TGIF 31 July 2020 – Federal Court rejects claim that rent incurred during administration does not have priority over other unsecured debts

Administrators unsuccessfully argued that rent incurred during the administrators’ statutory “no personal liability” period was an unsecured debt which would not enjoy priority in the event the relevant companies went into liquidation. 

Key takeaways

• Where an administrator causes a company to continue occupying leased premises for the purposes of the administration, the rent incurred will be considered an expense of the administration.
  
  
• This is the case even if the administrators are not personally liable for the rent by operation of s.443B(2) of the Corporations Act 2001 (Cth).
  
  
• The result is that, if the company enters into liquidation, the rent will be treated as an expense “properly incurred” by a relevant authority and will therefore rank above ordinary unsecured debts.  

This article considers the recent Federal Court case of Ford (Administrator), PAS Group Ltd (Admins Apptd) v Scentre Management Ltd [2020] FCA 1023.

What happened?

The “PAS Companies” were an Australian-based fashion group, which leased 166 premises in both Australia and New Zealand.

Administrators were appointed to the “PAS Companies” who elected to actively trade the PAS Companies “on a ‘business as usual’ basis so that [they could] explore options available to maximise the prospects of the PAS Companies’ business continuing in existence via a going concern sale or a deed of company arrangement.”

By virtue of s.443B(2) of the Corporations Act 2001 (Cth) (Act), the administrators had a period of five business days in respect of which they were not personally liable for the rent, but had obtained an order from the Court extending the period so that it commenced on 29 May 2020 and expired on 22 June 2020 (Standstill Period).

The administrators sought a declaration that (among other things), in the event the PAS Companies went into liquidation, the rent incurred during the Standstill Period was a mere unsecured debt, which would not enjoy priority over other unsecured debts notwithstanding s.556(1) of the Act.

Scentre, the largest lessor of premises to the PAS Companies, opposed such a declaration and argued that rent incurred during the Standstill Period would, in the event of a winding up, be an expense properly incurred by the administrators in carrying on the business of the PAS Companies within the meaning of s.556(1)(a) of the Act and would therefore enjoy priority over other unsecured debts.   

Administrators’ Argument 

The administrators argued that s.443B(2) of the Act varied / replaced the Lundy Granite principle, also known as the “salvage” principle or the “liquidation expenses” principle.

That principle, in effect, is that if property of a company is retained rather than being returned to its owner (e.g. a lessor), the rent that is incurred is treated as a “liquidation expense” and therefore enjoys priority over ordinary unsecured debts.

The administrators’ central proposition was that, because the administrators only became personally liable for rent after the Standstill Period had ended, rent incurred during the administration prior to that date could only be an ordinary unsecured claim.

A further argument advanced by the administrators was that no debt had been relevantly “incurred” because the administrators had not done anything to cause the PAS companies to incur rent during the “Standstill Period” and could not be taken to have “elected” to retain the leased property until after the Standstill Period had ended.  

Scentre's Argument   

Scentre argued that that the relevant question was not whether the administrators were personally liable for the rent having regard to the provisions of s.443B(2) of the Act, but rather whether the rent was an expense “properly incurred” by the administrators and therefore given priority over other unsecured debts by virtue of s.556(1) of the Act, which relevantly provides as follows:

1. Subject to this Division, in the winding up of a company the following debts and claims must be paid in priority to all other unsecured debts and claims:
   
   
   1. first, expenses (except deferred expenses) properly incurred by a relevant authority in preserving, realising or getting in property of the company, or in carrying on the company’s business;
      
      
   2. next, any other expenses (except deferred expenses) properly incurred by a relevant authority [which includes an administrator] …”

What did the Court decide?   

The Court rejected the administrators’ argument.

The Court held that the provisions relating to an administrator’s liability in Part 5.3A of the Act (including s.443B) have no relevant bearing on the question of the ranking of claims in a liquidation under s.556, which is contained in a completely different Part of the Act (Part 5.6, headed “Winding up generally”).

As the administrators had elected to continue trading from the leased premises for the purposes of the administration, and as they had derived substantial revenue from doing so ($7M), the Court found that the rent incurred during the Standstill Period was an expense “properly incurred” by the administrators within the meaning of s.556(1) of the Act, which meant that the rental amounts would enjoy priority over other unsecured debts in the event the companies went into liquidation.  

Comment

This case serves as a useful reminder for landlords that, while an administrator is afforded protection against being personally liable for rent, that will not mean that the administrator can retain property of the company without the landlord having rights of priority in respect of the rent that is incurred for so long as the property is retained.