Australia: Delays while the lessee is in administration

In the matter of Specialty Mens Apparel Pty Ltd (administrators appointed) [2019] VSC 40

The administrators were appointed to this fashion retailer on 15 January 2019.

The Legislation

The legislated process for administration is as follows:

  • the administrator must hold the first meeting of creditors within 8 business days of being appointed;
  • at the first meeting, the creditors can vote to replace the administrator or form a Committee of Inspection (which will monitor and assist the administrator);
  • the administrator is then required to investigate the company and make a report to the creditors about the alternatives for the company;
  • the administrator is required to provide the report at the second meeting of creditors, which should be within 25 business days of appointment.

At the second meeting, the creditors decide what should happen to the company.

The options for the creditors are:

  • execute a Deed of Company Arrangement – which sets out how the company can continue, and which may include the sale of some assets and the release of some debts;
  • end the administration and let the company continue; or
  • wind the company up.

For all these options, the administration period ends;

  • the second meeting can be adjourned for a period of up to 45 business days.

The administration period can be difficult for a landlord, as their rights in relation to the premises are restricted. If a redevelopment was planned, the landlord cannot use a demolition or relocation clause to recover possession of premises while that tenant is in administration; even if that tenant is in holdover, and the lessor has a replacement tenant, the landlord cannot force the administrator to vacate.

The administration period should end after 25 business days – 5 weeks. If the second meeting is adjourned, then the administration should all be over in 14 weeks. Then the landlord gets its rights back again – however, the administration period is often extended.

In this Case

In this short case, the Victorian Supreme Court set out some of the things that it considers when assessing an administrator’s application to extend the administration period. The administrator sought an extension of time to hold the second creditors meeting so that they may explore the possibility of achieving a sale of the business. The landlords were not formally notified of the application to extend the period of administration.

The state of the business was:

“the books and records reveal as at the date of the appointment of administrators the Company had debts totalling approximately $13 million to $13.5 million. Of that sum, approximately $4 million was owed to secured creditors, employee entitlements totalled approximately $1,422,000 (applying the capped liability amounts pursuant to  s 566), or in the absence of such capped liability, $1,837,000. The Company has unsecured creditors totalling approximately $7.7 million, $5.3 million of which is owed to trade creditors, while approximately $2.4 million is owed to the landlords in respect of all 87 retail store leases and the lease of the head office premises from which the Company operates its business. The amounts referred to are subject to revision and are only estimates.” [para 7]

“The liability to landlords consists of rent and arrears outstanding as at the date of the administrator’s appointment, anticipated make good costs and break fees required to be paid on termination of some of the leases. The amounts owing to employees predominately consist of accrued annual and long service leave.” [para 8]

“[The administrator confirmed] that the landlords have been kept informed of the progress of the administration. To date, none of them have expressed any objection or concern regarding the continuing lease of the various premises by the Company.” [para 11]

“Approximately 11 per cent of the inventory has been sold as of 28 January for a price of $2,278,846. It is intended that the ongoing sale of stock will be a source of cash which will be applied to pay employee entitlements and creditors pending a sale of the business or an orderly closing down.” [para 12]

Five expressions of interest had been received from potential purchasers of the business. The book value of remaining stock was approximately $10 million.

The administrators sought a 3 month extension so they could continue to try to negotiate a sale of the business, as well as continue to clear the stock owned by the business through their retail stores. If a sale of business did not eventuate, the administrators believed it would take 8 – 12 weeks to sell all the stock.

The strategy was to keep trading and selling stock, while trying to sell the business. The administrators confirmed to the Court that they had been keeping the landlords informed of their plans and no landlord had made any objection.

The Court’s Consideration

The Court had to consider the impact of an extension on the creditors. The administrators claimed that:

  • the landlords will continue to be paid rent;
  • if the business is sold, each premises will either be assigned or vacated;
  • the operation of the business will generate enough sales to pay the employees all accrued and current entitlements;
  • if the business is sold, the employees may retain employment; and
  • in relation to other creditors, as trading was generating cash and covering the employee costs and rent. There was likely to be more cash available to other creditors.

The Court needed to consider the overall purpose of Part 5.3 of the Corporations Act (which sets out the administration process). There is a tension in the goals: speedy resolution v maximising the result for creditors.

The Court accepted that this was a complex administration, which did not suit the time constraints imposed by the Corporations Act and the Court recognised that holding the second meeting when the administrators are not ready, can result in more difficulty and cost for the creditors.

Courts have identified broad categories of cases where extensions can be granted:

  • where the business is large and complex;
  • where there are a large number of employees with complex entitlements;
  • where it will take time to dispose of assets;
  • where a thorough assessment of a way forward needs additional time;
  • where the extension will allow the sale of the business;
  • where the extension will enhance the return for unsecured creditors.

Based on the evidence and the administrator’s strategy, the Court granted the extension because it would preserve employment, reduce unsecured debt and maximise the return from the sale of stock.

The Court found that an extension served the best interest of the employees, unsecured creditors and others. The greatest possibility for detriment was landlords, whose rights to secure vacant possession of the premises would remain abated during the extension. The Court considered that this was satisfactorily addressed by the right of individual landlords to make an application to the Court for alternate orders for their premises.

The Court also mentioned that the administrator may also seek a further extension, if needed.

Outcome

The second meeting of creditors has now been called for 23 April 2019, and the administrators are recommending that the company be wound up. The company ceased trading on 24 March 2019 when the stock had been sold. They were not able to sell the business. The stock book value was approximately $10 million, the administrators realised the stock for approximately $15 million. All employee entitlements were paid. The administrators considered that a managed winding down of operations over an extended period produced a materially better outcome for creditors.

Lessons

Periods of administration will often be extended, particularly when the business is complex or has a large number of stores and employees. An administrator can apply for an extension without formally notifying landlords (as happened here). If a landlord has a need for vacant possession of a premises, they should make their needs known to the administrator and ensure the administrator knows that they object to the lessee’s continued occupation of the premises. A Court may take their situation into account, even if they are not notified of the administrator’s request for an extension.

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.

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