IMO Colorado Group Limited
[2011] VSC 552
•28 October 2011
| Do Not Send for Reporting | ||
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
S CI 2011 02947
-and-
S CI 2011 03278
IN THE MATTER OF COLORADO GROUP LIMITED (administrators appointed) (receivers and managers appointed) (ACN 004 327 566)
BETWEEN:
| VENTANA PTY LTD (ACN 008 84 129) | Plaintiff |
| v | |
| COLORADO GROUP LIMITED (administrators appointed) (receivers and managers appointed) (ACN 004 327 566) | Defendant |
| AND BETWEEN: | |
| S CI 2011 3278 | |
| PT LIMITED AS CUSTODIAN OF THE WESTFIELD TRUST (ACN 004 454 666) and for the benefit of Re 1 Limited as responsible entity of the Westfield Retail Trust 1 | Plaintiff |
| v | |
| COLORADO GROUP LIMITED (administrators appointed) (receivers and managers appointed) (ACN 004 327 566) | Defendant |
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JUDGE: | GARDINER AsJ | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 9 August 2011 | |
DATE OF JUDGMENT: | 28 October 2011 | |
CASE MAY BE CITED AS: | IMO Colorado Group Limited | |
MEDIUM NEUTRAL CITATION: | [2011] VSC 552 | Revised 21 November 2011 |
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CORPORATIONS – External administration under Part 5.3A of the Corporations Act 2001 (Cth) (“the Act”) – application by owners of property to enforce rights to possession of premises during administration of company pursuant to s 440C(b) of the Act– grant of leave not likely to materially effect the achievement of the objects of Part 5.3A of the Act – application granted.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Ms C.M. Kenny SC, with Ms A.L. Robertson | Holding Redlich |
| For the Administrators of the Defendant | Mr S. Rosewarne | Freehills |
| For the Receivers | Mr P. Crutchfield SC with | Blake Dawson |
| Dr O. Bigos |
HIS HONOUR:
On 30 March 2011, the defendant (“Colorado”) together with nine associated companies was placed in administration pursuant to Part 5.3A of the Corporations Act 2001 (Cth) (“the Act”). Salvatore Algeri, Timothy Bryce Norman and David John Frank Lombe were appointed as joint and several administrators of the ten companies. On 13 April 2011, they were also appointed as administrators of a New Zealand company, Colorado Adventurewear Limited (NZ).
On the same day, James Stewart, Brendan Richards and Will Colwell of Ferrier Hodson, Chartered Accountants, were appointed joint and several receivers and managers of the six operating “active” companies in the group, including Colorado.
The group, which is comprised of the ten companies, operates retail and wholesale businesses in Australia and New Zealand under various names including “Colorado”, “Diana Ferrari”, “Jag”, “Mathers” and “Williams”. Colorado is the central trading arm of the group and is the main contracting entity with employees, suppliers, landlords and lenders.
Because the receivers and managers were appointed within the decision period provided for in s 441A of the Act, they presently have the general day-to-day carriage of the operations of Colorado and the business of the active members of the group.
The group owes debts to its primary secured lenders of approximately $440 million which is secured by fixed and floating charges given by each member of the group in favour of ANZ Fiduciary Services Pty Ltd, the security trustee for the syndicate of lenders. In addition, 678 ordinary unsecured lenders are owed in excess of $20 million and employee entitlements of the order of $13 million are owed to 2,372 employees of the group.
On 4 May 2011, Judd J made orders pursuant to s 439A(6) and s 447A(1) of the Act extending the period within which the administrators must convene the second meetings of creditors of Colorado and the nine other members of the group to 3 February 2012.[1]
[1]Algeri; Re Colorado Group Limited [2011] VSC 260.
Judd J, in his reasons for granting the extension, stated:
A person adversely affected by the moratorium may approach the Court for leave to deal with property. There was no attendance by any landlord, although I was informed that solicitors for one landlord, where the lease on the premises had expired, have advised that they are seeking instructions from their client as to what if any steps it may wish to take under s 440C of the Act. The grant of the extension sought by the administrators will not inhibit a lessor making application to the Court.[2]
[2]Ibid at [28].
Ventana Pty Ltd (“Ventana”) is a member of the Westfield Group and is the owner and landlord of the shopping centre known as Westfield Southland. Westfield Southland is made up of 416 tenancies. These include large supermarkets, department stores and specialty stores. The entities in the Westfield Group manage and have ownership interests in 44 shopping centres around Australia. Colorado has 98 tenancies in those shopping centres.
On 10 June 2011, Ventana made application by originating process for leave of the Court pursuant to s 440C of the Act to enforce its right to possession of a property which it had leased to Colorado at Shop 2219 at Westfield Southland.
PT Limited (“PT”) is also a member of the Westfield Group and is the owner and landlord of a shopping centre known as Westfield Carousel in Cannington, Western Australia. Westfield Carousel is a regional shopping centre and is operated along similar lines to the Southland Shopping Centre. It is made up of approximately 249 tenancies which include large supermarkets, department stores, discount department stores and specialty stores.
On 27 June 2011, PT made application by originating process for leave pursuant to s 440C of the Act to enforce its right to take possession of Shop 1025 at Westfield Carousel Shopping Centre.
At the hearing of these applications, Ventana and PT sought and were granted leave to amend the originating processes filed by them to include an additional ground of relief, being a declaration that they had each exercised a power under s 441F(1)(b) to take possession of the respective premises or otherwise recover it and, for that reason, s 440C(b) of the Act did not apply.
Ventana’s application was supported by the affidavits of Nicholas Michael Loukides, sworn 3 June 2011, and 29 July 2011, Eliza Ellen Curtain of 6 June 2011 and 24 June 2011 and Christopher Clement Broderick of 29 July 2011.
PT’s application was supported by the affidavits of Judd Otley sworn 22 June 2011, Christopher Clement Broderick of 29 July 2011, Nicholas Michael Loukides of 29 July 2011, and Eliza Ellen Curtain of 2 August 2011.
The administrators oppose the applications and rely on the affidavits of Timothy Bryce Norman sworn 19 July 2011 in each proceeding. They also rely on the affidavits filed by the receivers of Colorado, who also oppose the application.
The receivers rely on the affidavits of James Stewart, sworn 18 July 2011, which were filed in each proceeding, together with an affidavit of Byron Hayes sworn in Ventana’s application. They also rely on Mr Norman’s affidavits sworn 19 July 2011 and filed in each proceeding.
Ventana leased the Southland premises to Colorado under a lease dated 5 May 2006 for a period of five years commencing on 3 April 2006. Colorado operates a Diana Ferrari store at the premises. There are eight other Diana Ferrari stores in Victoria and 149 Diana Ferrari stockists. Four people are employed at the Southland store.
In the last several months of the lease, from late October 2010 to 23 March 2011, Colorado and Ventana conducted negotiations for a renewal of the lease. Those negotiations are detailed in the affidavit material. The parties exchanged a number of oral and written proposals in that regard. Ultimately, Ventana put a proposal to Colorado in a letter of 23 March 2011 to which there was no response. The lease expired on 2 April 2011.
In the meantime, between 9 September 2010 and 25 February 2011, Ventana conducted negotiations with Apple in relation to a site which would comprise three adjoining premises at Southland. In order to create accommodation for the Apple store, three other tenants of the Southland centre had to be moved to alternative premises during the term of their leases. One of those tenants was Blue Illusion Pty Ltd (“Blue Illusion”). Because negotiations with Colorado about renewal of its lease had stalled, Ventana proceeded to make a proposal to Blue Illusion to lease the Colorado premises at the Southland centre and that proposal was accepted.
The lease of the premises occupied by Colorado expired three days after the appointment of the administrators on 2 April 2011. Because the moratorium provisions of s 440C the Act had come into force, Ventana was not able to obtain possession of the premises despite the expiry of the lease.
On 13 April 2011, the solicitors for Ventana wrote to the administrators seeking their consent under s 440C(b) of the Act to regain possession of the premises. However, the administrators did not consent and Colorado continues to occupy the premises at Southland.
Because of this, Blue Illusion has had to be placed in alternative temporary premises. The receivers of Colorado were offered that temporary site on the same terms as to a fit out contribution that were offered to Blue Illusion, and Ventana also offered to contribute $10,000 to Colorado for make good costs. Colorado, through its receivers, has declined to relocate.
By a lease dated 4 October 2004, PT leased the premises at the Westfield Carousel centre to Colorado for a period of five years. A Williams store trades from the premises. Westfield extended Colorado’s lease of the Carousel premises on two occasions. The second extension extended the lease from 4 April 2011 to 17 May 2011. In PT’s letter granting the second extension, PT enclosed a Notice to Vacate dated 17 March 2011 requiring the premises to be vacated by 17 May 2011. During the period of that extension, Colorado went into administration and the premises became subject to the statutory moratorium imposed by s 440C of the Act.
A Williams store has operated at Westfield Carousel since October 1991. It has traded from the current premises since September 1999. There are presently 128 Williams stores trading throughout Australia. The Westfield Carousel store presently generates approximately $1.1 million per annum in revenue and employs five staff members.
Throughout 2010, PT negotiated with Colorado with a view to leasing alternative premises to it but these negotiations concluded on 16 March 2011 at which time Mr Otley, a leasing executive employed by the Westfield Group, confirmed that the lease with Colorado was to be terminated.
In 2009, Westfield decided to reconfigure the Carousel premises into two premises and plans were prepared for that purpose.
During the period of negotiations with Colorado and prior to the expiration of the first extension of the lease, PT also negotiated with potential tenants to lease the two new shops which would became available when the reconfiguration works were completed. The reconfiguration works were planned to take place once Colorado had vacated the premises. Because of the proposed reconfiguration, it was PT’s intention to offer Colorado a lease of another shop at Westfield Carousel once the first extension had expired. One of the shops, which would become Shop 1025A following the reconfiguration, was leased to Cotton On Clothing Pty Ltd, which trades as Typo, on 1 March 2011. Shop 1025 was leased to Specialty Fashion Group Limited which trades as La Senza, on 6 April 2011.
PT gave Colorado notice to vacate the Carousel premises on 17 March 2011 with the intention being to undertake the reconfiguration works when the lease expired on 17 May 2011. However, by then the receivers, who were in office, refused to deliver up possession of the premises, stating that by reason that Colorado was in administration, they were entitled to stay in possession of the property notwithstanding the expiry of the lease. Because of this, it has not been possible to complete the reconfiguration works, nor have the new lessees been able to take up occupation of the premises.
Following the appointment of the receivers, it was decided to close 139 under‑performing stores. Thirty of these stores leased premises from a member of the Westfield group. Two hundred and eight two stores remain open for trading.
One of the receivers, Mr Stewart, states that it is intended that the two stores the subject of the present applications will continue to trade as part of a restructured group. In addition to employing a total of nine staff, they receive stock from suppliers of a value, when their supplies to the group as a whole are aggregated, which constitutes 34% of the ordinary unsecured trade creditors of the group. It is not explained by Mr Stewart how those two shops will form part of a restructured group given that when the statutory moratorium concludes, vacant possession will be required to be given by reason that the leases for the two stores have expired. If Colorado and the other members of the group proceed to execute a deed of company arrangement, in order for Colorado to remain in possession of the two premises, it would need to make application under s 444F(4) of the Act. The deed administrator of Colorado would then bear the onus of establishing that the taking of possession of the properties would have a material adverse effect on achieving the purposes of the deed and that the interests of the lessors will be adequately protected before the Court will make an order restraining the lessors from taking possession of the premises.[3] As to the figure cited in respect of the percentage of 34% referred to, it is not particularised as to what percentage the trading volume of the two stores have to the total trading turnover of the group.
[3]See Re Mentha; Ansett Australia Limited v Sydney Airports Corporation Limited (2002) 41 ACSR 352 at [53].
Of the 98 tenancies that Colorado has with the Westfield Group, there are five tenancies for which Westfield has requested that the administrators and receivers and managers of Colorado give vacant possession. The leases in respect of these tenancies have either expired or are due to expire. Of those, the receivers and managers have indicated that three stores will be closed. This leaves only the two stores which are the subject of these applications.
The two applications involve identical considerations and there appear to be no material differences. Ventana and PT contend in their submissions that there are five reasons why the Court in the exercise of its discretion should grant them leave to regain possession of the respective premises.
The plaintiff’s submissions
First, it is said that by reason of the extension of the convening period granted by Judd J, a second creditors’ meeting is some time off (and may indeed be the subject of a further extension) and by operation of s 440C the moratorium prevents the plaintiffs from exercising their proprietary rights. The plaintiffs say that their proprietary rights should not be so affected, particularly in circumstances where there is evidence of significant financial loss occasioned by Colorado’s continued occupation of the premises and that Judd J was mindful of the position in this regard when he made reference to the prospect of applications for relief under s 440C(b) of the Act in his reasons for judgment.
Secondly, both leases have expired and Colorado cannot offer any potential purchaser a lease of either premises as part of any proposal. Colorado, through its receivers and administrators, have no right to remain in possession of the property once the statutory moratorium imposed by s 440C concludes. It is submitted therefore that there is no advantage in continuing to trade from the stores. If the group as a whole is restructured and enters into a deed of company arrangement, the plaintiffs would not be bound by the deed unless they consented to it and the two stores the subject of these applications would not form any part of the business and undertaking of Colorado. As I have noted above, the only means by which Colorado could remain in occupation would be, if having executed a deed of company arrangement, its deed administrator successfully applied to prevent the plaintiffs from regaining possession of the premises by obtaining an order under s 444F(4). The plaintiffs say that the prevention of the plaintiffs from exercising their right of possession for such a lengthy period of time is inconsistent with Part 5.3A as it unjustly imposes on them tenants which they do not want. The plaintiffs will not be affected by any proposal put to creditors at the second meeting of creditors as there are no longer any leases to bind the plaintiffs. Section 444D(3) of the Act operates such that even if there is a deed of company arrangement it would not bind the plaintiffs unless they consent to it.
Thirdly, the plaintiffs say that they have suffered ongoing financial loss because of the refusal to deliver up possession of the premises. At the Southland site, the new lessee, Blue Illusion, has had to be offered a temporary site and as a result of this Ventana is losing $17,000 rent per month. In addition, Ventana has had to contribute costs of approximately $50,000 towards the fit out and conversion of the temporary site for use by Blue Illusion.
As far as the Western Australian premises is concerned, the new lessees, Typo and La Senza, have not been able to take up possession in accordance with their leases and the reconfiguration works have not been able to be commenced. PT contends from 4 July 2011, it is losing rent at a rate of $10,363 per month and one of the lessees, La Senza, has put Westfield on notice that it will seek compensation for losses sustained as a result of not being able to take up possession of the premises for which it has taken a lease.
Fourthly, it is said that the grant of leave by the Court will not affect the likelihood of a successful sale or restructure of Colorado. They draw attention to the affidavit of Mr Stewart of 18 July 2011, which describes the sale process being undertaken to locate a purchaser. Despite the steps described in Mr Stewart’s affidavit, no final offers have been acceptable to the receivers. The plaintiffs say there is no evidence that closing the two stores the subject of this application will diminish the range of options available to the creditors. The Colorado group, according to the evidence, continues to operate 282 stores throughout Australia and New Zealand, 139 stores having been closed on 16 June 2011. The plaintiffs say that the assertion that the closure of the two stores which will result from the grant of the leave in this case will jeopardise the sale of the business or a re‑structure of it is not developed beyond assertion and is not made out by the evidence.
In this regard, reference was made to the evidence that the Southland premises forms part of a chain of 29 Diana Ferrari stores throughout Australia. It generates $739,568 per annum in revenue and employs four staff members. The stock at that store, Ventana submits, could be moved from the Southland premises and sold at another Diana Ferrari store. Ventana submits that if the Southland store was such a significant member of the Diana Ferrari chain, the receivers, knowing that the lease had expired, should have accepted the relocation offer made by Ventana. In addition, Ventana submits that while that store turns over $739,568 per annum, no analysis was presented in the affidavit sworn by Mr Stewart, one of the receivers, as to what expenses are incurred in deriving that revenue or what the net profit of the store is. Nor, it is submitted, is there any evidence as to what proportion of the anticipated 2012 earnings before interest, tax, depreciation and amortisation of $24 million will be generated by the two stores the subject of the present applications.
The plaintiffs say that the applications do no involve a “disorderly or distracting grab” by them for the assets of Colorado. Rather, they are exercising their legitimate right in relation to their proprietary rights long after the statutory time for convening a second creditors’ meeting has expired and the provisions which enable an extension of the convening period coexist with the ability of the owner of property to be given leave in the appropriate case.
Finally, the plaintiffs say that there has been no delay in bringing the present applications. Ventana sought to reach a commercial agreement to resolve the matter which would have enabled Colorado to continue trading at Southland, including offers of relocation and contribution to relocation costs but that offer was declined. It is said that it was unreasonable for the receivers to reject that offer in circumstances where the lease had expired.
The Receivers’ and Administrators’ submissions
The receivers and the administrators oppose the applications for leave. In their submissions, the receivers contend that the stores that remain after the closures of the 139 stores in June form the “foundation stone” of the group. The receivers assert that they wish to preserve the businesses and maintain control of the store network in order to implement the proposed sale or restructure and that they are concerned that the grant of leave in respect of these two stores would reduce the likelihood of a successful sale or restructure because key revenue generating stores would have to be closed. I note at this juncture that while the stores are described as such, the contribution that the stores make to the revenue streams of the respective chains to which they belong is not established.
Mr Stewart in his affidavit contends that if the stores have to close or relocate, Colorado would face significant expenses, $250,000 in respect of the Westfield Carousel store and $235,000 in respect of the Southland store. Mr Stewart says that these relocation costs are so significant that the receivers would have to close the stores and the employment of the staff of those stores would be terminated. On the other hand, he says if they remain open, the employees will be retained and the stores will continue to trade.
Mr Stewart expects that any new owner of the Colorado group or its businesses would be interested in negotiating with the lessors to take on the leases of the stores at market rent. This expectation of course conflicts with the evidence of the plaintiffs in relation to the completion of negotiations with new lessees. Again, the only mechanism by which the plaintiffs could be forced to treat with any new owners of the businesses is if the deed administrators made successful application under s 444F(4).
During the period of the administration, the receivers say that they are continuing to pay for the trade suppliers at a rate of between $7 million and $14 million a month, pay the wages of 2,372 employees, pay rent and outgoings for the 282 occupied leased premises.
I note at this juncture that those figures are of course in respect of the whole group. The situation in regard to the premises the subject of this application is that eight employees are affected by a closure of the stores. If their employment is terminated, that is undoubtedly most unfortunate for them but they may well be employed at other stores in the Colorado group. The two stores represent a small fraction of the total undertaking of the group. While Mr Stewart asserts that the grant of leave would reduce the likelihood of a successful sale or restructure, I do not consider that it has been established that closure of the two stores will bring this about.
The administrators say that the continuation of the business as going concern, with the prospect of a sale or restructure, is beneficial to unsecured creditors, including the employees who retain their employment, and trade creditors who continue to receive income from supplying goods. They say that if the remaining stores close, employees will be made redundant and trade suppliers will lose Colorado as a customer.
The receivers and the administrators submitted that if Ventana and Westfield and other landlords moved to repossess their properties, then the entire sale process or restructure is likely to be frustrated. It said that the grant of leave to even one or two landlords may lead to other landlords making similar applications which is particularly significant given that there are approximately 36% of the Colorado Group’s leases which will expire due to the effluxion of time by the end of 2011. It is submitted that this would endanger a going concern sale and sacrifice the interests of a large number of creditors to the benefit of the plaintiffs. It is to be noted however that Mr Stewart deposes that there are presently only two applications on foot, being the Ventana and PT proceedings whereby the landlords are seeking leave to take back possession of their premises. A third application has been withdrawn.
The receivers and the administrators submit that the fact that the lease of the Southland premises expired by effluxion of time on 2 April 2011 is irrelevant, as the moratorium created by s 440C applies even though there is no lease. In addition, the receivers contend that the expiry of the lease occurred soon after the administrators were appointed and negotiations had been on foot to renew the lease and the parties were close to reaching agreement. It is said that by the time Ventana had agreed to lease the Southland premises to the new tenant, it knew of the appointment of administrators and the existence of the moratorium.
Byron Hayes, who is a property leasing executive employed by Colorado, deposes in his affidavit that the rental proposed by the new tenant of $155,000 per annum is the same as he had proposed on behalf of Colorado on 10 March 2011.
Legal principles
The plaintiffs’ applications arise out of the operation of Part 5.3A of the Corporations Act. The object of that part, according to s 435A of the Act, is to provide for the business, property and affairs of an insolvent company to be administered in a way that maximises the chances of the company, or as much as possible of its business, continuing in existence, or if it is not possible for the company or its business to continue in existence, results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.
Division 3 of Part 5.3A deals with the assumption of control of a company’s affairs by an administrator. Under s 437A(1), while a company is under administration, the administrator:
· has control of the company’s business, property and affairs;
· may carry on that business and manage that property and those affairs;
· may terminate or dispose of all or any part of that business;
· may dispose of any part of that property; and
· may perform any function, and exercise any power, the company or any of its officers could perform or exercise of the company were not under administration.
While a company is under administration, s 437C provides that no other person may perform or exercise a function or power as an officer of the company. The powers of the directors are displaced. Division 5 of Part 5.3A is concerned with meetings of creditors to decide a company’s future. Under s 439A(1), the administrator of a company under administration must convene a meeting of the company’s creditors within the convening period, as determined by s 439A. Normally, the convening period is, relevantly, the period of 20 days beginning on the day after the administration begins. Under s 439A(6), as has happened in the Colorado administrations, the Court may extend the convening period.
Of central significance to these applications is the operation of Division 6 of Part 5.3A which provides for the imposition of a moratorium restraining parties from taking steps against a company during the administration period. A number of moratoria are provided for, including restraints in some circumstances on the enforcement of a charge on property of the company, (s 440B), on the holder of a lien or pledge (s 440BA), and exacting distress for rent (s 440BB). Section 440F restrains enforcement process, s 440D provides for a stay of proceedings against the company, and s 440A provides that a company under administration cannot be wound up voluntarily, except as provided by s 446A.
The current application involves the provisions of s 440C which provides that during the administration of a company, the owner or lessor of property which is used or occupied by or is in the possession of the company cannot take possession of the property or otherwise recover it, except with the administrator’s written consent or with the leave of the Court.
Ventana and PT bear the onus of establishing that they should be given leave.[4] In Re Java 452 Pty Ltd (admins appointed) Permanent Trustee Australia Limited v Stout,[5] Byrne J stated:
It is clear, however, that it is for the lessor wishing to take possession to satisfy the court on an application under s 440C that this is the appropriate course. It may be appropriate where it is shown that the taking of possession will not in any practical way affect the availability of the options which the creditors must consider or their decision on those options. …
[4]Re Java 452 Pty Ltd (Admin appointed); Permanent Trustee Australia Limited v Stout (1990) 32 ACSR 507 (Java) at 517 per Byrne J; Re Atlantic Computer Systems PLC [1992] Ch 505 at 542 (Atlantic Computer) (judgment of the English Court of Appeal delivered by Nicholls LJ).
[5]Ibid.
In Canberra International Airport Pty Ltd v Ansett Australia Limited (Admins appointed) and ors,[6] Kenny J observed:[7]
The discretion conferred by s 440C is a broad one: Re Ansett Australia Limited (Admin appointed); Intrepid Aviation Partners LLC v Ansett Australia Limited (Admin appointed) (2001) 39 ACSR 255 at 257; Intrepid and [Java] at 516. Leave may be granted if the statutory restraint imposed on the lessor will occasion the lessor loss or detriment (financial or otherwise) of a relevant kind. The loss or detriment may be regarded as relevant to a grant of leave where the Court considers it is greater than any benefit or advantage that might enure to the creditors by reason of the statutory restraint. The outcome of a grant of leave may depend on the history of the administration, the conduct of the parties, and whether terms may practically be imposed on the grant or refusal of leave to protect competing interests.
[6](2002) 41 ACSR 309.
[7]At [24].
In Java and the West Australian decision of Le Miere J in Rewards Land Pty Ltdv Jones and ors[8], reference was made to the decision in Re Atlantic Computer Systems PLC[9] where the Court of Appeal in the United Kingdom made some general observations on the principles to be applied on an application for a grant of leave under s 11 of the Insolvency Act (UK). Le Miere J observed that care must be exercised because of the different legislative regimes between the United Kingdom and Australia.[10] Byrne J observed in Java:[11]
Although the English legislation is in terms different from Part 5.3A, the problems and conflicts which it seeks to address are familiar to practitioners working within the Australian regime. The factors mentioned by Nicholls LJ in the Atlantic Computer Systems case, or some of them, have been treated as important in Australia in Hamilton v National Australia Bank Limited (1996) 66 FCR 12 at 32 per Lehane J, an application under s 444F to restrain a secured creditor from realising an asset in the face of a proposed deed of company arrangement.
[8][2010] WASC 233.
[9][1992] Ch 505.
[10]At [27].
[11]At [40].
The general observations to which reference was made in Java and Rewards Land are set out in the conclusion to the decision in Atlantic Computers and those that I consider to be relevant in the present context are as follows:[12]
[12][1992] Ch 505 at 542.
(1) It is in every case for the person who seeks leave to make out a case for him to be given leave.
(2) The prohibition in s 11(3)(c) and (d) is intended to assist the company, under the management of the administrator, to achieve the purpose for which the administration order was made. If granting leave to a lessor of land or the hirer of goods (a “lessor”) to exercise his proprietary rights and repossess his land or goods is unlikely to impede the achievement of that purpose, leave should normally be given.
(3) In other cases when a lessor seeks possession the court has to carry out a balancing exercise, balancing the legitimate interests of the lessor and the legitimate interests of the other creditors of the company: … It must be kept in mind that the exercise under s 11 is not a mechanical one; each case calls for an exercise in judicial judgment, in which the court seeks to give effect to the purpose of the statutory provisions, having regard to the parties’ interests and all the circumstances of the case. As already noted, the purpose of the prohibition is to enable or assist the company to achieve the object for which the administration order was made. The purpose of the power to give leave is to enable the court to relax the prohibition where it would be inequitable for the prohibition to apply.
(4) In carrying out the balancing exercise great importance, or weight, is normally to be given to the proprietary interests of the lessor. Sir Nicolas Browne-Wilkinson VC observed in Bristol Airport Plc v Powdrill [1990] Ch 744 at 767D–E that, so far as possible, the administration procedure should not be used to prejudice those who were secured creditors when the administration order was made in lieu of a winding up order. The same is true regarding the proprietary interests of a lessor. The underlying principle here is that an administration for the benefit of unsecured creditors should not be conducted at the expense of those who have proprietary rights which they are seeking to exercise, save to the extent that this may be unavoidable and even then this will usually be acceptable only to a strictly limited extent.
(5) Thus it will normally be a sufficient ground for the grant of leave if significant loss would be caused to the lessor by a refusal. For this purpose loss comprises any kind of financial loss, direct or indirect, including loss by reason of delay, and may extend to loss which is not financial. But if substantially greater loss would be caused to others by the grant of leave, or loss which is out of all proportion to the benefit which leave would confer on the lessor, that may outweigh the loss to the lessor caused by a refusal …
(6) In assessing these respective losses the court will have regard to matters such as: the financial position of the company, its ability to pay the rental arrears and the continuing rentals, the administrator’s proposals, the period for which the administration order has already been in force and is expected to remain in force, the effect on the administration if leave were given, the effect on the applicant if leave were refused, the end result sought to be achieved by the administration, the prospects of that result being achieved, and the history of the administration so far.
(7) In considering these matters it will often be necessary to assess how probable the suggested consequences are. Thus if loss to the applicant is virtually certain if leave is refused, and loss to others a remote possibility if leave is granted, that will be a powerful factor in favour of granting leave.
(8) This is not an exhaustive list. For example, the conduct of the parties may also be a material consideration in a particular case …[13]
[13]The factors mentioned in points 9, 10, 11 and 12 relate to whether terms should be imposed on the grant of leave but the parties did not submit that this was appropriate in the present context.
As Nicholls LJ emphasised, the observations are only guidelines and there is a danger that they may be treated as something more. Bearing that in mind, I consider that an application of those factors, adopting the same paragraph numbering as the judgment of the Court of Appeal, results in the following:
(1)It is clear that Ventana and PT bear the onus of persuading the court that leave should be granted.
(2)The Diana Ferrari store conducted at Ventana’s premises at Southland is part of a chain of 29 stores in operation. As Ventana points out, it is not shown what proportion of the 2012 earnings is represented by the Southland store to the earnings of the Diana Ferrari Group. The shop at Westfield Carousel is part of a chain of 128 stores. In my view there is no evidence developed beyond assertion that closing the stores at the present time, if leave is granted, would effect the achievement of the policies underlying Part 5.3A as the stores represent such a minor part of the undertakings of the respective chains.
(3)This element is related to (2). The policy underlying the moratorium provisions is to enable the company to achieve the object of the Part. The stores the subject of these applications are but single branches of the respective chains. Because the leases have expired there is nothing in any event in the way of goodwill attaching to the two stores which can be passed on to a purchaser under a deed of company arrangement, unless a successful application is made by the deed administrators under s 444F(4).
(4)The unsecured creditors will receive no benefit from the administration whereas the proprietary rights of the plaintiffs in relation to the two premises are severely restricted. In addition, they are suffering ongoing financial loss by reason of the difference in rent being paid by the receivers compared with that which can be obtained from alternative lessees who are available to take up the tenancies.
(5)The imposition of the moratorium is the source of clear financial loss to the plaintiffs and one lessee has indicated it may sue for being unable to take up its tenancy. The plaintiffs are not able to engage new tenants during the period of the moratorium and enjoy the certainty of longer lease periods. The reconfiguration works at the Westfield Carousel Centre will be delayed for the period that PT is denied vacant possession.
(6)The financial position of Colorado is such that the unsecured creditors will receive no dividends. The receivers are paying current rentals. The administrators’ proposals are yet to be determined but because of the expiry of the two leases the subject of these applications, such proposals will not involve ongoing arrangements with Ventana or PT. The administration has already proceeded for a period of six months and will extend to at least early February next year when it may perhaps be further extended, depending upon whether an application is made and granted to do this. As to the effect of the administration if leave were given, it could not, in my view, be said that the receivers or administrators have demonstrated that the prospects of entering into a deed of company arrangement would be jeopardised by the grant of leave in respect of the two premises.
(7)The plaintiffs are each suffering losses by reason of the imposition of the moratorium by the lower rent presently being paid and the inability, until the moratorium is lifted, of securing long term commercial tenants.
(8)The attitude of the plaintiffs was made known to the administrators and the receivers in a timely manner. I could find no conduct which would be regarded as commercially impeachable on the part of the plaintiffs. On the other hand, the receivers have been criticized for not taking up Ventana’s offer of alternative premises at the Southland store.
A consideration of the applications for leave under s 440C requires a balancing exercise involving the weighing up of the interests of the plaintiffs whose proprietary rights in respect of the premises are substantially qualified by operation of the section and the object of endeavouring to preserve the business of Colorado as a going concern.[14] It is conceded by the receivers and the administrators that the unsecured creditors will not receive a dividend as there will be no surplus after the secured creditors have been paid. The maintenance of the restraints impose by s 440C works to enable the receivers to enhance the return to the secured creditors; the secured creditors are creditors and they cannot be criticized for taking advantage of the moratorium provisions in this way. The unsecured creditors however will not benefit from the moratorium, save that in the case of the two stores the subject of these proceedings, nine employees will continue to be retained and suppliers to the two stores will benefit by the continuance of to trade. In my view however, the plaintiffs should be granted leave to take possession of the respective premises. I do not consider that the grant of leave will materially impact the administration or that it has been established that the viability of the business as a going concern or a restructure of the companies will be affected by the grant of leave.
[14]ABC Learning Centres Ltd, in the matter of ABC Learning Centres Ltd; application by Walker (No 8) [2009] FCA 994 at [62].
The “flood gates” argument put by the receivers and the administrators has little merit in my view. As I have referred to above, the current applications were the only applications for leave at the date of the hearing of this matter, despite the fact that the administration has been in progress for over six months. Each application by any owner or lessor of property will be determined on its own merits. Every owner and lessor of property affected is entitled to make application under s 440C and it is not part of the Court’s function to dissuade them from exercising those rights. In his affidavit, Mr Stewart states that only 14% of the leases are due to expire for what remains of 2011. There is no evidence that there will be a flurry of applications and any court considering applications by other owners and lessors would be in no sense bound by the orders made in these applications.
In the circumstances, by reason of my decision to grant leave under s 440C, it is not necessary for me to consider the applications which the plaintiffs made by their amendments to the originating processes seeking relief under s 441F(1)(b).
I will order as follows:
In proceeding No S CI 2011 02947,
The plaintiff be granted leave pursuant to section 440C(b) of the Corporations Act 2001 (Cth) to enforce its right to possession of the property known as Shop 2129 Westfield Southland.
In proceeding No S CI 2011 03278,
The plaintiff be granted leave pursuant to section 440C(b) of the Corporations Act 2001 (Cth) to enforce its right to possession of the property known as Shop 1025 Westfield Carousel.
I will ask the parties to submit short written submissions as to what order should be made for costs.
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