover possession with the agreement of the administrator or leave of the court, the statutory moratorium imposed by section 440C is generally considered to be an insuperable obstacle to the retaking of possession.

The Facts

Colorado was placed in administration on 30 March 2011, and receivers were appointed shortly thereafter. On 4 May 2011, orders were made extending the convening period by 9 months. Ventana Pty Ltd (Ventana) and PT Limited (PT) were the landlords of premises leased to Colorado at Westfield Southland and Westfield Carousel respectively.

On 17 March 2011, PT and Colorado agreed that the PT lease would be terminated and vacant possession delivered on 17 May 2011, at which time the premises was to be reconfigured into two separate shops. Negotiations with potential tenants for those premises had concluded. Following their appointment, the receivers refused to give up possession, citing an entitlement to remain in possession by reason of section 440C, notwithstanding the expiry of the lease.

The Ventana lease expired on 2 April 2011. After Colorado failed to respond to Ventana's proposal to re-let the premises, Ventana offered to lease the premises to a third party, Blue Illusion. That offer was accepted. Notwithstanding that the only basis for Colorado's entitlement to possession of the premises was section 440C of the Corporations Act, it refused to give up possession and Blue Illusion was placed in alternative temporary premises.

In June 2011, both made applications for leave of the Court to enforce the recovery of possession.

The competing arguments

The receivers and administrators argued that, after the closure of 139 Colorado stores in June 2011, all remaining stores were the "foundation stone" of the company and a grant of leave in respect of the two stores would impede a successful sale or restructure. They submitted further that it was too expensive to relocate the stores, and if leave were granted the stores would inevitably close. As a result, employees would be made redundant and trade creditors would lose Colorado as a customer.

The receivers and administrators also argued that the grant of leave would "open the floodgates" to similar applications by other landlords, which would be significant given that 36% of Colorado's leases would expire during the administration. This, it was submitted, would further damage the prospects of a successful sale or restructure.

Ventana and PT emphasised the significant financial loss occasioned by Colorado's continued occupation of the premises. They argued further that as both leases have expired Colorado would have no right to remain in possession of the property once the statutory moratorium imposed by s 440C concludes.

The Decision

The Court found that the two stores represented a small fraction of the undertaking of the group, and found no evidence that their closure would impede a sale or restructure. The receivers and administrators' "floodgates" argument did not garner much support from the Court, there being no evidence that this was likely to occur.

In weighing up the interests of the landlords in the premises, and the object of endeavouring to preserve the business of Colorado as a going concern, the Court ultimately found for the landlords and concluded that leave should be granted.

Conclusion

There has, to date, been little guidance from the courts in relation to the considerations that will inform a decision to grant, or refuse, leave under section 440C of the Corporations Act. The decision in Re Colorado Group Limited therefore clarifies the matters which need to be established to obtain (or resist) an application for leave.

It is significant that the likely return to unsecured creditors in a winding up was a factor that influenced the Court's decision to grant leave. Whilst there were receivers and administrators appointed in this case, the principles that the Court relied upon were in the context of an administration. The Court therefore had to take into consideration the objects of the administration (being maximising the return to unsecured creditors) as opposed to the interests of secured creditors. As it was conceded that the unsecured creditors were not going to receive a dividend, the grant of leave would not materially impact the administration. It may therefore be the case that this decision erodes receivers' ability to take advantage of the statutory moratorium imposed by Part 5.3A of the Corporations Act where a receivership runs concurrently with an administration.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.