Re FineTea Pty Ltd (admins apptd)
[2020] VSC 357
•15 June 2020
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2020 01729
| IN THE MATTER OF FINETEA PTY LTD (ACN 142 164 449) (ADMINS APPTD) | |
| WINCHELADA PTY LIMITED (ACN 006 476 788) | Plaintiff |
| v | |
| FINETEA PTY LTD (ACN 142 164 449) (ADMINS APPTD) | Defendant |
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JUDGE: | DELANY J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 12 June 2020 |
DATE OF RULING: | 15 June 2020 |
CASE MAY BE CITED AS: | Re FineTea Pty Ltd (admins apptd) |
MEDIUM NEUTRAL CITATION: | [2020] VSC 357 |
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CORPORATIONS – External administration – Application by administrators to adjourn hearing of winding up application – Where landlord had served notice terminating lease pursuant to s 146 of the Property Law Act 1958 (Vic) – Whether in the interests of creditors – Winding up application adjourned – Corporations Act 2001 (Cth) s 440A
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff and Block Arcade Melbourne Pty Ltd | Mr A Ounapuu | HWL Ebsworth Lawyers |
| For the Administrators and Defendant | Ms C Battaglia (solicitor) | Harricks |
| For Ms Koutoumanos | Mr J Sinisgalli (solicitor) | Sinisgalli Foster Legal Pty Ltd |
HIS HONOUR:
The application
This is an application by the administrators of FineTea Pty Ltd (administrators appointed) by interlocutory process filed 5 June 2024 for orders:
(1) that the winding up application filed 9 April 2020 be adjourned to 15 July 2020;
(2) pursuant to ss 440A and 447A(1) of the Corporations Act 2001 (Cth) (the ‘Act’) and r 90–15 of the Insolvency Practice Schedule (Corporations) at Schedule 2 to the Act (the ‘Insolvency Practice Rules’), that the administrators’ personal liability under ss 443A(1)(c) and 443B(2) of the Act be varied such that they will not be liable for rent and outgoings for the premises at shops one and two and part of the basement of Block Arcade 282 Collins Street Melbourne for the period from 16 June 2020 to 15 July 2020; and
(3) pursuant to Order 54 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) (the ‘Rules’) and s 63 of the Trustee Act1958 (Vic), that the assets of the FineTea Trust be sold and the proceeds of sale be retained by the company in partial satisfaction of its right of indemnity against those assets, such sale to be conducted by the administrators.
The application seeks alternative relief should the Court refuse to adjourn the winding up application. Such relief includes that the administrators have leave pursuant to s 532(2)(c)(i) of the Act to be appointed liquidators of the company.
The application is supported by Ms Kelly Koutoumanos who is a creditor and the sole director of the company.
The application is opposed by the petitioning creditor, Winchelada Pty Ltd, and by a corporation associated with the same commercial interests, Block Arcade Melbourne Pty Ltd, the landlord of the premises, to whom leave was granted to be heard on the application.
Background
The company was incorporated on 19 February 2010 and operated a business known as Hopetoun Tea Rooms from shops one and two Block Arcade 282 Collins Street Melbourne.
The lease of those premises and part of the basement of the Block Arcade was originally made on 27 July 2007. On 15 March 2010, the lease was assigned to the company. The lease has been the subject of various subsequent deeds of variation or assignment. Ms Koutoumanos is a guarantor of the lease. The landlord purchased the freehold in 2014.
All of the company’s business ceased operating on 19 March 2020 as a consequence of restrictions on restaurant and café trade introduced by government in response to the COVID–19 pandemic.
The administrators’ Report to Creditors dated 5 June 2020 reports that in 2016 the petitioning creditor entered into a loan agreement with the company in the amount of $2 million to be used by the company for the development and for the benefit of the Hopetoun Tea Rooms business.
In connection with the 2016 loan agreement, the company was granted a lease of an additional area within the basement and shop 13 of the Block Arcade. Building works were carried out in these areas with a view to expand the Hopetoun Tea Rooms business. The administrators report that following disputes between the landlord and the company regarding construction and other matters the landlord entered into possession of those premises, removed most of the partly completed construction work, carried out renovations and then re-leased those premises.
In July 2017, the company commenced proceedings in Victorian Civil and Administrative Tribunal (‘VCAT’) against the landlord seeking various orders including damages for breach of the lease agreement concerning shop 13. There were also proceedings involving the company and the petitioning creditor. On 20 December 2019, VCAT handed down its decision. The claims by the company against the petitioning creditor and Block Arcade Melbourne Pty Ltd were unsuccessful. The orders adverse to the company included an order that the company pay the petitioning creditor the sum of $1,011,793.56 pursuant to the loan agreement.
On 28 February 2020, the petitioning creditor made a statutory demand relying upon the VCAT judgement debt.
The statutory demand not having been satisfied, on 9 April 2020 the petitioning creditor filed its application to wind up the company in insolvency pursuant to s 459P the Act. The application is supported by an affidavit of Mr Cohen sworn 7 April 2020.
On 8 May 2020, Mr Gountzos and Mr Carrafa were appointed as administrators of the company. Mr Gountzos and Mr Carrafa recently filed a consent to act as liquidator and declaration of relevant relationships, should it be the case that the company is wound up.
The winding up application came before the Court on 13 May 2020. The administrators appeared and sought an adjournment until 13 May 2020. At that time, the administrators’ grounds for the adjournment included so that they could complete their investigations into the company’s business, property and affairs in order to report to creditors and to allow the director of the company, Ms Koutoumanos, time to consider the option of proposing a Deed of Company Arrangement (‘DOCA’).
On 13 May 2020, Judicial Registrar Matthews adjourned the further hearing of the winding up application to 10 June 2020. The authenticated Order recorded in ‘other matters’ that the administrators undertook not to hold the meeting of creditors at which the fate of the company is decided until after the adjourned date. I was informed this order was made so that decisions as to the sale of the company’s assets would not be taken out of the hands of the Court and determined by the creditors whilst this proceeding was on foot.
On 25 May 2020, the administrators made an agreement for rental with the landlord. The evidence before me is that the administration did not have sufficient funds available to pay the amount of rent and outgoings due under the lease for the period that the administrators may remain in occupancy as well as seeking to retain employees amongst other financial obligations. The administrators agreed with the landlord to pay the sum of $8,000 for rent and outgoings in order to meet the administrators’ personal exposure pursuant to ss 443A(1)(c) and 443B(2) for the period of the administration up to 15 June 2020.
On 27 May 2020, due to dwindling funds, in order to meet the JobKeeper prepayment requirement and the ongoing COVID–19 restrictions, and the continued inability of the business to trade profitably under the social distancing rules, the 37 employees of the business were terminated.
On 5 June 2020, the administrators provided their Report to Creditors pursuant to r 75–225(3) of the Insolvency Practice Rules and s 439A of the Act.
Mr Gountzos has given evidence that the expenses that have accrued, including employee entitlements, legal costs and costs associated with the rental determination concerning shops 1 and 2 of the Block Arcade, means that there will be insufficient funds remaining to meet the rent or outgoings for the four to six week period from the date of his 5 June 2020 affidavit.
On 4 June 2020, the landlord served a notice under s 146 of the Property Law Act 1958 (Vic) asserting that the lease had been terminated by reason of the appointment of the administrators on 8 May 2020. The s 146 notice requires that the breach be remedied within 14 days and asserts that should this not occur the term created by the lease ‘absolutely ceases and determines’.
On 5 June 2020, Mr Forsyth, a Specialist Retail Valuer appointed by the Victorian Small Business Commissioner to determine the rent of the premises in accordance with appendix 2 of the lease, determined the current market rent to be $245,000 per annum plus GST, effective from 15 July 2019.
On 10 June 2020, Judicial Registrar Matthews ordered that the further hearing of the proceeding, including of the interlocutory process filed 5 June 2020, be adjourned to 12 June 2020 before me.
The sale process
The administrators have conducted an expression of interest (‘EOI’) campaign with a view to selling the business and assets of the company. The EOI campaign period ended on 3 June 2020. It resulted in 47 expressions of interest being received and subsequently, as a result of that campaign, 23 prospective purchasers have executed confidentiality agreements with a view to receiving an Information Memorandum.
The administrators have provided or are in the process of providing the Information Memorandum to prospective purchasers. This occurred from about Monday 8 June 2020. There was a delay in completing the Information Memorandum because of the substantial dispute between the company and the landlord that existed prior to Mr Forsyth’s rental determination as to the market rent payable under the lease.
In 2019 the company exercised its option for a further six year term of the premises at shops one and two of the Block Arcade. At that time the landlord proposed a base rent of $335,600 per annum plus GST. The company disagreed and its director, Ms Koutoumanos, proposed a base rent of $165,085 per annum plus GST.
It is the evidence of Mr Gountzos that part of the business to be sold is the leasehold interest in the premises and that the business is inextricably linked with the premises. It is his evidence that if the company were to go into liquidation with a valid s 146 notice on foot then the landlord could terminate the lease and re-enter the premises.
The administrators submit that ordinarily they would recommend that the company be wound up in the absence of a DOCA. However, because of the perceived difference in the position of the company concerning the assignment of the lease if in administration, compared to liquidation, they contend that it is in the interests of the creditors that the winding up be adjourned.
It was accepted by all parties who appeared on the application that not only is the leasehold interest in the premises a significant part of the business sought to be sold but that not having a lease to assign to a prospective purchaser would be, to use the words of Mr Gountzos, ‘catastrophic’ to the sales campaign.
Mr Gountzos has given evidence that in his opinion it would be in the best interests of the creditors if the lease remained on foot for the duration of the sale process. However, as earlier mentioned, he does not have funds to meet the costs of rent and outgoings beyond 15 June 2020. It is in those circumstances that he seeks an order that the administrators be released from liability for the rent and outgoings associated with the premises.
Whilst in the interlocutory process the release from personal liability for rent and outgoings is sought until the completion of the administration and any subsequent liquidation in order to allow the sale process to be completed, in the hearing before me the claim for rent and outgoings relief was more confined. Relief is sought by the administrators for the period between 15 June 2020 and the proposed adjournment date of 15 July 2020.
The issues
The parties to the application identified the following issues as relevantly arising on the application:
(1)whether the application to wind up the company in insolvency should be adjourned to 15 July 2020;
(2)whether the administrators should be relieved from personal liability pursuant to the lease between 15 June 2020 and 15 July 2020;
(3) whether orders should be made in relation to the sale of the trust assets;
(4)in case of a winding up, whether the administrators should be given leave and appointed the liquidators;
(5)the impact on the application of the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (Vic) (the ‘COVID-19 Regulations’); and
(6)the consequences of the s 146 notice in the context of clauses 6.1 – 6.3 of the lease. That is, in circumstances where the company is in administration and the administrators are seeking to sell the business and to procure an assignment of the lease in favour of any proposed purchaser.
There is no contest as to proposed issues (3) and (4) and I propose to make orders accordingly. There is no reason why, if the company is liquidated, the administrators should not be appointed liquidators and the petitioning creditor is content for the leave sought to be granted. The evidence establishes that it is in the interests of the company and its creditors, and Ms Koutoumanos, who in effect controls the trust, consents, that the assets of the trust be sold at the same time as the assets of the company.
Each of the remaining issues are in contest on the application. In particular, concerning issue (6), the petitioning creditor contends that by reason of the operation of clauses 6.1 – 6.3 of the lease; a notice having been served under s 146 of the Property Law Act 1958 (Vic) relying upon the appointment of administrators, a breach which is incapable of being remedied, there is no right to assign the lease. If that contention is correct, there would be no utility in adjourning the application to wind up the company or in granting the rent relief sought by the administrators.
As directed during the hearing, the parties helpfully provided short written submissions later that day, including references to relevant authorities, addressing this issue.
Relevant legislation
Section 435 of the Act provides that the object of the Part 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 that is not possible, results in a better return to creditors and members than would result from an immediate winding up.
Section 440A(2), which is central to the application to adjourn the winding up, is in the following terms:
(2)The Court is to adjourn the hearing of an application for an order to wind up a company if the company is under administration and the Court is satisfied that it is in the interests of the company’s creditors for the company to continue under administration rather than be wound up.
Section 447A(1) is also relevant to the adjournment application, and is relevant to the other orders sought. It is a broad power, as to the scope of which see Australian Memory Pty Ltd v Brien.[1] Section 447A(1) provides:
(1)The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company.
[1](2000) 200 CLR 270 [17]–[32] (Gleeson CJ, McHugh, Gummow, Hayne and Callinan JJ).
Sections 443A(1)(c) and 443B are concerned with the personal liability of an administrator for leased property. Those sections relevantly provide:
443AGeneral debts
(1)The administrator of a company under administration is liable for debts he or she incurs, in the performance or exercise, or purported performance or exercise, of any of his or her functions and powers as administrator, for:
…
(c)property hired, leased, used or occupied, including property consisting of goods that is subject to a lease that gives rise to a PPSA security interest in the goods; or
...
443BPayments for property used or occupied by, or in the possession of, the company
Scope
(1)This section applies if, under an agreement made before the administration of a company began, the company continues to use or occupy, or to be in possession of, property of which someone else is the owner or lessor, including property consisting of goods that is subject to a lease that gives rise to a PPSA security interest in the goods.
General rule
(2)Subject to this section, the administrator is liable for so much of the rent or other amounts payable by the company under the agreement as is attributable to a period:
(a)that begins more than 5 business days after the administration began; and
(b) throughout which:
(i)the company continues to use or occupy, or to be in possession of, the property; and
(ii) the administration continues.
…
Restrictions on general rule
(7)Subsection (2) does not apply in relation to so much of a period as elapses after:
(a) a receiver of the property is appointed; or
(b)under an agreement or instrument under which a security interest in the property is created or arises:
(i)the secured party appoints an agent to enter into possession, or to assume control, of the property; or
(ii)the secured party takes possession, or assumes control, of the property;
but this subsection does not affect a liability of the company.
(8)Subsection (2) does not apply in so far as a court, by order, excuses the administrator from liability, but an order does not affect a liability of the company.
(9) The administrator is not taken because of subsection (2):
(a) to have adopted the agreement; or
(b)to be liable under the agreement otherwise than as mentioned in subsection (2).
Section 440B prevents the landlord from taking action to enter into possession of the leased premises for so long as the administration continues. Section 440B is relevantly in the following terms:
General rule
(1)During the administration of a company, the restrictions set out in the table at the end of this section apply in relation to the exercise of the rights of a person (the third party ) in property of the company, or other property used or occupied by, or in the possession of, the company, as set out in the table.
Note:The property of the company includes any PPSA retention of title property of the company (see section 435B).
Exception—consent of administrator or leave of court
(2)The restrictions set out in the table at the end of this section do not apply in relation to the exercise of a third party's rights in property if the rights are exercised:
(a)with the administrator's written consent; or
(b)with the leave of the Court.
…
Restrictions on exercise of third party rights
Item
If the third party is ...
then ...
…
…
…
3
a lessor of property used or occupied by, or in the possession of, the company, including a secured party (a PPSA secured party) in relation to a PPSA security interest in goods arising out of a lease of the goods
the following restrictions apply:
(a) distress for rent must not be carried out against the property;
(b) the third party cannot take possession of the property or otherwise recover it;
(c) if the third party is a PPSA secured party--the third party cannot otherwise enforce the security interest.
…
…
…
Section 442C of the Act is relevant to the issues that have arisen concerning the potential assignment of the lease by the administrator to a prospective purchaser of the business in the context of the s 146 notice and clauses 6.1 – 6.3 of the lease. Section 442C relevantly provides:
(1)The administrator of a company under administration or of a deed of company arrangement must not dispose of:
(a)property of the company that is subject to a security interest; or
(b)property (other than PPSA retention of title property) that is used or occupied by, or is in the possession of, the company but of which someone else is the owner or lessor.
(2)Subsection (1) does not prevent a disposal:
(a)in the ordinary course of the company's business; or
(b)with the written consent of the secured party, owner or lessor, as the case may be; or
(c)with the leave of the Court.
(3)The Court may only give leave under paragraph (2)(c) if satisfied that arrangements have been made to protect adequately the interests of the secured party, owner or lessor, as the case may be.
…
Pursuant to r 90–15 of the Insolvency Practice Rules, the Court may make such orders as it thinks fit and may determine any question arising in the external administration of a company.
Should the winding up application be adjourned?
Whilst the parties referred to the general power in s 447A(1) of the Act in relation to the adjournment application, understandably the focus was upon the mandatory requirement in s 440A(2).
It was not in contest that for the requisite level of satisfaction in s 440A(2) to be made out, the onus is upon the administrator to show that there is a ‘sufficient possibility’, as distinct from mere speculation, that the adjournment of the winding up is in the interests of the creditors.[2] There must be some persuasive evidence to enable it to be seen that there are assets, which, if able to be realised by the administrators, would produce a larger dividend for the creditors than in a winding up.[3]
[2]See, eg, Re SFL/PILTECH (EA) Pty Ltd [2018] NSWSC 637 [6] (Brereton J); Waste Recycling and Processing Services of New South Wales v Local Government Recycling Co-Operative Ltd (1999) 32 ACSR 194, 195 (Santow J) cited with approval in Lubavitch Mazal v Yeshiva Properties (No 1) [2003] NSWSC 535 [69] (Austin J). See also Deputy Commissioner of Taxation v LDT Corp Pty Ltd (admins apptd) [2011] FCA 420 [27] (Nicholas J).
[3]Re SFL/PILTECH (EA) Pty Ltd (n 2) [6] applying Creevey v Commissioner of Taxation (1996) 19 ACSR 456, 457. See also In Offshore & Ocean Engineering Pty Ltd [2012] NSWSC 1296 [4]–[6].
A number of the authorities which apply s 440A(2) of the Act arise in the context of an application to adjourn the meeting so that a DOCA can be proposed and put to the creditors.[4] That is not this case.
[4]See, eg, Re South Pelagic Holdings Pty Ltd (recs & mgrs apptd) (admins apptd) [2020] FCA 187; Re Grandview Ausbuilder Pty Ltd (admins apptd) [2019] NSWSC 1243; Re Paltar Petroleum Ltd (admins apptd) (No 1) [2019] FCA 635.
Both in the Report to Creditors and in his affidavit, Mr Gountzos reports that he has not received any proposals for a DOCA. In the course of the hearing there were no submissions to the effect that a proposal for a DOCA was likely.
Whether or not the winding up should be adjourned turns on whether or not, if the application is adjourned, there is a sufficient possibility that the administrators will be able to sell the business with an assignment of the lease in favour of the purchaser compared to what would occur if the company is wound up. It is accepted that if the company is in liquidation, any right of the company to assign will be lost by reason of the s 146 notice.
Can the business be sold with an assignment of the lease?
Clauses 6.1(a), 6.2(d) and 6.3(a) of the lease are relevantly in the following terms:
6.1 No assignment, subletting mortgage etc
The tenant must obtain the written approval of the landlord before:
(a) assigning this lease.
6.2 Consent to assignment
The landlord must consent to an assignment of the lease unless:
…
(d) the tenant has not complied with clause 6.3.
6.3 Conditions for consent to assignment
The tenant must satisfy the following conditions in relation to any proposed assignment:
(a) the tenant had remedied each outstanding breach of the lease.
Clause 10.1 of the lease is titled ‘Termination for default’. Clause 10.1(c) provides:
If:
(c) the tenant being a corporation, is insolvent, in liquidation, has an administrator…. appointed…;
The tenant is in breach of the lease and the landlord may terminate the lease by re-entry or notice.
The landlord contends that subject to what any statutory provisions might say, the company is in breach and clause 6.2 does not operate to compel the landlord to assign the lease.
I agree that those parts of clause 6.1–6.3 set out above mean that, unless the tenant remedies the breach the subject of the s 146 notice, there is no right to assign. That is, irrespective of the qualities of the proposed assignee. It is also the case that the appointment of the administrator having occurred, the breach is not one that is capable of being remedied.
The premises are retail premises to which the Retail Leases Act 2003 (Vic) has application. Section 60 of the Retail Leases Act lists the only circumstances in which a landlord is entitled to withhold consent to assignment of a retail lease. The fact that the tenant is in breach, irrespective of whether the breach is capable of being remedied, is not one of the specified grounds for withholding consent.
However, s 94A of the Retail Leases Act provides, that:
to avoid doubt, section 146 of the Property Law Act 1958 applies to a retail premises lease.
The parties have not addressed submission as to the effect of s 94A of the Retail Leases Act. Nonetheless it appears that it is likely to operate so that no occasion for the criteria in s 60 of the Retail Leases Act to be applied arises. That is, unless the default relied upon in the s 146 notice has first been remedied. Remedying the breach is not something that is possible on the facts of this case.
Of greater significance so far as statutory provisions are concerned is s 442C of the Act, the relevant provisions of which are reproduced above.
Subsection (1) of s 442C limits the power of the administrator to dispose of property subject to a security interest or the interest of a lessor. Subsection 2 contains ‘carve out’. Subsection (2)(b) provides that subsection (1) does not prevent a disposal of property with the written consent of the lessor.
In this case the lessor has said that it will not consent to an assignment, although it has said that it is open to the prospect of entering into a new lease with a purchaser of the business from the administrator. In oral submissions I was informed that the landlord would consider entering into a new lease at a higher rent than the market rent for the premises determined by Mr Forsyth under the existing lease.
On 4 June 2020, the solicitors for the landlord responded to a request by the administrators for the withdrawal of the s 146 notice and for information about whether or not the landlord intended to hinder the proposed sale. In that letter the landlord’s solicitors asserted that their client was not required to consent to any potential purchaser and the granting of any lease to that party, regardless of whether a notice of termination was served or not.
It is clear from the correspondence and submissions that this is not a case to which s 442C(2)(b) has application.
However, that is not the end of the matter. That is so because s 442C(2)(c) permits a disposal by the administrators, with the leave of the Court. Subsection 3 specifies the requirement of which the Court must be satisfied before granting leave on any such application. The Court can only give leave for the administrators to dispose of property of which someone else is the lessor if it is satisfied that arrangements have been made to adequately protect the interests of the lessor.
Recently, in Re Holdco Pty Ltd (admins apptd)[5] O’Bryan J considered the application of s 442C(2)(c) and s 442C(3) in the context of a sale of property by administrators that included intellectual property encumbered by security interests. His Honour made observations concerning s 442C which, so far as is relevant to the present application, were as follows:[6]
[5]Re Holdco Pty Ltd (admins apptd) [2020] FCA 666 (‘Re Holdco’).
[6]Re Holdco (n 5) [44]–[49].
44 A number of matters can be noted about section 442C.
45First, the section operates to limit the powers of an administrator to dispose of property of the company under administration that is subject to a security interest or property that is used or occupied by, or is in the possession of, the company under administration but of which someone else is the owner or lessor (other than PPSA retention of title property).
46Second, the section gives the Court power, by the grant of leave under s 442C(2)(c), to authorise an administrator to dispose of such property. That power involves a significant intrusion on third party security interests and property rights, authorising an administrator to dispose of property that is owned by, or encumbered in favour of, a third party. …
47Third, the Court’s power to grant such leave is subject to the condition that the Court must be satisfied that arrangements have been made to protect adequately the interests of the secured party, owner or lessor, as the case may be. The administrator bears the onus of establishing that condition: Re Le Meilleur Pty Ltd (2011) 256 FLR 240 at [365]. Arrangements “to protect adequately the interests of the secured party, owner or lessor” would ordinarily contemplate arrangements seeking to obtain the best available return for the property being disposed of and the payment of such amounts to the security interest holder, owner or lessor in a manner that is consistent with the principles found in Part 5.3A of the Act, recognising the prior interests of the security interest holder, owner or lessor as the case may be. If that cannot be achieved, the Court may not be satisfied that the condition stated in s 442C(3) can be fulfilled. Arrangements of that kind were approved in Re Rewards Projects Ltd (administrators appointed) [2010] WASC 394 (see at [16]), Re Renovation Boys Pty Ltd (administrators appointed) [2014] NSWSC 340 (see at [42]) and Re Luxtown Pty Ltd (administrators appointed) [2019] FCA 1861 (Luxtown) (see at [28]).
48Fourth, if the Court is satisfied that arrangements have been made to protect adequately the interests of the secured party, owner or lessor, the Court’s discretion under s 442C(2)(c) is otherwise unconstrained. However, the discretionary power must be exercised judicially by reference to considerations relevant to its exercise, particularly the objects of Part 5.3A. …
49Reflecting the objects of Part 5.3A, in Mentha v GE Capital Ltd (1997) 27 ACSR 696, Finkelstein J considered that the Court should also consider whether the disposition will prejudice the interests of other creditors or the interests of the company under administration, while recognising that the occasion for such prejudice will not often arise in the case of the disposition of secured property (at 700-701).
In the present case no occasion for the consideration of s 442C(2)(c) has yet arisen, and none may in fact arise. However, in light of s 442C(2)(c) and the observations by O’Bryan J in Re Holdco, albeit observations made in a different context, it cannot be said that there is no utility in granting the adjournment sought because by reason of clauses 6.1–6.3 the landlord cannot be compelled to consent to an assignment.
The Court has express power to compel an assignment over the opposition of an unwilling lessor provided the criteria in s 442C(3) are satisfied. That this is so is unsurprising as, if it were not the case, provisions such as clauses 6.1–6.3 in the present lease, combined with the service of a s 146 notice could significantly undermine the objects of Part 5.3A of the Act.
Because the power exists to compel an assignment whilst the company is in administration, a power not available once the company is wound up, given the significance of the lease in this case, to the value of the business and to the sale process currently under way, there is a very strong imperative in favour of adjourning the winding up application. That is, so that the administrators can pursue the sale process, and, if needed, if no consent to assignment is forthcoming, can apply to the Court under s 442C(2)(c).
At my invitation the parties also addressed the question of whether or not relief against forfeiture is available in circumstances such as the present. Namely, where the event of default relied upon under the lease is incapable of being cured. The administrators drew attention to the decision in Re Hi-Fi Sydney Pty Ltd (admin apptd),[7] but submitted the case was distinguishable because it concerned the exercise of the power in s 444F to grant relief against forfeiture where there was already a DOCA in place. The case may or may not be distinguishable, however, the reasons of Brereton J when determining to grant relief against forfeiture where the event of breach relied upon was the appointment of an administrator are of relevance in the present circumstances. In Re Hi-Fi Sydney, Brereton J said:
[7][2015] NSWSC 1312 (‘Re Hi-Fi Sydney’).
26.So far as the equitable jurisdiction is concerned, Lord Wilberforce explained in Shiloh Spinners Ltd v Harding [1973] 1 All ER 90; [1973] 2 WLR 28; [1973] AC 691, 722-723, that there were three situations where equity gives relief: first, where it is possible to state that the object of the transaction and of the insertion of the right to forfeit is essentially to secure the payment of money; secondly, where there has been fraud, accident, mistake or surprise (the traditional heads of equitable jurisdiction); and thirdly, where the primary object of a bargain is to secure a stated result which can be effectively obtained when the matter comes before the court and where the forfeiture provision is security for the production of that result [see also Wynsix, [20]].
27.The considerations applicable on an application for relief against forfeiture, at least in this general context, were summarised by Keane JA (as his Honour then was) in Ace Property Holdings Pty Ltd v Australian Postal Corporation [2011] 1 Qd R 504; [2010] QCA 55, [163], as involving the conduct of the applicant for relief, including whether the default was inadvertent or wilful; the gravity of the breaches; the damage to the covenantee or lessor; the relative loss to the covenantor or lessee; and the disparity between the value of the property forfeited and the damage caused by the breach.
28.The first and third of the Shiloh Spinners categories have as their essential touchstone that the forfeiture is seen in equity, like other forms of security, as a means of securing the bargain, and not of providing to the secured party benefits over and above what are necessary to achieve that end, nor to impose on the party giving security a penalty or sanction over and above the primary purpose of the bargain. That notion underlies much of the approach of equity to the law of penalties and forfeiture.
29.In the present context, that then begs the question, what is the primary object of the bargain and, in particular, of cl 22.1(d). In Melacare, Bryson J suggested that the purpose of such a clause was (at [17]):
plainly enough to protect the lessor against being held in a continuing relationship with a lessee which was not financially responsible and was not able to sustain the relationship.
30.I would perhaps state it slightly, but not very, differently, as being to protect the lessor from being required to continue to suffer an insolvent tenant.
31.Arguably, such provisions might also have as their purpose the protection of the lessor from any requirement to deal with an insolvency administration – whether involving an administrator, a deed administrator or a liquidator. However, that purpose would cut across the statutory policy embodied in Corporations Act, Pt 5.3A – especially, first, s 440B, which prevents re-entry during administration, and secondly, s 444F, which authorises the Court in connection with the deed of company arrangement to make an order that a lessor not retake possession of premises if its interests can be adequately protected. That said, it seems to me that essentially underlying these provisions is the idea that the lessor should not be required to continue to suffer an insolvent tenant with the associated risk that the rent will not be paid.
32.The current situation is that the rent has been paid in full up to date. …
33.Secondly, as a result of the deed of company arrangement, the company will no longer be insolvent, …
34.Thirdly, and importantly, the lessor has suffered no damage from the breach of lease in question. This has often been treated as significant; for example, in Pioneer Gravels (Qld) Pty Ltd v T & T Mining Corporation Pty Ltd [1975] Qd R 151, Hart J, with reference to the third category of situations spoken of by Lord Wilberforce in Shiloh Spinners, said (at 161):
But he also speaks of securing “a stated result” and of securing “the essentials of the bargain”. Clearly he was thinking of cases in which the lessor had suffered some loss or damage, which could be put right. I think that a fortiori relief should be granted in a case where no loss or damage has been suffered, so that there is nothing to be put right.
35.Fourthly, if relief is not granted, the lessor will gain and the lessee will lose the benefit of the expenditure of $2.6 million or so on fit-out and establishment costs. This too is a significant, though by no means determinative, consideration [see Wynsix (at [63]-[70]), where Young CJ in Eq said that such circumstances “make it more likely relief against forfeiture should be given rather than less likely”].
36.Fifth, it was submitted that the default in this case was not the wilful act of the company. However, I see that of limited significance in circumstances where it is a consequence, in reality, of the company's then insolvency. That view is reinforced by the circumstance that it was the deliberate act of the secured creditor, who now is the new controller of the company and the real party interested in seeking relief against forfeiture. Indeed, if the appointment of an administrator had occasioned any damage of substance to the lessor, this would have been a most significant factor telling against granting relief. Where a party takes a deliberate act that damages the lessor's position, forgiving that with a grant of relief against forfeiture would be a much more difficult exercise. However, it is of slight significance where the result has been essentially the reconstruction of the lessee and ultimately, if anything, an improvement in the position of the lessor. [8]
[8]Re Hi-Fi Sydney (n 7) [26]–[36].
The submissions on behalf of Ms Koutoumanos referred to the decision of the High Court in TanwarEnterprises Pty Ltd v Cauchi,[9] where the considerations guiding the exercise of jurisdiction to relieve against forfeiture so as to relieve against unconscionable conduct, or, as stated by Deane and Dawson JJ in Stern v McArthur,[10] is more accurately described as relieving against unconscientious conduct, are discussed.
[9](2003) 217 CLR 315.
[10](1988) 165 CLR 489.
The petitioning creditor and landlord jointly submitted that as there was no unconscionability, relief from forfeiture is not available. The submissions on behalf of Ms Koutoumanos assert to the contrary. Unconscionable conduct is alleged and the potential application of s 77(1) of the Retail Leases Act is identified.
Separately, the administrators submit that an estoppel by conduct arises against the landlord preventing the landlord from contending that the lease will be at an end following the expiration of the 14 day period in the s 146 notice due to the negotiations that have taken place between the landlord and the administrators concerning the proposed sale and the lease.
It is neither possible nor appropriate to resolve these complex and competing contentions on the adjournment application. However, the presence of these issues supports the Court adjourning the winding up application.
Interests of the creditors
The report to creditors identifies that the company’s insolvent financial position can be directly attributed to a combination of the VCAT order and statutory demand and the inability of the business to continue trading due to the restrictions imposed as a consequence of the COVID–19 pandemic.
It appears from the administrator’s report to creditors that the business has an historic turnover, pre-COVID-19, of approximately $3 million per annum. Modest profits were reported in 2017 and 2018 and a loss in 2019. It is not clear on the information before me whether the profitability as reported was impacted by the problems for the company that arose due to its proposed and failed expansion to shop 13 of the Block Arcade and the VCAT litigation, although that would certainly not seem unlikely, particularly when regard is had to the reported causes of the company’s insolvency.
The sale process has attracted a high level of interest. Whatever the value of the business, the evidence clearly shows that the sale, which includes various fixtures and fittings located at the leased premises, will achieve a higher price and therefore a greater return to creditors if the lease is able to be assigned than if it is not – that is so whether as the result of an assignment by agreement or as the result of an application to the Court pursuant to s 442C(2)(c).
It is true as submitted in opposition to the adjournment application that the business has no employees and is currently not trading. However, the evidence shows that the business is long-established and well known as a business trading from the leased premises. The fact it is not trading and has not embarked on the provision of take away food as some other businesses have in response to the COVID-19 restrictions on such businesses is not surprising given the nature of the offering of the business. These facts do not, in my opinion, mean that the business is not a valuable one and how valuable or otherwise will be determined by the sale process.
Pursuant to r 75–225(3) of the Insolvency Practice Rules, the administrators are required to provide their opinion on the options available to the company.
In responding to those matters the administrators’ report notes; first, that a DOCA has not been proposed by any party and therefore that option will not be available to creditors to consider. Second, to end the administration would not be in the best interests of the creditors. The director placed the company in administration to deal with its financial difficulties and that position has not been rectified. Third, as to liquidation, a winding up would allow the liquidator to further investigate the affairs of the company and undertake actions that may result in additional funds becoming available that allow distribution to creditors. But, there is no evidence in the report as to what those claims might be or what if anything they might realise. Fourth, the option which the administrators favour, namely, that given the current sale campaign on foot that it is appropriate the creditors give strong consideration to adjourning the second meeting of creditors either for a period of up to 45 business days, or to allow the sale process to be concluded.
The sale process can only continue in a meaningful way with the prospect of an assignment of the lease if the winding up is adjourned. It is very much in the interests of the creditors for the sale campaign to continue under the control and direction of the administrators.
In all the circumstances, I am satisfied that pursuant to s 440A(2) there is much more than a ‘sufficient possibility’ that the adjournment sought is in the best interests of the creditors. If the matter is not adjourned and the company is placed into liquidation, there is no prospect that the lease can be assigned. That is not the case whilst the company remains in administration. The criteria in s 440A(2) being satisfied, the Court must adjourn the winding up and I propose to do so until 15 July 2020.
If it were not the case that I was satisfied that I was obliged to adjourn the winding up under s 440A(2), I would in any case have adjourned the matter in the exercise of the discretion to do so conferred by s 447A(1). That is so for the following brief reasons:
(1) the clear benefit to the creditors of a sale that includes an assignment of the lease, a prospect not available on a winding up;
(2) the potential for an application in the meantime by the administrators relying upon s 442C(2)(c) if consent to assignment is not obtained by agreement; and
(3) the need for the Court to consider, if required, the arguments advanced as to estoppel, unconscionable conduct and relief against forfeiture and s 77(1) of the Retail Leases Act.
Relief from the rent obligation
On a practical level, the amount of rent, the obligation from which the administrators seek to be relieved, calculated based on the determination by Mr Forsyth, is a little over $20,000. If it were to be the case the COVID-19 Regulations have application to the lease, the amount of the rent is quantified as a little over $10,000 in each case, plus outgoings. It is unnecessary to decide whether or not the prerequisites for the application of the COVID-19 Regulations have or have not been satisfied. It is sufficient to note that this is an area of contest between the parties.
In Re CBCH Group Pty Ltd (admins apptd) (No 2)[11] (‘Strawbridge’), the Federal Court granted relief from the obligation to pay rent on the application of the administrators for a period of two weeks in the context of a proposed sale of 93 stores of the group that remained trading across Australia. There were 17 different landlords. The monthly liability for rent was $1.3 million.
[11][2020] FCA 472 (‘Strawbridge’).
In Strawbridge, the administrators informed the Court that their decision not to pay rent was a commercial one. The Court nevertheless accepted, in the circumstances of the COVID-19 pandemic, that whilst the order sought might jeopardise the tenancies of the group, taking into account the interests of the creditors as a whole, it was appropriate to relieve the administrators from personal liability.
The principles to be applied on an application to make orders pursuant to s 447A to vary the personal liability of administrators were summarised by Gilmore J in Re Griffin Coal Mining Company Pty Ltd (admins apptd)[12] as follows:
[12][2010] FCA 1469 (‘Griffin Coal’) [30] (citations omitted).
30.The principles governing the granting of an application for orders under s 447A to vary the liability of administrators under s 443A can be summarised as follows:
(a)the proposed arrangements are in the interests of the company’s creditors and consistent with the objectives of Part 5.3A of the Corporations Act.
(b)typically the arrangements proposed are to enable the company’s business to continue to trade for the benefit of the company’s creditors.
(c)the creditors of the company are not prejudiced or disadvantaged by the types of orders sought and stand to benefit from the administrators entering into the arrangement.
(d)notice has been given to those who may be affected by the order.
The principles discussed in Griffin Coal were applied by Markovic J in Strawbridge.
Having regard to the facts and circumstances of this case, I am satisfied that orders should be made pursuant to s 447A excusing the administrators from personal liability for rent and outgoings and other obligations under the lease until 15 July 2020. Those circumstances include:
(1)the evidence that there are insufficient funds to enable the rent and outgoings to be paid; unlike Strawbridge, the application is based on unavailiability of funds, not on a commercial decision by the administrators;
(2)the amount of rent foregone is modest and is to be seen in the context of the earlier agreement by the administrators to pay $8,000 rent when the business was not trading at a time when COVID-19 restrictions were in place;
(3)the period in respect of which the variation from personal liability is sought is both short and for the purposes of facilitating a sale of the business for the benefit of the creditors; and
(4)the landlord will still be able to claim the rent for this period as an unsecured creditor.
With orders pursuant to s 447A in place, the administrators will have time to pursue the sale process without being exposed to personal liability as would otherwise be the case by reason of ss 443A(1)(c) and 443B. It is in the interests of the creditors, including the landlord, in that capacity, that the administrators be in a position to pursue the sale. In those circumstances, excusing them from personal liability for rent and outgoings which the company has no ability to pay itself until 15 July 2020 is appropriate.
The FineTea Trust
The company is trustee of the FineTea Trust. The FineTea Trust deed provides that upon liquidation of the trustee, the trustee is deemed to have retired. The assets of the business currently being offered for sale are held by the company as trustee. That includes one of the two trademarks which form part of the intellectual property of the business.
If the company is wound up and deemed retired as trustee of the trust, the company will lose the right of sale over the trust assets to satisfy its indemnity. It is contended that in order to ensure that all of the assets are available to complete the sale of the business that either the company should continue in administration or, if that does not occur, that the Court should make a judicial sale order against the assets of the trust.
The FineTea Trust is a unit trust. The trust deed refers to Premium Tea Pty Ltd and Blocktoun Holdings Pty Ltd as the unit holders. Ms Koutoumanos has given evidence that Premium Tea Pty Ltd is a company in which she holds all of the issued shares and that in March 2014 Premium Tea acquired Blocktoun Holdings’ interests in the company and in the unit trust.
Ms Koutoumanos who was represented on the application supports the application by the administrators for orders pursuant to Order 54 of the Rules and s 63 of the Trustee Act concerning the trust. The orders sought are not opposed by the petitioning creditor and I consider it appropriate that they be made.
The meeting of creditors
The administrators have power under r 75–140 of the Insolvency Practice Rules to adjourn the meeting of creditors convened to decide the company’s future pursuant to s 439A of the Act.
I am satisfied it is in the interests of the creditors to adjourn the meeting scheduled for 11:00 am today until after 15 July 2020 to enable the sale process to be advanced.
I propose to direct the administrators to adjourn the meeting to 17 July 2020 or to such other date as is convenient.
Conclusion
I have determined to adjourn the winding up of the company to 15 July 2020, to direct the administrators to adjourn the meeting of creditors to 17 July 2020 and to make orders under s 447A of the Act varying what would otherwise have been the liability of the administrators under the lease, excusing the administrators from personal liability, until 15 July 2020.
I will make orders, which are not opposed, concerning the sale of the trust assets and the retention of the proceeds in partial satisfaction of the right of indemnity and will grant leave to the administrators to act a liquidators pursuant to s 532(2)(c) of the Act.
I will order that the costs of the application be costs in the administration, or in the winding up, and grant liberty to apply on no less than two days’ notice.
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