Can administrators avoid personal liability during the COVID-19 crisis?

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The Federal Court grants administrators an extension of time to explore options for retail business in this fast-changing COVID-19 era

On 15 April 2020, Justice Markovic in the Federal Court granted further orders to the Administrators of the Colette by Colette Hayman Retail Group. The orders extended the earlier court orders so that:

  • Each of the Administrators is not personally liable for rent or other payments due under leases from 1 April 2020 to 6 May 2020 for any of the 93 stores that the Colette Group had to close during the COVID-19 pandemic
  • The Administrators are justified in causing the Colette Group to not pay rent during the additional three weeks during which the orders are operative
  • Dealt with the confidentiality of certain evidence

The judgment means that the Colette Group has no obligation to pay either their initial rent arrears of $648,923 nor any ongoing rent commitments at least until 6 May 2020 when the hearing is next listed.

This case demonstrates the court’s willingness to provide administrators extensions to personal liability exemptions during the COVID-19 crisis.

Background

The case of Strawbridge (Administrator), in the matter of CBCH Group Pty Ltd (Administrators Appointed) (No 2) [2020] FCA 472 was brought by the Administrators of the Colette by Colette Hayman Group (the Colette Group).

The Colette Group are a fashion accessory retailer. When they entered administration on 31 January 2020, they operated 124 stores in Australia and 14 in New Zealand. The appointed Administrators continued to trade the Colette Group.

On 21 February 2020, the Administrators applied for an extension of the convening period for the second creditors meeting, which was due to expire on 28 February 2020. The court granted an extension. At that point, the COVID-19 pandemic had not yet hit Australian shores and the eventual impact was not part of the Administrators’ calculations albeit they had decided to immediately close 31 under-performing stores, leaving 93 stores open from 26 March 2020. The intention at that time was to operate the business while either seeking to sell it or recapitalise it by the end of April 2020.

By 26 March 2020, the situation had changed dramatically. The Administrators formed the view that all remaining stores had to be closed immediately to protect public health. Sales, which had been dropping dramatically since 9 March, now ground to a complete halt.

The Colette Group continued to be responsible for the leases attached to all 93 premises. The total monthly liability for those leases was around $1.3 million. The Administrators requested a 100% rent reduction from the landlords, but could only secure a reduction of 9%.

By 30 March 2020, there was still no formal legislation in place to deal with retail rent relief. The Administrators faced the possibility that they would be personally liable for the arrears.  Therefore, the Administrators sought court orders that:

  • the Colette Group not be required to pay the rent arrears; and
  • that the Administrators would not be personally liable for those arrears.

On 1 April 2020, those orders were granted for two weeks. On 15 April 2020, they were extended for a further three weeks.

Justice Markovic recognised that the Administrators found themselves in “extraordinary circumstances” which required them to operate the Colette Group in “an ever-changing environment”. To be able to act the interest of stakeholders, including the creditors of the Colette Group, they needed to be agile and explore all options.

The orders are intended to allow the administrators to:

  • Engage in good faith discussions with the landlords
  • Assess how the JobKeeper subsidy impacts the business and its eligible employees, especially since the employees are unlikely to receive the JobKeeper subsidy if the Colette Group goes into liquidation
  • Model the impact of the Code of Conduct, JobKeeper subsidy and rental concessions on the Colette Group
  • Engage with creditors and other stakeholders
  • Monitor developments in the Government response and the approach of other retailers
  • Devise an exit strategy, which may include reopening stores to work towards a sale or DOCA

The court’s willingness to recognise the extraordinary circumstances that now affect retail businesses has huge implications for administrators. While the Colette Group entered administration before COVID-19 affected Australia, many more businesses are set to follow in their footsteps as a direct result of the pandemic.

How has the COVID-19 crisis affected businesses?

The COVID-19 crisis, and in particular the restrictions imposed by Federal and State Governments in their efforts to contain it, have seen many businesses experience financial difficulty. Hospitality, retail and tourism businesses have been especially hard hit, but no industry has been completely unaffected. Supply chain issues, a reduction of discretionary spending and the forced closure of many brick-and-mortar premises have all contributed to the disruption.

As a result, Australian businesses are haemorrhaging money. This has caused some businesses entering voluntary administration or liquidation, and many commentators believe there will be a significant spike in the coming months.

At the same time, the Government has also introduced a raft of packages aimed at stemming the flow of blood. The $130 billion JobKeeper package, in particular, may be an effective tourniquet.

These packages have required new legislation to be drafted, as well as new and significant amendments to a number of Acts. Administrators are working blind as they wait for details.

As we have previously discussed, the Federal Government’s economic response includes a six-month measure to allow companies to potentially trade out of insolvency by temporarily relieving directors from personal liability under the Corporations Act 2001 (Cth) for insolvent trading. This measure does not extend to administrators, even though they might be in the same boat. This is what makes the Colette Group decision so interesting.

What are an administrator’s duties?

While a company is under administration, it is controlled by the administrator(s). Their role is to try to save the business if possible. If it isn’t possible, they must administer the company in a way that returns the best outcome to its creditors.

Acting jointly and severally, the administrators may carry on, wind down or sell the business or any of its property. They can enter into contracts to:

  • purchase goods;
  • provide services;
  • hire or lease property; and
  • borrow money on behalf of the business, for example to meet ongoing wage costs or repair and maintenance bills.

Why are administrators personally liable for the debts of a company?

If the costs incurred by the administrators aren’t covered by the assets of the business, the administrator may be personally liable for the shortfall under sections 443A (1) and (2) of the Corporations Act 2001 (Cth).

This is so that different parties can continue to deal with the company with confidence. Suppliers of goods want to know that they will get paid. Landlords want to feel confident that the rent will be paid. A company can’t trade through the administration period without providing reassurance to suppliers and creditors that they won’t lose money.

Can administrators limit their exposure to personal liability?

If an administrator believes that it is in the best interests of a company to incur substantial future debts, what should they do? Expecting administrators to accept personal liability may be an unreasonable burden. It might cause administrators to choose a less risky path, even if that path isn’t in the best interests of the company. However, creditors need assurance that they won’t be left high and dry.

Under Section 447A of the Corporations Act 2001, courts may make orders limiting the personal liability of administrators. Such orders are likely to be granted when:

  • The proposed arrangements are in the interests of the company’s creditors and consistent with the objectives of the Corporations Act
  • The proposed arrangements enable the company to trade for the benefit of its creditors
  • The creditors are not disadvantaged by the types of orders sought, and may benefit from the administrator’s proposed arrangements
  • Notice has been given to anyone affected by the order

In the Colette Group case, these principles were met. The administrators needed the extension of time so that they could pursue opportunities to sell the business once the ‘hibernation period’ ended. A retail business which has had to shut its doors during a health crisis is not in the best position to explore its options. For the creditors’ sake, the extension was considered reasonable.

While it also acknowledged the difficult position of retail landlords, the order waiving the rent arrears was intended to put the Colette Group on a similar footing to other retailers.

How might the judgment affect your business?

If your business has been disrupted by COVID-19, you may be considering your options. Do you enter voluntary administration or hope to weather the storm?

For many businesses, especially retailers, rent is one of the biggest overheads. This decision indicates that the courts might interpret lease and rent liability in the company’s favour. If they can avoid rent during this difficult time, it might make it easier to emerge from hibernation at the other end.

For landlords who lease retail premises, it may be a death knell. If both directors and administrators can avoid personal liability for rental arrears, do retail landlords have any protection?

One argument seen in the Colette Group decision is that by allowing administrators the extension of time before incurring personal liability, the parties have more scope to enter into a good faith negotiation.

How might the judgment affect you as an administrator?

If you’re an administrator for a COVID-19 affected business, the judgment might give you some breathing room.

In these unprecedented times, deciding the best path forward is more complicated than ever. The Government might roll out a new rescue package tomorrow – or they might not. Restrictions may ease in May or last until October. Nobody knows.

The court’s willingness to consider an application to limit an administrator’s personal liability is a huge boon. Whether you are pursuing a restructure or trying to trade out of administration, it is almost inevitable that you will need to take on additional debt even while getting no revenue. The Government and banks have made business loans more available than ever to try to help struggling companies, which administrators can utilise if they know that they won’t be personally liable to repay them.

What this means for you

If you are acting as an administrator, the Colette Group decision is important. It might indicate that you have more options to avoid incurring rent liability during the hibernation period. It might also allow you to limit or avoid personal liability.

Further information

For more information about how COVID-19 is affecting retail businesses or voluntary administration, please contact::
Trevor Withane: trevor.withane@blackwattlelegal.com.au, tel +61 (0)418 717 001

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