What you need to know
The decision shows that the Courts are willing to frame appropriate orders, using s447A of the Corporations Act 2001 (Cth) and section 90-15 of the Insolvency Practice Schedule (Corporations), to assist administrators of businesses forced into hibernation by the COVID 19 crisis avoid personal liability.
This position will continue to evolve as governments announce and implement their plans in respect of commercial leasing arrangements in response to the COVID-19 crisis.
Why the administrators were allowed to avoid personal liability for rent
After their appointment on 31 January 2020, the administrators of the Colette Group elected to continue to trade 93 of its stores, and in February 2020 obtained orders extending the convening period for the second meeting of creditors through to June 2020 to enable a sale process to proceed.
However, by 26 March 2020 the administrators formed the view it was in the interests of the health of employees and the communities in which they operated to close the stores. This was after a sales campaign had been undertaken, generating interest which had subsequently fallen away because of COVID-19 related market uncertainty.
The administrators conducted modelling on different approaches to selling the business in light of those circumstances. They decided that the best course was to run a post COVID 19 sale, with a two month period of "mothballing", followed by a four week trading period in which the marketing process for the business would be resumed. To facilitate this, the administrators sought a complete reduction of rent from landlords, but were only able to achieve a total 9% reduction.
The court relieved the administrators from personal liability for a two week period whilst the physical, legal and economic landscape continues to evolve to respond to the impacts of COVID-19. It made a further order that the administrators were justified in not paying rent for those stores which the companies continued to occupy during that two week period.
Justice Markovic considered that the landlords would be in no worse a position than if the administrators abandoned the leases, whilst there was significant upside to creditors if the administrators’ plan achieved a better return on the sale of the business.
The matter is back before Justice Markovic on 15 April 2020, doubtless in anticipation that the state and territory governments will have progressed protections for commercial tenants by then.
Relief for tenants is coming in NSW and QLD
The Federal Government issued a National Cabinet Mandatory Code of Conduct: SME Commercial Leasing Principles During COVID 19 (Code), seeking to impose a set of "good faith leasing principles for application to commercial tenancies" where the tenant is a business with an annual group turnover of up to A$50m and is eligible for the Commonwealth "JobKeeper" stimulus package.
The Code needs to be legislated in each of the Australian states and territories to have effect, which has not yet happened.
On 12 April 2020, the NSW Government announced a proposed package of protections and concessions for tenants and landlords including:
- a 6 month support package for residential tenants and landlords facing COVID-19 financial stress including an interim moratorium on applications for forced evictions due to rent arrears and an obligation for the parties to negotiate before a landlord can terminate a tenancy arrangement, with rent accruing as arrears during this process
- A$440m to be provided in rent relief through land tax waivers or rebates of up to 25%, split between commercial and residential landlords, if the savings are passed on to tenants in COVID-19 financial distress
- legislation of the Code, including:
- offering land tax concessions to commercial landlords who pass the savings through to tenants affected by COVID-19 by rent reductions; and
- for businesses with turnover of less than A$50m that experience a COVID-19 related drop in revenue of at least 30%, restricting commercial landlords for terminating leases due to payment arrears and requiring rent relief proportionate to the decline in tenant turnover, with waivers to make up 50% of such rent relief and deferrals the balance.
The package is yet to be legislated, and Parliament will be recalled for this purpose.
It is expected that the other states and territories will be implementing the Code and their raft of protections and concessions imminently, with Queensland having already announced their land tax relief package on 9 April 2020 and intent to move quickly to legislate the Code.