VA is Back in the Game: Commercial Leasing Code and the Colette Judgment

In the initial days of the COVID-19 pandemic, the voluntary administration (VA) process was riddled with additional complexities due to forced closures under Government orders. The personal liability of voluntary administrators for rents, which kicks in after 5 business days under s 443B of the Corporations Act 2001 (Cth), posed a particular problem. 2 developments have put the VA process back on the table in practical terms.

The National Cabinet’s Mandatory Code of Conduct (Code) arguably removes a current impediment on a distressed company engaging in the voluntary administration process. The NSW Government has not yet legislated for the Code to apply though that is expected imminently.

In COVID 19 circumstances insolvency administrators would fairly have been reticent to accept an appointment as a voluntary administrator, where a trade-on was the only restructure solution, as they are personally liable for the lease liability after 5 business days. Pre-appointment negotiations between lessors and tenants in relation rent relief may not progress rapidly or result in a suitable agreement allowing the tenants business to survive the current crisis.

However, the Code specifically provides that in negotiations between landlords and tenants “regard should be given to whether the tenant is in administration or receivership and the application of the code modified accordingly.”

Arguably a voluntary administrator has a stronger negotiation position to obtain rent relief than the company may have had prior to appointment. During the 5 day “rent free” period the voluntary administrator can “tell it like it is” during the negotiations as to what is required to enable the company to survive.

If no agreement is reached the administrator has the option to disclaim the lease which may not be in the interests of either the company or the lessor.

The recent decision of the Federal Court of Australia in the Colette group administration relieved the voluntary administrators from their personal liability for rent beyond the 5 day period. This provides an additional option. If an agreement cannot be reached with lessors, voluntary administrators can consider an application to the court for similar relief provided that they can demonstrate to the Court that it is in the general interests of creditors and that the lessor will not be substantially prejudiced. The lessors position is unlikely to be prejudiced if the only other consequence is the administrators disclaiming the lease and vacating the premises. Further, this decision will be a very useful tool for voluntary administrators seeking to negotiate rent relief under the Code.