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COURT CASE MAY SIGNAL NEW OPPORTUNITIES FOR POST-COVID BUSINESS RESCUES

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by Scott Newton29.04.20

In an era where the unthinkable has become unremarkable, a recent judgement in the Federal Court of Australia (i)  may become a template for Voluntary Administrations in the time of COVID-19.

Under the Corporations Act 2001 (Cth) ss 443A(1), 443(A)(2), administrators are personally liable for costs incurred in running a company once they have been appointed. The costs enable administrators to continue to trade and maintain or improve business value and are intended to be recouped from company assets.

On April 1st, in the case Strawbridge (Administrator), in of the matter of CBCH Group Pty Ltd (Administrators Appointed) (No 2) [2020] FCA 472, the Administrators for CBCH Group Pty Ltd, a bag, jewellery and accessories retailer operating stores in Australia and New Zealand, sought to have their personal liability for rent on retail premises waived. 

Rent is the second largest cost for Australian retailers after employment expenses(ii). CBCH Group Pty Ltd (the Group), with an online store, 124 Australian and 14 New Zealand stores, had a monthly rent bill of $1.3 million for its Australian stores alone. 

The Background

On appointment the Administrators continued to trade the Group. They had culled 31 underperforming Australian stores by March 26th. Between appointment and March 8th retail sales were far above the Administrators’ targets.

Then COVID-19 measures began to bite hard and sales rapidly dropped 50% below target. The Administrators sought 100% rent reductions for the remainder of the Australian store leases. A mere nine percent reduction was achieved.

Eleven entities that had been in discussion with the Administrators about buying or recapitalising the Group were growing nervous but indicated that they would still be interested when things returned to normal.

By March 26th it became obvious that the stores would have to be closed for the safety of staff and the community. There was no indication at this stage what more, if any, economic relief might be offered by government.

The Findings

Judge Markovic’s findings included:

  • The Administrators were not personally liable for unpaid rent for the period in the application (2 weeks from April 1st to 5pm on April 14th)*
  • The Administrators were justified in causing the companies not to pay rent, and
  • The court costs for the hearing, and a previous hearing on 30th March, were costs of the administration and could be allocated pro rata among the companies
  • Commercially sensitive evidence could be kept confidential

*(it has since been reported that the orders have been extended to May 6th.)(iii)

Judge Markovic acknowledged the extreme levels of uncertainty and complexity in which the Administrators are operating, and that the weight she has given their views. The Administrators had modelled four scenarios and determined that a period of ‘mothballing’ in which stores close, the leases maintained but no rent is paid had the best chance of returning the most value to creditors.

The Administrators’ position is that relief from rent payment will achieve the best outcome for creditors because:

  • rent payment seriously depletes the Group’s cash resources reducing possible returns to creditors and undermining potential sale or recapitalisation post-COVID-19
  • other retailers have closed stores for the COVID-19 duration and do not pay rent
  • some form of government assistance may become available
  • it is unlikely that the stores could be re-leased for the period of the orders, and revitalised trading after the period of ‘mothballing’ maintains tenanted stores and could result in outstanding rent becoming part of new lease negotiations.

In considering any detriment to the landlords, Judge Markovic concluded that no rent was due during the period of the order, and, enabling the Group to survive a ‘mothballing’ period which may facilitate a sale or recapitalisation, would not be a worse outcome for the landlords. The alternative would be immediate shutdown and vacating the stores (with or without removal of stock) which would not benefit the landlords as that they would be unlikely to re-lease the stores in the current climate.

Conclusion

The courts have historically waived Administrator liability most commonly for the purposes of borrowing from the company’s usual lender to meet ongoing expenses.(iv)

This case indicates that the courts are endeavouring to ensure that voluntary administration laws aimed at restructuring are still effective in an extraordinary, rapidly changing business climate. 

Opportunity remains for MSMEs to act now to survive into the post-COVID-19 era, reduce the impacts of insolvency or to learn how to do things differently and better when our new normal returns.

Please don’t hesitate to contact Shaw Gidley restructure, insolvency and turnaround experts for up-to-the-minute advice.


Strawbridge (Administrator), re CBCH Group Pty Ltd (Administrators Appointed) (No 2) [2020] FCA 472
https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2020/2020fca0472

ii RBA (Reserve Bank of Australia) (2019). Competition and Profit Margins in the Retail Trade Sector. RBA Bulletin, June 2019. Accessed 23/4/2020 at https://www.rba.gov.au/publications/bulletin/2019/jun/competition-and-profit-margins-in-the-retail-trade-sector.html

iii Corrs, Chambers and Westgarth (2020, April 17). TGIF 17 April 2020: Not so business as usual – administrators relieved of personal liability for rent during the COVID-19 pandemic. Accessed 23/4/2020 at https://corrs.com.au/insights/not-so-business-as-usual-administrators-relieved-of-personal-liability-for-rent-during-the-covid-19-pandemic

iv BRI Ferrier (2016, November 23). Court orders limiting the personal liability of administrators for debts arising in the course of administration. Accessed 24/4/2020 at http://briferrier.com.au/news/court-orders-limiting-the-personal-liability-of-administrators-for-debts-arising-in-the-course-of-ad