TGIF 21 August 2020 – Time is money – extending convening periods in light of COVID-19

This week’s TGIF considers a recent decision of the Federal Court which demonstrates that, irrespective of the COVID-19 landscape, the Court will continue to support administrators acting to maximise a return for creditors and stakeholders. 

Key takeaways

• In an application to extend the convening period, the Court will consider the objectives in Part 5.3A of the Corporations Act 2001 (Cth), including maximising the chances of the company continuing in existence, or if that is not possible, maximising the return to creditors and shareholders compared to a winding up.
  
  
• Relevant matters in support of an application include the size of the business, complex corporate group structures, access to financial records, the time needed to consider DOCA proposals and whether the extension will allow the sale of the business as a going concern.
  
  
• Irrespective of COVID-19, the Court will continue to support administrators and will support value judgments by administrators acting in the best interests of creditors as a whole.

What happened?

Miniso Master Franchisee Pty Ltd (the Company) was a retailer of household and consumer goods, operating 32 stores in Australia and trading online. The Company was the wholly owned subsidiary of Miniso Holdings Pty Ltd, which was the shareholder of a number of other administrative and operating entities within the Miniso group. 

As a result of COVID-19, and its associated restrictions, the Company suffered a significant downturn in revenue, leading to the appointment of the administrators on 13 July 2020 pursuant to a resolution of the board of directors under s 436A of the Corporations Act 2001 (Cth) (the Act). 

As has become common in light of COVID-19, the Court made orders on 17 July 2020 for the administrators to not be held personally liable for rent or other amounts payable by the Company in respect of property leased, used or occupied by the administrators until 16 August 2020 (the 17 July 2020 Orders).[1]

Since the making of those orders, the administrators: 

• continued to trade the company to conserve value for a potential sale and/or recapitalisation;
• commenced rent relief negotiations with landlords; 
• continued to investigate the financial position of the company;
• concluded a stocktake which identified a value of $3.8 million;
• issued a notice to the landlord of the head office (in accordance with s 443B(3) of the Act) and vacated those premises; and
• advanced discussions with a potential deed proponent. 

The extension application

An administrator must convene the second meeting of creditors within the convening period fixed by s 439A(5) or as extended by s 439A(6): see s 439A(1).   That meeting must be held within five business days before or after the end of the convening period: s 439A(2). At the meeting the administrators may resolve to execute a DOCA, end the administration or wind-up the company. 

Notwithstanding efforts made, the administrators were unable to provide any meaningful recommendation to creditors as required by s 439A and sought to extend the convening period for six weeks, submitting they needed further time to:

• advance a potential DOCA proposal;
• continue their investigation with respect to the financial position of the Company;
• consult with retail store owners, including 14 stores in Victoria closed due to COVID-19;
• negotiate with landlords of the retail stores; and
• consider whether to issue any further notices under s 443B.

A further matter, which underpinned the application, was that a high proportion of store owners were Chinese, with English as a second language, and some lived overseas.  The administrators had sought the assistance of a Cantonese and Mandarin speaker to explain the administration process, assist with proofs of debt and translate documents. Evidence was adduced which demonstrated this was a time consuming process which, due to the nature of the business, would need to continue.

The decision

In considering the application, the Court had regard to the objectives of Pt 5.3A of the Act and, in particular, the matters set out in In the matter of Riviera Group Pty Ltd (admins apptd)(recrs & mgrs apptd) [2009] 72 ACSR 352, including:

• the size and scope of the business;
• complex corporate group structure and intercompany loans;
• lack of access to corporate financial records;
• the time needed for thorough assessment of a proposal for a DOCA; and
• where the extension will allow sale of the business as a going concern.

Ultimately, the Court granted the extension to enable the administrators to properly investigate the company’s affairs and provide a meaningful recommendation to creditors. 

His Honour supported the administrators’ opinion that enabling the retail store owners in Queensland, New South Wales and Western Australia to continue to trade would provide the most value to creditors as it allowed the Company to continue to receive franchise fees and support Victorian employees who could receive JobKeeper payments.  

Further, his Honour accepted that even if the DOCA proposal was not put forward, the extension would allow the administrators to work with the retail store owners and stock agents to sell all stock in a managed wind down, rather than a fire sale – a relevant factor given that all retail stores in Victoria were closed due to COVID-19.

In considering prejudice, his Honour accepted landlords would be affected, however, as the administrators did not seek an extension of the 17 July 2020 Orders, they would be personally liable for any rent accrued from 16 August 2020.  

Comment

While the consequences of COVID-19 continue to add complexity to insolvency matters in Australia, it remains clear that the Court will continue to support applications that maximise a return to creditors and shareholders, and support value judgments by administrators acting in the best interests of creditors as a whole.

^{[1] Jahani, in the matter of Miniso Master Franchisee Pty Ltd (Administrators Appointed) [2020] FCA 1066}