On 23 February 2022, WBHO Australia Pty Ltd and 17 other companies in the Probuild group (Probuild, or the Group), entered voluntary administration in Australia. Probuild is one of the largest construction groups in Australia, working on many large office, residential and resources related construction projects across the country.
Given the scale of the Probuild collapse the administrators (Salvatore Algeri, Jason Tracy, Matthew Donnelly and David Orr of Deloitte) (the Administrators) sought orders from the Australian Federal Court extending their ‘no personal liability period’ for leases of the Group companies, under section 443B of the Corporations Act 2001 (Cth) (the Act), for an additional 3 weeks (until 24 March 2022). This was to give the Administrators sufficient time to conduct the investigations required to decide whether to retain or give up possession of leased property.
In Algeri, in the matter of WBHO Australia Pty Ltd (Administrators appointed) [2022] FCA 169 (WBHO Australia), Beach J granted the order, considering it to be in the interests of the Groups’ creditors and consistent with the objectives of Part 5.3A of the Act.
The decision is the latest in a series of cases, which indicate a growing trend for such orders to be made in administrations where there are a significant number of leases and some uncertainty as to prospects for ongoing trading of the business as a whole. This is an important development impacting landlords and other lessors.
Liability for leased property
Section 443B of the Act provides for the treatment of rent and other payments in respect of property that is used or occupied by the company during the period of administration. These rules apply to both real estate and personal property, wherever a third party is the lessor or owner of that property.
An administrator is personally liable for so much of the rent (or other payments) that are payable by the company under the relevant agreement as is attributable to the period:
- that begins 5 business days after the administration began; and
- throughout which the company continues to use or occupy, or to be in possession of, the property (and during which the administration continues).
During the initial 5 business day period the administrator may give a notice to the owner or lessor stating that the company does not propose to exercise rights in relation to the property (referred to as a ‘section 443B notice’). Where such a section 443B notice is given the administrator will not be personally liable for the any rent (or other amounts) payable by the company (for so long as the notice is not revoked).
This regime therefore provides administrators with a 5 business day ‘no personal liability period’ which administrators use to assess whether leased property is likely to be needed as part of a restructuring or sale of the company’s business (and whether such a restructuring or sale is likely to be feasible).
This puts administrators on a tight timeframe to make a key decision as to whether it is worthwhile to keep paying rent, often in circumstances where cash will be constrained, and where administrators will be very cognisant of their personal liability risk should there be insufficient funds in the company to meet these rental claims.
Applications to extend the ‘no personal liability period’
For a complex administration, 5 business days is a very short period of time within which to make such a consequential decision.
Accordingly, there has been a string of cases where the administrators have applied to the court for orders extending the 5 business day no personal liability period to allow more time to carry out an assessment of what property is required. Such orders were made in the following administrations:
- Hastie Group (an engineering business): a 15 business day extension was granted;[1]
- Collette (a fashion retailer): initially a 2 week extension was granted,[2] followed by a further 3 week extension;[3] and
- Virgin Australia (an airline): initially a four week extension was granted,[4] followed by a further three weeks.[5]
Where the ‘no personal liability’ period is in effect, the lessor or owner will generally not receive any rental payment during the administration itself. However, the administration moratorium will continue to apply during this period restricting the landlord from taking possession of or re-entering the property (except with the administrator’s written consent or the leave of the court).
Rent for property used in the administration has liquidation priority
It is not all bad news for lessors and landlords however. In the PAS Group administration, O’Callaghan J held that rent accruing during the period that the administrator causes the company to continue to occupy or use leased property will be afforded priority (ahead of ordinary unsecured creditors) in a subsequent liquidation pursuant to section 556(1)(a) of the Act. [6] This priority is based on the “Lundy Granite” principle – an application of equity, which affords priority to these rental expenses in a subsequent liquidation to avoid an administrator (or liquidator) being able to use leased premises and goods for the benefit of the company for nothing.
The section 556(1)(a) liquidation priority applies notwithstanding any ‘no personal liability’ period under section 443B that may apply to the period that the property is used.
Probuild extension application
The recent collapse of the Probuild construction group marks the latest occasion for the court to grant extension orders in respect of section 443B.
Following their appointment, the Administrators were tasked with (amongst the many other tasks required following the sudden collapse of one of Australia’s largest construction business) urgently reviewing the companies’ leasing and financing arrangements to determine which leased property was required in connection with the administration. The task was significant – the court noted that at the time of the application, the Group had:
- seven real property leases;
- 921 registrations against the companies on the Personal Property Securities Register (many of which were likely to relate to finance and operating leases);
- annual revenue in excess of $1.4 billion; and
- 768 employees located throughout Australia.
Whilst some work had been done to identify and manage the relevant arrangements, significant work remained. Furthermore, the Administrators did not know what parts of the Group’s business would be the subject of a sale and/or recapitalisation transaction, and therefore which of the Group’s existing leases would be required for that purpose.
The Administrators applied for orders modifying the operation of sections 443A(1)(c) and 443B(2) of the Act, so as to limit their personal liability under leases of real and personal property, such that the Administrators have no liability until 24 March 2022 (i.e. a 21 day extension of the ‘no personal liability period’).
These orders were sought pursuant to section 447A of the Act (which grants the Court a broad power to modify how Part 5.3A of the Act operates with respect to a particular administration),[7] in the same manner as occurred in previous applications of this nature.
Granting the extension
Beach J granted the orders requested by the Administrators, finding that extending the ‘no personal liability period’ was appropriate, given it was clear that the Administrators had not had sufficient time to conduct the investigations required to take a view as to whether to retain or give up possession of leased property.[8]
Beach J accepted four main reasons why an extension of time was appropriate in these circumstances:
- an extension would enable the Administrators to better identify the exact location of assets and to identify which leased assets are necessary to preserve and enhance the value of the Group companies;
- an extension would enhance the prospects of facilitating a restructure of the business, or a going concern sale;
- giving section 443B notices too early may produce costly negotiations if the leased property is needed at a subsequent time; and
- giving section 443B notices without conducting necessary investigations would be detrimental to creditors, other stakeholders and would disrupt any prospective sale or restructure strategy.[9]
Beach J also observed in support of this conclusion that Courts have previously granted similar extensions of time equal to or greater than the 21 day extension requested by the administrators, referring to the Hastie, Collette and Virgin Australia decisions noted above.
Orders as to notice for first meeting of creditors
The Administrators also sought orders from the Court in connection with the notice period required for the first meeting of creditors for each of the Group companies.
Prior to the hearing, the Administrators had become aware of a significant number of previously unknown creditors, and applied for orders:
- allowing proxy forms to be provided electronically;[10] and
- shortening the notice period in connection with the first meeting from at least five business days to less than two.[11]
Beach J was prepared to make both orders sought by the Administrators in connection with the first creditors meeting.
Comment
The collapse of the Probuild companies represents one of the first major administrations in Australia following the COVID-19 lockdowns of 2020 and 2021.
During 2020, the Court was willing in several instances to provide extensions of the time period to give notices to owners of leased goods used by a company in administration.[12] The orders granted in WBHO Australia demonstrate that, even though the country is not currently facing lockdown conditions, there may nonetheless be grounds to obtain orders extending the ‘no personal liability period’ where:
- the size and complexity of the administration make identifying all of the leased property in a 5 business day period unrealistic; and/or
- there is still significant uncertainty as to the prospects for a sale or recapitalisation (and what leased assets would be required in this regard).
It may therefore be that these orders become a more commonplace feature of administrations going forwards.
This also raises the question whether the 5 business day period is too short, and whether consideration should be given to legislative modification of the section 443B regime. Any change will need to weight up protection of lessors with the potential benefit to creditors as a whole (if additional time ultimately allows better prospects for businesses to be restructured or sold on a going concern basis).
For further information, please contact:
Paul Apathy, Partner, Herbert Smith Freehills
paul.apathy@hsf.com
Endnotes
[1] Carson, in the matter of Hastie Group Limited (No 3) [2012] FCA 626.
[2] Strawbridge, in the matter of CBCH Group Pty Ltd (administrators appointed) (No 2) [2020] FCA 472.
[3] Strawbridge, in the matter of CBCH Group Pty Ltd (administrators appointed) (No 3) [2020] FCA 555.
[4] Strawbridge, in the matter of Virgin Australia Holdings Ltd (administrators appointed) [2020] FCA 571; (2020) 144 ACSR 310
[5] Strawbridge, in the matter of Virgin Australia Holdings Ltd (administrators appointed) (No 2) [2020] FCA 717; (2020) 144 ACSR 347.
[6] Ford (administrator), Re PAS Group Ltd (administrators appointed) v Scentre Management Ltd [2020] FCA 1023.
[7] Algeri, in the matter of WBHO Australia Pty Ltd (administrators appointed) [2022] FCA 169, [15].
[8] Algeri, in the matter of WBHO Australia Pty Ltd (administrators appointed) [2022] FCA 169, [19].
[9] Algeri, in the matter of WBHO Australia Pty Ltd (administrators appointed) [2022] FCA 169, [21]-[24].
[10] C.f. Insolvency Practice Rules (Corporations) 2016 (Cth) s 75-25(a).
[12] Notable examples include Strawbridge, in the matter of CBCH Group Pty Ltd (Administrators Appointed) (No 2) [2020] FCA 472; Strawbridge, in the matter of Virgin Australia Holdings Limited (administrators appointed) [2020] FCA 571; and Eagle, in the matter of Techfront Australia Pty Limited (administrators appointed) [2020] FCA 542.
[11] Corporations Act 2001 (Cth) s 436E(3), Algeri, in the matter of WBHO Australia Pty Ltd (administrators appointed) [2022] FCA 169, [35].
