In the decision of Hardy, in the matter of Greencare Developments Pty Ltd (Administrators Appointed) [2024] FCA 44, Justice McElwaine of the Federal Court considered an application by the voluntary administrators of the Hiro Brands group (Group) under s443B(8) of the Corporations Act 2001 (Cth) (Act) for a second extension of the time during which they would be excused from personal liability for rent in respect of leased premises.
An initial extension of the usual 5 business days grace period under section 443B(3) of the Act excusing the administrators from personal liability was not opposed by the landlord and granted on 16 January 2024 by Justice Anderson for the period 2 January 2024 to 7 February 2024.
On 24 January 2024, the voluntary administrators commenced a second application, the subject of this article, for an extension of Anderson J’s orders for up to 12 weeks. The landlord of the leased premises opposed the extension.
McElwaine J dismissed the application.
Greencare owed rent and other lease liabilities exceeding $1.5 million as at the relevant date, which were continuing to accrue at approximately $10,000 per day. The landlord held a bank guarantee for $2.5 million.
The voluntary administrators sought the second extension of the grace period to provide them with time to undertake an orderly in-situ sale of the stock, plant and equipment stored at the premises.
The voluntary administrators’ evidence in summary, was that:
Relevant law – voluntary administrators’ liability and indemnity under Division 9 of Part 5.3A of the Act for debts of voluntary administration
Voluntary administrators are, generally speaking, personally liable under s 443A of the Act for debts incurred on behalf of a company during the voluntary administration period in respect of services rendered, goods bought and property hired, leased, used or occupied by the company.
However, s443B(2) of the Act provides voluntary administrators with a 5 business day grace period before they become liable for rent or other amounts payable by the company under a pre-existing lease or similar agreement.
The voluntary administrators may provide the owner/lessor with a notice under section 443B(3) of the Act specifying, among other things, that the company does not propose to exercise rights in relation to the property.
Once a notice has been issued, as long as it is not revoked and rights are not exercised in relation to the property, the voluntary administrators are relieved from personally liability under the agreement (although the company remains liable).
The Courts have power pursuant to s443B(8) and s447A of the Act, to extend the grace period and defer payment of rent.
More than one extension may be granted.
The usual rationale for seeking an extension of the grace period
Generally speaking, the reason for seeking an extension of the grace period is that the voluntary administrators have been unable to conduct the necessary investigations to decide, within the ordinary five business day period, whether it is in the interests of the company (and its creditors) to continue to use or occupy the leased property or to give up possession.
Application here
The voluntary administrators here did not require additional time to undertake investigations or form a view about whether or not the lease was required. Nor was there a large amount of documentation to review. They understood that it was likely that the lease liabilities would be close to if not exceed the likely recoveries from the sale of the stock, plant and equipment even if the sale was undertaken on-site as proposed. In the circumstances, the voluntary administrators were not prepared to accept the usual personal liability under the lease that ordinarily arises under s443B.
McElwaine J noted that it is not necessary for the ‘usual rationale’ to apply to obtain an extension of the grace period. However, the fact that the ‘usual rationale’ did not apply here was a “… significant consideration in undertaking the balancing exercise that is required and is not, in the circumstances of this case, supportive of the extension that is sought.”.
The matter was further complicated by the fact that most of the stock, plant and equipment was not owned by the lessee, Greencare. The voluntary administrators’ evidence dealt with the potential benefit to the Group of an on-site sale, with little, if any, evidence of the benefit to Greencare’s creditors.
While the voluntary administrators did not consider that the relative prejudice to the landlord was significant, the evidence indicated that even if the property was sold on-site, there would be a significant amount of obsolete and expired stock that would remain for the landlord to dispose of, at the landlord’s cost.
The Court preferred the landlord’s evidence as to the prejudice it would suffer if the extension was granted, and considered it outweighed the likely benefit to creditors in light of, among other things:
The Court confirmed the general principles for extending the five business day grace period from personal liability of voluntary administrators under s443B of the Act.
While noting that the power to extend is not limited to situations involving the “usual rationale” (that the voluntary administrator has not been able to determine whether the property is required or not during the statutory five business day grace period) its absence is a potential factor taken into consideration when the Court is exercising its discretion to extend the grace period.
The decision also highlights the importance of evidence of a material benefit to the creditors of the lessee company in order to overcome any prejudice suffered by the landlord from an extension of the grace period.
If you have any questions regarding this decision or a voluntary administration, the experienced Lavan team is here to assist.
