By Jeremy Mackenzie, Partner and Kirsten Farmer, Partner
On 15 April 2020, the Federal Court provided the Administrators of Colette with relief from personal liability with respect to the company’s lease obligations.
Colette entered administration in February 2020, prior to the Coronavirus pandemic in Australia. In early March 2020, Administrators noticed sales had begun to substantially decline which had resulted in the company operating at a loss. The decline in sales dropped even further following the Government’s announcements regarding social isolation measures.
During the period up to 26 March 2020, the Administrators had been attempting to coordinate a potential sale or recapitalisation of the company. The Administrators ultimately formed the view that the company would suffer significant further losses as a consequence of COVID-19 in addition to outstanding debts of almost $650,000. The Administrators decided to close all retail stores while the pandemic remained an active concern. Notwithstanding the closures, the total monthly rental liability, excluding associated outgoings, for the stores was approximately $1.3 million. While a 100% rental reduction was sought from the landlords, the Administrators had only received an average of 9% rent reduction across all stores.
The Administrators thought the cash position could be stabilised if rent did not have to be paid and this would in turn avoid diminishing the return available to creditors.
The Administrators turned to s447A(1) of the Corporations Act. This section provides that the Court “may make such order as it thinks appropriate about how [Part 5.3A] is to operate in relation to a particular company”. The Administrators applied to the Federal Court for orders that the Administrators would not be held personally liable for rents for the retail stores that had been closed due to COVID-19.
The Court accepted that the Administrators had acted in accordance with the aims of Part 5.3A of the Corporations Act 2001 (Cth) by attempting to maximise the chances of the business to continue to exist and to provide a better return to its creditors. The Court understood the commercial reality behind the application and ultimately made orders under s447A (and section 90-15 of the Insolvency Practice Schedule (Corporations)) releasing the Administrators from personal liability for rent, for a period of two weeks, while the COVID-19 pandemic evolves, explaining that “the Administrators find themselves operating the Colette Group in an ever-changing environment brought about entirely by external factors”.
As the application by the Administrators was made ex parte, the attitude of the landlords is not known.
Section 447A has long been the elixir of voluntary administration, used widely by Courts to remedy everything from time limits to invalid appointments of administrators. With the Court finding the COVID-19 pandemic had created “extraordinary” circumstances and the ongoing uncertainty surrounding the period of time social distancing measures will be in place, we expect many more applications of this type will be brought by practitioners and the debate about the boundaries of s447A will be re-enlivened.
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