TGIF 2 February 2024 – Complex but critical: Administrators given time to decide on convoluted leasing arrangements

In Re Tucker, Quintis Leasing Pty Ltd [2023] FCA 1673, the administrators of a company successfully obtained orders from the Federal Court modifying the operation of section 443B of the Corporations Act 2001 (Cth). The Court extended the deadline for the company to give notice regarding the exercise of its rights in relation to leased property, and extended the period in which the administrators were not personally liable for rent in respect of that property.

Key Takeaways

• Administrators may be required to act quickly after their appointment to protect the interests of creditors. This may include applying for an urgent hearing to modify the operation of the usual statutory rules, such as the decision period for leased property.
  
  
• In determining such an application, a court will primarily consider the effect of such an order on the interests of the creditors as a whole, even where certain creditors may be adversely affected.
  
  
• In general, it is not expected that administrators should expose themselves to substantial personal liability. The Court is open to relieving that personal liability for a further period to enable the administrators to make commercial and rational decisions in respect of the company where that may be for the benefit of all creditors in the longer term.

Background

Administrators were appointed to Quintis Leasing Pty Ltd (Quintis) on 20 December 2023. That very evening, the administrators filed an application seeking relief from the requirements of section 443B of the Corporations Act concerning leased property and the five business day notice period to landlords. An urgent hearing was granted and took place on 22 December 2023.

Specifically, the administrators sought relief to modify the operation of sections 443B(2) and 443B(3) of the Act to:

• delay the commencement of the period for which the administrators are personally liable for rent in respect of property the company used, occupied or possessed from ‘within five business days after the beginning of the administration’ to 30 January 2024; and
  
  
• extend the deadline for the administrators to give notice that Quintis did not propose to exercise rights in relation to the leased property.
  

Quintis leased property as part of 11 managed investment schemes that were managed by another entity in its corporate group. Each of those entities was involved in the cultivation of sandalwood on the leased land. The administrators provided evidence to support their submission that the statutory time period of five business days was insufficient to determine whether to retain or give up the leases. That evidence included:

• the number of leases (14 leases and six sub-leases);
  
  
• the number of counterparties to the leases;
  
  
• the significant and ongoing liabilities associated with the head leases;
  
  
• the likely complexity of administering the entities within the corporate group and managed investment schemes;
  
  
• the ongoing uncertainty as to the nature, use, and value of the property and the obligations associated with the leases;
  
  
• the practical difficulties preventing certain work being performed under the leases until the end of March 2024; and
  
  
• the unavailability of staff and counterparties over the Christmas and New Year period.

Decision

Justice Feutril of the Federal Court accepted the administrators’ submission that a view could not be appropriately formed on the exercise of Quintis’ leasing rights in five business days. His Honour extended the deadline for the administrators to give notice to the lessors to 30 January 2024. The Court also ordered that the administrators’ personal liability for rent in that period should be excluded. Both orders were made under general provisions of section 447A(1) of the Act permitting the Court to make orders as it thinks appropriate from the operation of the Act on a company in administration.

Justice Feutril adopted the views in Strawbridge (Administrator), in the matter of CBCH Group Pty Ltd (Administrators Appointed) (No 2) [2020] FCA 472 and In the matter of Mothercare Australia Ltd (Administrators Appointed) [2013] NSWSC 263. His Honour held that a material consideration when deciding whether to modify the operation of section 443B is whether it would be in the interests of the creditors of the company and otherwise consistent with the objects of Pt 5.3A of the Act. The Court observed that it was also appropriate for due weight to be given to the administrators’ own of views of what constitutes that interest.

Here, the Court was influenced by the administrators’ opinion, which was deemed ‘understandable’ in the circumstances, that they were not willing to incur personal liability for a significant quantum of rent in circumstances where the company did not have sufficient cash to meet that liability. Accordingly, without the extension of time, it was likely that the administrators would need to give notice prematurely that the company does not propose to exercise its rights in relation to the leased property, which may not be in the best interests of the company’s creditors as a whole.

The Court also held that a relevant consideration was whether any potential prejudice to creditors or other interested parties could be accommodated by orders allowing them to apply to vary or dissolve the orders.

While Justice Feutril acknowledged the opposition by a number of lessors to the administrators’ application (as well as their limited notice and time to make submissions), his Honour held that such opposition must be balanced against the interests of the creditors as a whole.

In deciding to exercise the Court’s discretion in favour of granting the administrators’ application, Justice Feutril considered that:

• coming to grips with the nature of the business and its interactions with managed investment schemes and other entities would not be straight-forward – rather it would be complex, time consuming and likely to require significant legal advice. Undertaking work of this nature within five business days would be difficult at any time of the year, but that difficulty would be compounded by the Christmas and New Year holiday period;
  
  
• an extension would permit the administrators to make reasoned decisions about the continuing use or occupation or possession of the property the subject of the leases;
  
  
• in general, voluntary administrators should not be expected to expose themselves to substantial personal liability;
  
  
• relieving the administrators of personal liability for a further period would permit them to make commercial decisions by focusing on what is in the best interests of creditors, uninfluenced by concerns of personal liability; and
  
  
• the orders were framed so that any lessor or other interested party could apply to the Court to vary or dissolve the orders.

Comment

Administrators should be alert to the fact that they may be required to act quickly after their appointment to protect the interests of creditors. Where those decisions must be made in the face of imperfect information and complex company structures, administrators should not feel compelled to shortcut their due diligence or make decisions prematurely in the face of exposure to personal liability.