International Business Articles
SumoSalad is an example of a tenant that has used the administration provisions of the Corporations Act 2001 (Cth). Company administration produces a lot of questions. Here are some answers.
What is a company administration?
The Corporations Act allows for the appointment of an administrator to a financially troubled company. During the administration period, the administrator has to:
- take control of the affairs and business of the company; and
- investigate the financial situation and affairs of the company with a view to recommending to the company's creditors a course of action for the future of the company which would be in the best interests of creditors.
Can you take action during the administration period?
During the administration period the company has the benefit of a moratorium during which creditors are prohibited from taking any action against the company to recover debts, enforce security interests or have the company wound up, subject to a few limited exceptions such as where the administrator consents or the Court grants leave.
Owners of property that is being used by the company (eg hired equipment) and landlords of property leased to the company are also prohibited from taking possession of the property without consent.
Directors cannot be sued on their personal guarantees of the company debts until the administration ends, except with Court approval.
The first meeting
A meeting of creditors must be held within eight business days after the commencement of administration. The purpose of this meeting is for the creditors to decide whether to appoint a committee of creditors to advise the administrator. The creditors may also remove the administrator appointed and appoint another one.
What should a landlord do when notified of the appointment of an administrator?
The landlord or managing agent should open a separate rental account for the administrator and the administrator should be billed separately from the company. Payments made by the administrator should be applied to this account rather than to any other amounts owed by the company.
What rent is an administrator liable for?
The administrator is personally liable for rent and other amounts payable by the company under the lease from the period commencing five business days after the administration began and continuing throughout the administration period for so long as the company continues to occupy the property. The administrator will not be liable for any amounts payable under the lease before the fifth business day, or after the company vacates the premises or the administration ends, but the separate liability of the company under the lease is not affected except as described below.
The administrator can avoid personal liability by giving notice to the landlord of the property within five business days after the commencement of the administration stating that the company does not propose to exercise rights in relation to the property. While the notice is in force the administrator is not liable for rent or other amounts payable under the lease, but the liability of the company for such amounts is not affected by the notice.
If the notice is given, it will cease to have effect if it is revoked by the administrator, or if the company exercises or purports to exercise rights in relation to the property.
If the notice is given and the company vacates the premises then with the administrator’s consent and a suitable lease the landlord can immediately re-take possession and should be able to immediately re-let, subject to filing documents to remove the lease from the title.
There may be difficulties in calculating amounts to be paid by an administrator where no lease has been entered into.
The administrator will not be personally liable for rent or other amounts payable after another party (eg the company’s bankers) appoints a receiver under a security interest, a secured party appoints an agent to enter into possession or to assume control of the property, or when a secured party takes possession of the property. From then on the liability for further rent and other amounts owing under the lease will be an issue with the receiver or secured party.
When must an administrator pay the rent?
An administrator must pay within a reasonable time. No actual time is specified. An administrator is not required to pay rent in advance.
What if you commenced action against the company before the administration period?
Landlords who started Court action to recover their property before the administration of the company began can continue action to recover the property during the period of administration, subject to the Court’s power to limit the exercise of any powers of the landlord to recover property during the administration period. In making any order the Court must be satisfied that what the administrator proposes to do during the administration will adequately protect the interests of the landlord.
A landlord is not prevented from giving any notices to the company under the lease relating to the property during the administration period.
What if the administrator wants to sell the business during the administration period?
If the company is holding over as a monthly tenant (eg because its lease has already been terminated or it has expired) then the landlord may (but does not have to) negotiate a new lease with the proposed purchaser of the business. The key-money prohibitions of the Retail Leases Act 1994 (NSW) prevent the landlord from insisting on payment of any arrears or of a premium as a condition of the new lease of retail premises governed by that Act. However, the landlord can demand a higher base rent for a new lease than applied under the old lease.
If the lease still has a period to run, the landlord should assess the proposed purchaser in the same way as a normal application for assignment of lease. If consent is to be given and there are arrears of rent, any verbal and written consents should say that the landlord consents to assignment of the lease but proposes to terminate the lease for non-payment of the arrears of rent. This will often bring a satisfactory result in collecting arrears!
The Retail Leases Act provides only five grounds for which consent to assignment can be withheld in relation to leases governed by that Act:
(a) if there is a change of use proposed;
(b) if the proposed assignee has financial resources or retailing skills that are inferior to the tenant (unlikely in the case of the outgoing tenant being a company in administration!);
(c) if the tenant has not complied with the procedure in the Act for obtaining consent;
(d) in relation to a lease of airside premises at Sydney Airport, the assignee has inferior skills for competing in the international airport retail market; or
(e) if the lease was awarded by public tender, the assignee fails to meet any criteria of the tender.
This means that the landlord cannot refuse consent for assignment of a lease which is subject to the Retail Leases Act just because rent is owing, but if the parties are formally notified before the assignment of the landlord’s intention to do so, the landlord can seek to terminate the lease after the assignment if the arrears are not paid. This may encourage the administrator or purchaser to pay the arrears.
What happens at the end of an administration?
The administration normally ends with approval of a deed of company arrangement, a resolution to end the administration and return the company to the control of the directors, or a resolution to wind up the company. A meeting of creditors must be convened by an administrator to consider these alternatives.
The moratorium of actions against the company and guarantors then comes to an end. If the company enters into a deed of company arrangement, a landlord of property will be bound by any restriction on the landlord’s rights contained in the deed if the landlord voted in favour of the deed at the creditors' meeting or the Court otherwise orders. For that reason, landlords should give careful consideration to any proposal for a deed of company arrangement. Legal advice may be appropriate.
If a landlord votes against the deed, then unless the Court otherwise orders, on the administration ending, the landlord will not be restricted in exercising any rights to resume possession of the premises or to sue on a guarantee. However, the landlord’s rights to sue the company itself for arrears or future rent may be compromised in a deed approved by the creditors even if the landlord voted against the deed. If the landlord is treated in a manner that is oppressive, unfairly prejudicial, or unfairly discriminatory, the landlord may ask the Court to terminate the deed. The Court will not be sympathetic if the landlord delays making an application.
The Court can still make an order that the landlord not take possession of or recover property, but only if it is satisfied it would have a material adverse effect on achieving the purposes of the deed and if, having regard to the terms of the deed, the terms of the order and any other relevant matter, the interests of the owner or landlord will be adequately protected.
A deed of company arrangement will normally treat arrears of rent in the same way as it treats other unsecured liabilities. Except for preferred creditors (eg employee claims), these are usually paid at a uniform rate - eg five cents in the dollar.
Even though the landlord cannot sue the company for arrears whilst the deed is in effect, the landlord may still be able to terminate the lease for non-payment of the arrears. In this way the right of termination of the lease may be used as “security” for the unpaid arrears.
After the end of the administration the landlord may also be able to sue the guarantors for all arrears even if the landlord cannot sue the company. This depends upon the wording of the guarantee. If the guarantors only guarantee the tenant’s obligation, and that obligation is reduced or cancelled by the deed of company arrangement, the guarantee may be of little value. Special drafting of guarantees may overcome that problem.
Can a tenant use a deed of company arrangement to get out of a lease?
Yes. This is a common use of the deed of company arrangement. This is achieved by the deed providing effectively that a specific landlord, or all landlords of the company, cannot claim for future rents or arrears. In our view the affected landlord can treat that deed as a “repudiation” of the lease so that if the landlord does not waive its rights or vote for the deed, the landlord can terminate the lease and resume possession of the premises at the end of the administration.
If the landlord is going to suffer unavoidable loss as a result, such as loss of rent in the period until re-letting and any loss on re-letting at a lower market rent, the landlord may be able to lodge a claim for that loss as part of its proof of debt in the administration. If that claim is accepted by the administrator or by the Court, it will increase the amount in relation to which the landlord can participate in a distribution on an administration.
The Courts have accepted tenants using a deed to get out of leases on the basis that the landlord would be no worse off if the company instead went into liquidation.
Sometimes a company will enter into voluntary administration, seek to get out of the lease, and then enter into negotiations with the landlord for a new lease at a lower rent. This was the case for SumoSalad, which put its leasing entities into voluntary administration and sought to reduce the rent payable under a number of leases it had in Westfield shopping centres. If the previous lease was above market rent and the landlord is keen to retain the business of the tenant, the landlord may agree to this.
What about bank guarantees?
A landlord can obtain a substantially better result if its managers take special care in how they deal with any bank guarantees held in respect of the tenancy.
The aim is to use the bank guarantee to meet arrears as at the start of the administration rather than to meet amounts falling due during the administration period, for which the administrator is personally liable (after the first five business days).
Any proxy or proof of debt lodged in the administration should deduct from the amount claimed as an “unsecured” liability, the amount of any bank “secured” guarantee held. The amount of debt covered by the bank guarantee should instead be shown in those documents as a “secured” liability.
The bank guarantee should not be called during the administration period or until the administrator has paid the amount for which the administrator is personally liable. The administrator may want the landlord to use the bank guarantee for that debt, but the landlord should refuse and indicate that the bank guarantee will be used for earlier arrears. As administrators are professional persons (usually accountants) they generally ensure that they have available funds to meet the liabilities. The administrator generally will pay, even if that takes a long time.
After the administrator has met their own liability, which is described above, the bank guarantee can be called to meet any earlier arrears deducted by the landlord in calculating the landlord's claim as an unsecured creditor in the administration.
What if a deed of company arrangement is not signed?
If the deed is not approved, this usually means the creditors have resolved to wind up the company and it goes into liquidation. If the deed is approved but not signed within a fixed period after the approval meeting, the company also automatically goes into liquidation. The position will then be similar to what happens if a deed is entered into except that the company will usually cease to trade and the landlord and other creditors will not be restricted by any deed of company arrangement. However, permission of the Court will then be required to take any action against the company, and the liquidator might effectively repudiate any lease, if that has not already happened. Also, the liquidator has extra recovery rights including a right to recover preferential payments to creditors and a right against the directors for any debts incurred during insolvent trading.
The administrator will still be personally liable for rent for the period commencing five business days after the start of administration and expiring on the earlier of the company vacating the premises or the administration ending.
Is administration always bad for landlords?
No. Sometimes an administration will enable a tenant to get their affairs in order. This will usually involve compromise by everyone, with the aim of achieving or maintaining a viable business.
Landlords should particularly remember to:
- Show separately as a secured liability, in any proof of debt or proxy, the amount of arrears covered by any bank guarantee.
- Open a separate account for and chase the administrator for payment of rent in respect of the period starting five business days after the commencement of the administration.
- Not call on any bank guarantee until the administrator has paid the amount for which the administrator is liable.
- Not vote in favour of any deed of company arrangement which affects their position differently to other creditors or which restricts their rights as a landlord or their claim for future rent.
- Make it clear that in considering or approving any assignment of the lease, they are not waiving any rights to terminate the lease for non payment of arrears, including arrears of the company in administration. Arrears should still be kept on any statements, so that the tenant and the purchaser of the business (if any) each understand that the lease can still be terminated for non payment of the arrears if the company cannot be sued for them.
What about special circumstances?
Each case has its own special circumstances. This summary should be treated as advice of a general nature and specific advice should be sought in every case.
One special circumstance was where a franchisor had taken leases in its name and then went into administration. Many of the franchisees continued to perform the leases and pay rent. Ultimately one franchisee wanted a new lease in his own name, but that could not be done without the franchisor (or the appropriate administrator) signing a surrender since the lease was still in the franchisor’s name. Because the franchisee had paid all rental and arrears it was not possible to terminate that lease for default, but the administrator was happy to sign the lease surrender.