Virgin Australia and Colette Group: Federal Court grants administrators rent reprieve amid COVID-19 pandemic
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In recent decisions involving accessories retailer Colette Group and Virgin airlines, the Federal Court of Australia found that the extraordinary circumstances of COVID-19 warrant a grant of relief for the administrators from personal liability for rent.
In both cases, the Court acknowledged the uncertainty caused by COVID-19 and found that the rent reprieve for the administrators was in the best interests of the creditors as a whole.
colette group
The Colette Group, a jewellery and accessories retailer, entered into voluntary administration in February 2020 before the COVID-19 crisis hit. During the period up until 26 March 2020, the Colette Group’s administrators had been in discussions with prospective buyers, all of whom withdrew their interest as the retail landscape deteriorated as a result of the pandemic. Amidst health concerns and the retail downturn following social distancing measures, the administrators decided to close all retail stores. Notwithstanding the closures, the total monthly rent liability for the stores was approximately $1.3 million. The administrators attempted to negotiate a 100% rent reduction from landlords but were offered only an average of a 9% reduction across all stores. Accordingly, the administrators made an application to the Federal Court of Australia under s 443B and 447A of the Corporations Act 2001 (Cth) (Act) for relief from personal liability.
Section 443B(3) of the Act provides that an administrator is liable for rent payable by a company under administration after 5 days after the administration begins, but the administrator might avoid liability if he or she provides notice that the company does not propose to remain in the lease. Under s 447A, the Court may extend the time for giving notice of an intention not to remain in the leases.
The Colette Group administrators conducted modelling on five different approaches and argued that the best course of action was to run a post COVID-19 sale, with a two-month period of “mothballing”, involving closing the physical stores but retaining an online presence, followed by a four-week trading period. They also argued that it would be in the interests of the landlords to grant the rent reprieve as landlords would be in no better position if Colette shut down and vacated the stores, as it was unlikely the landlords would be able to re-lease the premises in the current circumstances. The Court agreed with the administrators that the strategy of mothballing followed by a period of trading and then sale is likely to realise the most value for the business.
The Court acknowledged the “highly unusual and invidious position” that the administrators were in and granted the administrators the rent reprieve they sought for all 93 stores.
The Court’s reasons for granting the rent relief included:
- Varying the rental arrangements amidst “extraordinary” COVID-19 circumstances is consistent with the objectives of Part 5.3A of the Act, as the rent reprieve may enable the business to trade for the benefit of its creditors and may maximise the potential for a better return;
- The landlords would be in no worse position than if the administrators abandoned the leases given that the landlords are unlikely to be able to re-lease the premises for the period rent relief was sought; and
- Granting rental reprieve might ultimately improve the landlords’ position in comparison with the alternative option of a complete shutdown and abandonment of the premises.
The Court made orders relieving the administrators of the Colette Group from personal liability for rent for the 93 stores from 1 April to 14 April 2020 amidst the COVID-19 crisis. At a further hearing on 15 April 2020 the orders were extended for a further three weeks until 6 May 2020.
virgin holdings
Following a drastic reduction in demand for domestic and international travel as a result of COVID-19, administrators were appointed to Virgin Australia Holdings Ltd and its subsidiaries (Virgin Companies) on 20 April 2020. Since their appointment, the administrators continued to trade the Virgin Companies on a “business as usual” basis and assess viable options to continue operations and maximise the prospect of a sale of the business and assets of the Virgin Companies.
Given the magnitude of the Virgin Companies’ operations, the administrators were unable to form a view whether they should remain in the leases held by the companies within the 5 days of their appointment as required by s 443B of the Act. The administrators of the Virgin Companies made an application in the Federal Court of Australia seeking an extension of time under s 443B and s 447A of the Act.
Similar to the approach taken in the Colette Group decision, the Court acknowledged the necessity of having regard to the best interests of the creditors of the Companies as a whole. With a focus on protecting, not prejudicing, the interests of creditors as a whole, Justice Middleton found that a rent reprieve under s 443B of the Act is in the best interests of creditors as it maximises the prospect of preserving the business with a view to a post-COVID-19 sale or restructure. As a result, on 24 April 2020, the Court made orders relieving the administrators of the Virgin Companies from any personal liability with respect to any of the property leased, used or occupied from any lessors for the period of 28 April 2020 to 26 May 2020.
practical implications
These decisions demonstrate the flexible approach courts are willing to take in light of the evolving COVID-19 landscape to support the restructuring of distressed businesses and provide a framework for insolvency practitioners to maximise a return to creditors as a whole.
While these recent decisions may be welcomed by insolvency practitioners, they may not necessarily be embraced by commercial landlords in circumstances where landlords feel prejudiced by the rent reprieve, particularly as the National Cabinet Mandatory Code of Conduct—SME Commercial Leasing Principles During COVID-19 currently prevents landlords from terminating commercial leases for non-payment of rent.
The competing interests of creditors of distressed companies will remain a noteworthy issue for the courts, commercial landlords and insolvency practitioners in the months ahead.
Macpherson Kelley’s team of Restructuring and Insolvency lawyers will continue to monitor developments in this area and provide further updates when new information is at hand.
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Virgin Australia and Colette Group: Federal Court grants administrators rent reprieve amid COVID-19 pandemic
In recent decisions involving accessories retailer Colette Group and Virgin airlines, the Federal Court of Australia found that the extraordinary circumstances of COVID-19 warrant a grant of relief for the administrators from personal liability for rent.
In both cases, the Court acknowledged the uncertainty caused by COVID-19 and found that the rent reprieve for the administrators was in the best interests of the creditors as a whole.
colette group
The Colette Group, a jewellery and accessories retailer, entered into voluntary administration in February 2020 before the COVID-19 crisis hit. During the period up until 26 March 2020, the Colette Group’s administrators had been in discussions with prospective buyers, all of whom withdrew their interest as the retail landscape deteriorated as a result of the pandemic. Amidst health concerns and the retail downturn following social distancing measures, the administrators decided to close all retail stores. Notwithstanding the closures, the total monthly rent liability for the stores was approximately $1.3 million. The administrators attempted to negotiate a 100% rent reduction from landlords but were offered only an average of a 9% reduction across all stores. Accordingly, the administrators made an application to the Federal Court of Australia under s 443B and 447A of the Corporations Act 2001 (Cth) (Act) for relief from personal liability.
Section 443B(3) of the Act provides that an administrator is liable for rent payable by a company under administration after 5 days after the administration begins, but the administrator might avoid liability if he or she provides notice that the company does not propose to remain in the lease. Under s 447A, the Court may extend the time for giving notice of an intention not to remain in the leases.
The Colette Group administrators conducted modelling on five different approaches and argued that the best course of action was to run a post COVID-19 sale, with a two-month period of “mothballing”, involving closing the physical stores but retaining an online presence, followed by a four-week trading period. They also argued that it would be in the interests of the landlords to grant the rent reprieve as landlords would be in no better position if Colette shut down and vacated the stores, as it was unlikely the landlords would be able to re-lease the premises in the current circumstances. The Court agreed with the administrators that the strategy of mothballing followed by a period of trading and then sale is likely to realise the most value for the business.
The Court acknowledged the “highly unusual and invidious position” that the administrators were in and granted the administrators the rent reprieve they sought for all 93 stores.
The Court’s reasons for granting the rent relief included:
- Varying the rental arrangements amidst “extraordinary” COVID-19 circumstances is consistent with the objectives of Part 5.3A of the Act, as the rent reprieve may enable the business to trade for the benefit of its creditors and may maximise the potential for a better return;
- The landlords would be in no worse position than if the administrators abandoned the leases given that the landlords are unlikely to be able to re-lease the premises for the period rent relief was sought; and
- Granting rental reprieve might ultimately improve the landlords’ position in comparison with the alternative option of a complete shutdown and abandonment of the premises.
The Court made orders relieving the administrators of the Colette Group from personal liability for rent for the 93 stores from 1 April to 14 April 2020 amidst the COVID-19 crisis. At a further hearing on 15 April 2020 the orders were extended for a further three weeks until 6 May 2020.
virgin holdings
Following a drastic reduction in demand for domestic and international travel as a result of COVID-19, administrators were appointed to Virgin Australia Holdings Ltd and its subsidiaries (Virgin Companies) on 20 April 2020. Since their appointment, the administrators continued to trade the Virgin Companies on a “business as usual” basis and assess viable options to continue operations and maximise the prospect of a sale of the business and assets of the Virgin Companies.
Given the magnitude of the Virgin Companies’ operations, the administrators were unable to form a view whether they should remain in the leases held by the companies within the 5 days of their appointment as required by s 443B of the Act. The administrators of the Virgin Companies made an application in the Federal Court of Australia seeking an extension of time under s 443B and s 447A of the Act.
Similar to the approach taken in the Colette Group decision, the Court acknowledged the necessity of having regard to the best interests of the creditors of the Companies as a whole. With a focus on protecting, not prejudicing, the interests of creditors as a whole, Justice Middleton found that a rent reprieve under s 443B of the Act is in the best interests of creditors as it maximises the prospect of preserving the business with a view to a post-COVID-19 sale or restructure. As a result, on 24 April 2020, the Court made orders relieving the administrators of the Virgin Companies from any personal liability with respect to any of the property leased, used or occupied from any lessors for the period of 28 April 2020 to 26 May 2020.
practical implications
These decisions demonstrate the flexible approach courts are willing to take in light of the evolving COVID-19 landscape to support the restructuring of distressed businesses and provide a framework for insolvency practitioners to maximise a return to creditors as a whole.
While these recent decisions may be welcomed by insolvency practitioners, they may not necessarily be embraced by commercial landlords in circumstances where landlords feel prejudiced by the rent reprieve, particularly as the National Cabinet Mandatory Code of Conduct—SME Commercial Leasing Principles During COVID-19 currently prevents landlords from terminating commercial leases for non-payment of rent.
The competing interests of creditors of distressed companies will remain a noteworthy issue for the courts, commercial landlords and insolvency practitioners in the months ahead.
Macpherson Kelley’s team of Restructuring and Insolvency lawyers will continue to monitor developments in this area and provide further updates when new information is at hand.