Rent incurred during the administration period has priority over other unsecured debts - recent decision of the Federal Court of Australia

In what was a welcome decision for landlords in the current climate, the Federal Court of Australia recently ruled that rent was an expense “properly incurred” by the Administrators and accordingly given priority over other unsecured debts by virtue of s.556(1) of the Corporations Act 2001 (Cth) (Act).

This article discusses the decision of Ford (Administrator), PAS Group Ltd (Admins Apptd) v Scentre Management Ltd [2020] FCA 1023.

Overview

The “PAS Companies” are a group of companies that, among other things, operated a total of 161 retail stores (of which 18 are located in New Zealand), and leased a total of 166 premises. Administrators were appointed and elected to trade the PAS Companies whilst exploring a maximum return to creditors through a going concern sale or a deed of company arrangement. The administrators continued to lease and occupy all but 8 of the 161 retail stores.

Previously, the Administrators sought and obtained a declaration to extend the usual “no personal liability” period of five business days after the commencement of the administration on 29 May (as provided by s443B(2) of the Act) to 22 June (Standstill Period). Absent this declaration, the Administrators would have been personally liable for the rent on and from 6 June (which was substantial),

By a subsequent originating process, the Administrators sought a declaration that rent and any other amounts payable under any lease agreement during the Standstill Period constitute an ordinary unsecured debt in the PAS Companies administration and would not be afforded priority under s556(1)(a) of the Act.

Key argument

The Administrators argued that s443B(2) of the Act was a statutory mechanism that operated to replace the Lundy Granite principle (otherwise known as the salvage or liquidation expenses principle) – ultimately that as the Act only makes the Administrators personally liable for the rent after the expiration of 5 business days (or as extended in this case), it is only at that point that they have ‘elected’ to retain the property for the purposes of the administration and the Lundy Granite principle is enlivened.

Counsel for Scentre (the largest lessor of Premises) argued that whether the Administrators are personally liable for the rent has no relevant bearing on the question of ranking of claims in a liquidation under s556 - the relevant question is whether rent is taken to be an expense “relevantly incurred”.

Decision

The Court agreed with Counsel for Scentre and held that as the Administrators had elected to continue trading from the leased premises during the administration (and received substantial revenue as a result), the rent was “properly incurred” by the administrators within the meaning of s556(1) of the Act and thereby enjoyed priority over other unsecured debts in the event that the company went into liquidation.

 Conclusion

 The question was not a moot one, as the decision would have the capacity to ultimately affect the Administrators recommendation to creditors in the event of a Deed of Company Arrangement proposal, given ordinary unsecured creditors would receive less as a result of the priority afforded to the lessors. The key consideration appears to be the extent to which the Administrator has retained property of the company, which in this case was significant. In my view, it would have been inequitable for the Administrators to have derived revenue from the enjoyment of the premises during the Standstill Period, but the rent for same not be considered an expense “properly incurred”.

If you would like to discuss the above further and how this decision may impact your circumstances, please contact Ben Skinner on (03) 9099 8388 for an initial consultation.

06/08/2020

Disclaimer

DSS Law insight articles are intended to provide commentary and general information. They should not be relied upon as formal legal advice. If you would like specific advice relating to this topic, please contact DSS Law on 1300 DSS LAW or epost@dsslaw.com.au.