Insolvency Law Update - Rental expenses incurred by administrators: personal liability and priority

Insolvency Law
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Ford (Administrator), in the matter of The PAS Group Ltd (Administrators Appointed) v Scentre Management Ltd [2020] FCA 1023

Factual background

PAS Group Limited and its subsidiaries (the PAS Companies) form an Australian-based fashion group. The PAS Companies trade from 161 retail stores and are party to a large number of lease agreements. On 29 May 2020, in the midst of the COVID-19 pandemic, the PAS Companies entered administration. Upon their appointment, the administrators sought and obtained orders that had the effect of extending the statutory ‘no liability’ period such that it applied from 29 May 2020 to 22 June 2020 (the Standstill Period).

The administrators caused the PAS Companies to continue to trade from all but 8 of the 161 retail stores throughout the Standstill Period, during which time the PAS Companies generated approximately $7.32m in revenue and incurred rental expenses of approximately $1.385m. As at the date of hearing the PAS Companies had not paid, and did not propose to pay, rent under any of their leases in respect of the Standstill Period.

The application

By originating process filed on 19 June 2020, the administrators sought a declaration to the effect that rent and any other amounts payable under the PAS Companies’ lease agreements in respect of the Standstill Period (the Standstill Period Rent) constitute unsecured debts or claims which are not entitled to priority over other debts or claims pursuant to s 556(1) of the Corporations Act 2001 (Cth) (the Act).

The application was opposed by Scentre Management Limited (Scentre), who represented the interests of the PAS Companies’ landlords. Scentre’s position was that the Standstill Period Rent would, in the event of a winding up, be an expense properly incurred in carrying on the business of the PAS Companies within the meaning of s 556(1)(a) of the Act, and would therefore be paid in priority to all other unsecured debts and claims in accordance with the so-called Lundy Granite principle.

The administrators’ contention

The administrators relied primarily on ss 443A and 443B of the Act, which concern the liability of administrators for the debts of the administration. It was uncontroversial that the effect of those provisions is that the administrators are not personally liable for the Standstill Period Rent. The administrators submitted that it follows that a lessor’s claim in respect of Standstill Period Rent is an ‘ordinary unsecured claim’. The administrators contended that s 556(1) of the Act was not engaged because, until the expiry of the Standstill Period, the administrators cannot be taken to have caused the companies to ‘incur’ rental expenses, and cannot be taken to have ‘elected’ to retain property for the benefit of the administration.

The administrators also submitted that if the Standstill Period Rent was characterised as an expense of the administration within the meaning of s 556(1)(a) of the Act, the effect would be to afford landlords in the position of Scentre a “super priority” inconsistent with the balance of ‘competing equities’ struck by the Act.

Disposition

Justice O’Callaghan declined to make the orders sought by the administrators. His Honour observed that the provisions of the Act relating to an administrator’s liability had no relevant bearing on the question at issue, which concerned the ranking of claims in a liquidation. That question fell to be determined by reference to what his Honour described as the ‘orthodox principles’ derived from Re Lundy Granite Co; Ex Parte Heavan (1871) LR 6 Ch App 462 (Lundy Granite). O’Callaghan J set out those principles in the following terms:

[W]here an administrator (or a 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 (in Australia, s 556(1)(a) of the Act).

There was no doubt, on the evidence, that the leased properties were used in carrying on the PAS Companies’ businesses during the Standstill Period, or that the administrators had elected to use the leased properties for that purpose. For example, there was evidence before the court that the administrators decided to actively trade the PAS Companies on a “business as usual” basis to maximise the prospects of a sale of the PAS Companies’ business as a going concern.

Applying the orthodox principles derived from Lundy Granite, his Honour concluded that in any liquidation of the PAS Companies, the Standstill Period Rent would be afforded priority as an expense properly incurred in carrying on the business of the PAS Companies within the meaning of s 556(1)(a) of the Act. His Honour’s conclusion is consistent with the position advanced by Scentre.

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James practises in commercial and public law

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