When rent incurred might be elevated to a priority payment

Ford (Administrator), in the matter of The PAS Group Limited (Administrators Appointed) v Scentre Management Limited [2020] FCA 1023

In a decision made last week in the case of Ford (Administrator), in the matter of The PAS Group Limited (Administrators Appointed) v Scentre Management Limited[1], the Federal Court of Australia determined whether the rent incurred by the administrators under pre-appointment leases during the standstill period of the administration would be payable as an expense properly incurred in the administration.

The issue in contention was whether the rent incurred by the lessee company during the standstill period ought be classified as an unsecured debt or alternatively as a claim entitled to priority under s 556(1)(a) of the Corporations Act 2001 (Cth) and in any subsequent winding up.

The facts

On 9 June 2020, the administrators obtained an order which extended the end of the administrator’s statutory moratorium or “no personal liability” which usually runs for a period of five business days after the commencement of the administration. The period between 29 May 2020 and 22 June 2020 was determined to be the “standstill period”.

From the commencement of the administration and throughout the standstill period, the administrators continued to trade from all but eight of the 161 retail stores and to occupy and use five of the non-retail leased premises.

On 19 June 2020, the administrators filed an originating process seeking a declaration that the rent and any other amounts payable under any pre-appointment lease by the PAS Group of Companies (PAS Companies) during the standstill period was an unsecured debt or claim in the PAS Companies administration.

Arguments by the Administrators and the PAS Group of Companies

The administrators relied on the provisions of the Corporations Act 2001 (Cth) (Act) concerning their personal liability for the debts of the administration[2]. They argued that the administrators are only personally liable for amounts payable once the standstill period has ended. The administrators argued that the lessor’s claim in respect of the standstill period and any amounts payable under pre-appointment leases by the PAS Companies would be an unsecured claim and not entitled to priority over other debts or claims in the administration pursuant to s 556(1) of the Act.

Scentre Management Limited (Scentre) who represented the interests of the lessor creditors of the PAS Companies, argued that the rent incurred by the administrators during the standstill period was an expense properly incurred in carrying on of the business of the PAS Companies within the meaning of s 556(1) of the Act and therefore entitled to priority in any subsequent winding up.

Decision

Justice O’Callaghan considered that the relevant question for the Court was not whether the administrators are personally liable for the rent, but whether the rent is taken to be an expense relevantly incurred[3]. His Honour considered whether the rent incurred by the PAS Companies during the standstill periods would be a debt entitled to priority in a winding up pursuant to section 556(1)(a) of the Act.

His Honour considered the historical origins of the Act, the equivalent UK provisions and the Lundy Granite[4] principle. He found that where an administrator or liquidator decides to keep the company in the occupation of the leased premises for the purpose of the administration or the liquidation, the rent is payable as an expense of the administration or liquidation and properly incurred in carrying on the company’s business within the meaning of s 556(1)(a) of the Act[5].

Key takeaway

The decision demonstrates that where an administrator makes a decision to actively trade and continues in occupation of a leased premises throughout the administration and any standstill period, the rent payable by the lessee company during the standstill period will be an expense properly incurred in the administration within the meaning of s 556(1)(a) of the Act and entitled to priority in any subsequent winding up.

Authored by:

Patrick Walsh, Partner
Jasmina Bradonjic, Special Counsel
Stephanie Rawlinson, Associate

[1] [2020] FCA 1023.

[2] Corporations Act 2001 (Cth), ss 443A and 443B.

[3] At [22].

[4] Ex parte Heavan (1871) LR 6 Ch App 462 (James and Mellish LJJ) (Lundy Granite).

[5] At [33].