TGIF 23 June 2023 – Deed administrator unsuccessful in blocking property owner from retaking possession

In Vincent Cold Storage Pty Ltd v Centuria Property Funds No 2 Limited (No 2) [2023] VSC 314, the Deed Administrator sought section 444F orders to restrain the property owner from retaking premises leased by Vincent Cold Storage in administration and was unsuccessful. 

Key takeaways

• Orders under section 444F to restrain the owner of premises occupied by a company under a deed of company arrangement (DOCA) are subject to a robust analysis of the adequacy of protection of the owner’s interests.
  
  
• In assessing the owner’s interests, a court will consider the interests of the owner under the lease that existed immediately before its termination. There is a detailed consideration of the conditions proposed in the section 444F orders, including the adequacy of payment terms, timing of payment, any make good or maintenance obligations and termination rights of the parties.
  
  
• A court will also consider the necessity and effectiveness of the proposed orders in carrying into effect the DOCA such that if the orders are likely to prove futile, limiting the owner’s rights to retake possession is not warranted.

The Deed Administrator of cold storage company Vincent Cold Storage Pty Ltd (VCS) made an application to the Victorian Supreme Court to stop the owner of premises the company occupied from re-taking possession during the DOCA period. VCS was many months in arrears and had been occupying the premises as a trespasser since the owner’s unsuccessful attempts to retake possession.

The Court considered the statutory factors and decided in favour of the owner as its interests would not be adequately protected otherwise even though the owner retaking possession would make the DOCA’s success unlikely as there were no immediately available appropriate alternative facilities to which the company could be relocated.

Factual Background

The decision in Vincent Cold Storage Pty Ltd v Centuria Property Funds No 2 Limited (No 2) [2023] VSC 314 concerns occupation of a warehouse and storage facility owned by Centuria Property Funds No 2 Limited (Centuria) in Keysborough, Victoria (Premises). Vincent Cold Storage Pty Ltd and related party Vincent Transport Services Pty Ltd (in Liquidation) were tenants for a five-year term from 1 December 2019.

DOCA

The company voted to enter into a DOCA at the second meeting of creditors to allow VCS to continue as a going concern, consequently it contemplated VCS continuing to occupy the Premises until it was able to find an appropriate alternative.

Centuria voted against the DOCA and informed the administrator that it intended to retake possession immediately as execution of the DOCA is the end of the administration, in line with the Licence terms. When Centuria’s agents attempted to physically retake possession, access was denied by VCS and VCS remained in possession as a trespasser. Accordingly, Centuria applied for orders for possession and the deed administrator sought orders pursuant to section 444F(4) of the Corporations Act 2001 (Cth) (Act) that subject to VCS complying with certain conditions, Centuria would not take possession of the premises for a specified period.

Section 444F(4) application

Section 444F(4) of the Act allows a court to limit rights of a lessor of property occupied by a company subject to DOCA. A court must be satisfied of the factors in 444F(5) before making the orders sought and these factors are typically satisfied by making the orders subject to conditions per section 444F(6).

The statutory factors in 444F(5) are:

• for the owner or lessor to take possession of the property or otherwise recover it would have a material adverse effect on achieving the purposes of the deed; and
  
  
• the interests of the owner or lessor will be adequately protected, having regard to:

• the terms of the deed;
• and the terms of the order;
• and any other relevant matter.

The deed administrator proposed the conditions that VCS needed to comply with, including:

• a licence fee for the period of occupation payable in lump sums in advance of defined milestones;
  
  
• payment of arrears since the commencement of occupation by trespass on execution of DOCA;
  
  
• termination rights, allowing Centuria to terminate if VCS enters liquidation or fails to remediate a payment default within seven days or otherwise fails to comply with the conditions;
  
  
• termination rights allowing VCS to terminate on 14-days notice;
  
  
• obligations to remove all stock and debris on site and return the Premises in a clean and tidy state free of rubbish;
  
  
• limitations on stock quantities on Premises; and
  
  
• other obligations relating to third parties, inspection and reporting.

The key features for the assessment in section 444F(5) are considered in Strazdins v Birch Carroll & Coyle Ltd (2009) FCR 300 (Strazdins) at [130]-[133], [147]. The onus of establishing both subsections is on the administrator.

Material adverse effect on the DOCA

Osborne J decided granting the orders would have a materially adverse effect on achieving the DOCA purposes, in effect, because of the lack of available alternative facilities to relocate the business as a going concern. Evidence from real estate agents was received that the earliest available appropriate facility was between 12-18 months away as it was under construction. Accordingly, Centuria retaking possession would make it impossible for VCS to continue as a going concern and make contributions under the DOCA.

Were Centuria’s interests appropriately protected?

However, despite a finding in favour of VCS on the material adverse effect point, Osborne J ultimately decided the orders would not be made by applying the reasoning in Strazdins. This is because the conditions proposed by the deed administrator would not adequately protect Centuria’s interests as an owner of the Premises otherwise entitled to immediate possession.

The Court’s analysis in Strazdins compared the conditions proposed to the interests that the owner had under the Lease prior to its termination. In the VCS case, the conditions proposed were vastly different and inferior to the rights of Centuria under the Lease, and the known facts demonstrate the additional risks Centuria would be subject to, namely:

• the licence fee proposed was inclusive of outgoings and GST and therefore in real terms, materially below market for a long-term lease of such facilities;
  
  
• the proposed payment timing was largely monthly in advance and, given VCS’ history of failing to make payment deadlines, such a payment schedule was inadequate to protect Centuria’s interests (compared to a whole sum up front payment for example);
  
  
• Centuria was already an unsecured creditor in respect of around $1 million in rent and arrears for which it expected to receive a minimal return through the DOCA and there was no appropriate security or undertaking to prevent the further licence fee becoming another unsecured liability that was virtually unrecoverable;
  
  
• there was no evidence of VCS’ financial position before the Court to enable the Court to be satisfied the payment conditions actually could be satisfied, nor was there any protection from claw back should VCS enter liquidation;
  
  
• the lack of appropriate alternative facilities was well known and there is no evidence to satisfy the Court that it was capable of moving its operations to an alternative facility by the termination date of this further licence to effectuate the DOCA;
  
  
• there was significant subsisting default under the original Lease in that VCS has virtually paid no rent for its occupancy in about a year and has continued to run its business from the Premises unchanged, in contempt of the owner’s rights, despite the Lease being terminated and the owner making it clear it expected the tenants to vacate; and
  
  
• the Lease was terminated well before, and independently of, the events in respect of which Part 5.3A of the Act provides protection.

The conclusion was: Centuria’s interests were not adequately protected by the imposition of a mostly uncertain arrangement which required it to continue to suffer the presence of a defaulting and insolvent occupier who appeared to have a quite unrealistic understanding of the circumstances which attend its occupancy of the Premises. Discretionary factors were also considered by Osborne J which also pointed towards refusing the section 444F(4) orders sought by the deed administrator.

Commentary 

This decision is indicative of the level of detail courts will consider when weighing up the respective rights of the owner of premises and a company subject to a DOCA in an application to restrain the owner’s rights to possession. In making such an application, odds of success improve if:

• the conditions attached to the proposed orders are the same, as or better than, the rights of the owner under the lease;
  
  
• there are no subsisting defaults under the lease; and
  
  
• seeking the orders is not just a gamble in an uncertain situation as to whether the company can continue as a going concern.