FEDERAL COURT OF AUSTRALIA

McCallum, in the matter of TM Lewin Australia Pty Ltd (Administrators Appointed) [2020] FCA 992

ORDERS

THE COURT ORDERS THAT:

1.    The Originating Process filed on 8 July 2020 be returnable at 10.00 am on 10 July 2020.

Extension of commencement of personal liability

2.    Pursuant to sections 443B(8) and 447A(1) of the Corporations Act 2001 (Cth) (Act), and section 90-15 of the Insolvency Practice Schedule (Corporations), being Schedule 2 to the Act (IPSC), Part 5.3A of the Act is to operate in relation to the Second Plaintiff (Company) as if:

(a)    the personal liability of the First Plaintiffs (Administrators) under sections 443A(1)(c) and 443B(2) of the Act:

(i)    begins on 8 August 2020, for the rent or other amounts payable by the Company pursuant to the lease of the property leased, used or occupied by the Company situated at Tenancy 2, 235 Edward Street, Brisbane, QLD 4000 (Queensland Lease) and 129 King Street, Sydney, NSW 2000 (NSW Lease), such that the Administrators are not personally liable for any liability with respect to the Queensland Lease or the NSW Lease, in the period from their appointment to 7 August 2020 inclusive; and

(ii)    begins on 3 October 2020, for the rent or other amounts payable by the Company pursuant to the lease of the properties leased, used or occupied by the Company situated at Shop 1-032, 287 Lonsdale St, Melbourne, VIC 3000, Shop 359, 1341 Dandenong Road Chadstone, Melbourne VIC 3148 and 356 Collins Street, Melbourne VIC 3000 (together, Victorian Leases), such that the Administrators are not personally liable for any liability with respect to the Victorian Leases, in the period from their appointment to 2 October 2020 inclusive;

(b)    the words “within five business days after the beginning of the administration” in section 443B(3) of the Act instead read:

(i)    “by 7 August 2020” in respect of the Queensland Lease and the NSW Lease; and

(ii)    “by 2 October 2020” in respect of the Victorian Leases.

3.    Nothing in these orders constitutes an admission by Joberon Pty. Limited (ACN 001 167 200) that the Company was or is occupying or has or had any right to occupy the premises under the NSW Lease.

Extension of convening period

4.    Pursuant to section 439A(6) of the Act, the convening period defined in section 439A(5)(b) of the Act be extended to 20 October 2020.

5.    Pursuant to section 447A(1) of the Act and section 90-15 of the IPSC, Part 5.3A of the Act operate in relation to the Company so that the meeting of the creditors of the Company pursuant to section 439A of the Act may be held at any time during the period up to, or within 5 business days after the end of, the convening period as extended in paragraph 4 above.

Service of orders

6.    The Plaintiffs to provide copies of these orders:

(a)    to each of the lessors under the Queensland Lease and the Victorian Leases to the street address, email address or facsimile number of the lessors;

(b)    the Australian Securities and Investments Commission, to its street address, email address or facsimile number; and

(c)    to all creditors of the Company (other than the lessors) to the street address, email address or facsimile number of the creditors.

7.    Liberty to apply be reserved for the following persons to modify or discharge any orders made pursuant to paragraphs 2, 4, or 5 above:

(a)    on giving the Plaintiffs not less than 3 business days’ notice:

(i)    the lessors under the Queensland Lease, NSW Lease and the Victorian Leases; or

(ii)    any person who can demonstrate a sufficient interest, including any creditor of the Company or the Australian Securities and Investments Commission; and

(b)    the Plaintiffs, for any purpose connected with the administration of the Company.

Costs

8.    The Plaintiffs’ costs of the application be the Plaintiffs’ costs in the administration of the Company.

9.    Costs otherwise be reserved.

AND THE COURT DIRECTS THAT:

10.    Pursuant to section 90-15 of the IPSC, the Plaintiffs are justified in causing the Company not to meet its obligation to pay rent and other amounts payable, from the date of this order until:

(a)    7 August 2020, in respect of the Queensland Lease and the NSW Lease; and

(b)    2 October 2020, in respect of the Victorian Leases.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

DAVIES J:

Introduction

1    The first plaintiffs (the administrators) are the joint and several administrators of the second plaintiff, T.M. Lewin Australia Pty Ltd (the Company). On 1 July 2020, the Company was placed into voluntary administration pursuant to a resolution of the director of the Company under s 436A(1)(a) of the Corporations Act 2001 (Cth) (the Act) and the administrators were appointed as joint and several administrators of the Company.

2    The Company operates a retail clothing and accessories business that sells products including shirts, suits, ties and cufflinks. The Company sells its stock through five T.M. Lewin branded retail stores at premises situated in New South Wales (1), Queensland (1) and Victoria (3). The Company leases three premises (retail stores) in Victoria and one in Queensland pursuant to lease agreements made before the administration began between the Company as lessee and individual lessors. The lessee of the New South Wales premises is the Company’s United Kingdom (UK) related entity. Based on the information available to the administrators, the Company occupies that premises and has been paying the rent and other costs. The administrators have inferred that the Company’s occupation and payment of rent is pursuant to an agreement made before the administration began.

3    By an originating process lodged on 8 July 2020, the administrators applied for an extension of the time prescribed by s 443B of the Act for the administrators to give notice to the lessors of the premises leased by the Company as to whether the Company proposes to retain or give up possession of those premises, together with a corresponding extension of the period in which the administrators do not have personal liability for obligations under those leases. The administrators also applied for an extension of the time prescribed by s 439A of the Act for the convening of the second meeting of creditors. The application was supported by an affidavit of Stewart Alexander McCallum, one of the administrators. The application was heard on 10 July 2020 and I made the orders sought by the administrators with some modifications. These are my reasons for making those orders.

Extension of the period for the administrators to give notice to lessors of the property

4    Section 443B of the Act relevantly provides as follows:

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.

(3)     Within 5 business days after the beginning of the administration, the administrator may give to the owner or lessor a notice that:

(a)     specifies the property; and

(b)     states that the company does not propose to exercise rights in relation to the property; and

(c)     if the administrator:

(i)     knows the location of the property; or

(ii)     could, by the exercise of reasonable diligence, know the location of the property;

specifies the location of the property.

(4)     Despite subsection (2), the administrator is not liable for so much of the rent or other amounts payable by the company under the agreement as is attributable to a period during which a notice under subsection (3) is in force, but such a notice does not affect a liability of the company.

…

Restrictions on general rule

…

(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.

…

5    The principles governing the Court’s power to extend the five business day period for giving notice as prescribed by s 443B(3) were recently summarised by Markovic J in Strawbridge (Administrator), in the matter of CBCH Group Pty Ltd (Administrators Appointed) (No 2) [2020] FCA 472 where her Honour said at [39]:

Section 447A(1) of the Act also gives the Court ample power to alter the operation of s 443B(2) and (3) of the Act: see In the matter of Mothercare Australia Limited (administrators appointed) [2013] NSWSC 263 at [6]. Alternatively, s 443B(8) gives the Court an additional power to alter the operation of s 443B(2) and (3): see Silvia v FEA Carbon Pty Ltd (2010) 185 FCR 301 (Silvia v FEA) at [13]. The usual rationale behind the extension of the five business day period in s 443B(2) and (3) or the exercise of the power in s 443B(8) is because the administrator has had insufficient time to conduct the necessary investigations to decide whether he or she thinks it best to retain or give up possession of leased property: see Silvia v FEA at [12]-[13]. Further it seems that s 443B(8) allows the Court to excuse the administrator from liability to pay rent even after the five business day period has passed (see Silvia v FEA at [13]-[14]) or that s 447A enables a court to amend the operation of Pt 5.3A of the Act retrospectively (see Australasian Memory v Brien [(2000) 200 CLR 270] at [26]).

That passage was cited with approval by Middleton J in Strawbridge, in the matter of Virgin Australia Holdings Ltd (administrators appointed) [2020] FCA 571 (Re Virgin Australia Holdings Ltd) at [44]. In Re Virgin Australia Holdings Ltd at [46] Middleton J also made reference to In the matter of Mothercare Australia Limited (administrators appointed) [2013] NSWSC 263, where Black J at [2]–[4] canvassed the rationale for granting an extension of time for administrators to decide whether to give notice to landlords limiting their personal liability. His Honour stated:

The first issue which arises is the application for an extension of time in order to give any notice to lessors under s 443B(3) of the Corporations Act. That section broadly deals with the circumstances in which an administrator becomes subject to personal liability for rental or other amounts payable by a company under a lease. In broad terms, the section provides that the administrator is liable for rent payable by a company under administration for the period which begins more than five days after the administration begins, but may avoid that liability by giving notice that specifies the property and states that the company does not propose to exercise its rights in relation to the property. That section will operate in a relatively straightforward manner in circumstances that, for example, a company occupies a single or a small number of properties, and assumes that the administrator will be in a position, by the exercise of appropriate diligence, to form a view as to whether the company should continue to occupy the premises and whether or not to assume personal liability in respect of the premises within that period.

However, a situation may arise where there are obstacles to the administrator forming that view within that period. Such a situation was considered in Silvia v Fea Carbon Pty Ltd (ACN 009 505 195) (admins apptd) (recs and mgrs apptd) [2010] FCA 515; (2010) 185 FCR 301, where Finkelstein J noted the policy behind the section and that the section was intended to allow the administrator the opportunity to avoid personal liability for rental payable by giving notice within the five day period, but also recognised the possibility that that period may be too short in a particular case. His Honour noted that the Court can either excuse such liability under s 443B(8) of the Corporations Act or extend the time for investigation under s 447A of the Corporations Act.

The Administrators here seek orders under s 443B(8) of the Corporations Act or alternatively under s 447A which, in effect, extend the time for the giving of notice of an intention not to exercise rights in respect of the relevant properties to 5 March 2013, a month from today. A number of factors relevant to making such an order were identified in Silvia v Fea Carbon, including that there may be a large amount of paperwork to review; factual uncertainty in relation to the leases; or the administrators’ inability to form a view within the five business days allowed by the section as to whether it was necessary or desirable to exercise rights over the relevant property for the purpose of maximising the chances that some or all of the members of the companies can continue in existence or maximising the return to creditors.

The considerations mentioned by Black J are of direct relevance in this case.

6    The administrators seek an extension to the date on which they will potentially become personally liable for rent and other amounts payable under the New South Wales and Queensland leases to 7 August 2020 and in respect of the Victorian leases to 2 October 2020 (relevant dates), and commensurate extensions of time within which to give notice to the lessors under s 443B(3) of the Act. The reason why the administrators seek a longer period in relation to the Victorian leases is to allow for the new restriction levels which commenced on 8 July 2020 for six weeks for residents in metropolitan Melbourne and the Mitchell Shire to combat the transmission of COVID-19.

7    Mr McCallum deposed that the COVID-19 pandemic, and the restrictions put in place by the Australian Government and state and territory governments in an effort to reduce the transmission of COVID-19, resulted in a significant decline in the Company’s retail and wholesale sales. The Company temporarily closed all stores in March 2020 and they have remained closed since. Since the closure of its retail stores, no revenue has been generated by the Company. In the meantime, the rent under the leases of the retail stores is accruing at a total of approximately $215,000 per month. The lessors hold bank guarantees, issued by Westpac Banking Corporation, to support the leases in the amount of approximately $831,000. Since their appointment as administrators of the Company, the administrators have considered various options that may be available in relation to achieving the sale of the Company’s T.M. Lewin branded stock. The Company acquires its T.M. Lewin branded stock from its UK-based related entity in the UK (T.M. Lewin UK) and resells the stock to Australian customers. T.M. Lewin UK has also recently gone into administration in the UK. Mr McCallum deposed that the Company currently holds a substantial amount of unsold stock, valued at approximately $2.5 million at cost, comprising approximately $1.5 million worth of stock held in the retail stores and approximately $1 million worth of stock held in a warehouse.

8    The Company’s main assets are its stock and the leased premises (including the fit out). Based on advice from Hilco Global APAC, GA Australia Pty Ltd and Gordon Brothers Industries Pty Ltd (the Retail Experts), which specialise in online auctions and negotiated sales, and Mr McCallum’s personal experience, including in relation to G-Star (another administration involving a retail clothing business), Mr McCallum believes there is a realistic prospect of a direct sale of the business of the Company as a going-concern. Although the administrators have not yet received any proposals for a deed of company arrangement or a sale as a going concern, they expect that once the position in relation to the licencing of the “T.M. Lewin” brand by the Company is ascertained so that the administrators are at liberty to convey the right to sell T.M. Lewin branded products, the administrators will advertise the business for recapitalisation or a sale as a going concern.

9    Based upon the administrators’ preliminary assessment of the Company’s affairs, they consider that the options available to the Company are:

(a)    trading the Company for a period in order to maximise the retail sale of stock (Scenario A);

(b)    trading the Company for a period in order to maximise chances of achieving a sale as a going concern (Scenario B); or

(c)    the prompt winding up of the Company (Scenario C).

10    The administrators consider that it would be prudent for them to pursue Scenarios A and B, as this would likely maximise returns to creditors and be consistent with the objectives of Pt 5.3A of the Act and, if those options are not workable, the Company could then proceed to liquidation (ie. Scenario C). The administrators consider that Scenarios A and B would result in a better return for the Company’s creditors than would result from the prompt winding up of the Company (Scenario C) because:

(a)    based on the advice provided by the Retail Experts, one of the main assets of the Company, being its stock, is of no material value without access to the Company’s retail stores;

(b)    if the Company is wound up, it will no longer be afforded the protection of s 440B of the Act and the lessors will be entitled to take possession of the leased premises occupied by the Company, thereby limiting the Company’s ability to sell its stock at retail value;

(c)    opening the stores to trade for a limited period has the following advantages:

(i)    the opportunity to substantially increase the Company’s assets available to creditors through:

(A)     sale of the Company’s stock for retail value; and/or

(B)     sale of the Company’s business as a going concern;

(ii)    ongoing (albeit limited) employment for the Company’s employees and, either:

(A)     if the business is sold, provides the best prospects of continuing the employees’ employment, such that the employee entitlement liabilities of the Company may be minimised; or

(B)     if the Company is eventually wound up, provides the employees with additional time during which they will continue to be paid and can search for alternate employment;

(iii)    the ongoing occupation of the Lessors’ premises during a period of depressed retail trade; and

(d)    in the event that the Company’s business is sold, suppliers and contractors can continue to do business with the new owners, and tenancy arrangements can remain in place.

11    Under Scenario C, the prompt winding up of the Company would require the collection and sale of stock via auction, or to a wholesale buyer or buyers. That may be at a materially lower price compared to a sale of business as a going concern or its stock via retail stores.

12    If the extension is granted, the administrators intend to negotiate agreements with the lessors of premises from which positive sales volumes are being achieved to allow for the Company to continue to trade from those premises (if possible) after the relevant dates, until either:

(a)    the Company’s business is sold as a going concern; or

(b)    creditors resolve to wind up the Company at the second meeting of creditors.

13    Mr McCallum deposed that the lessors are not expected to suffer much detriment, if any, as a result of the extension, because:

(a)    the requested extension is relatively short, and while it is longer in Victoria, during much of the period there will be a lockdown anyway;

(b)    even if rent was payable during the extension period, the amount payable would be likely to be reduced pursuant to the “National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles During COVID-19”, agreed by National Cabinet in early April 2020;

(c)    there would be some benefit to the lessors in having the subject stores trading at a time when other retail premises may be closed; and

(d)    it is unlikely, in the present circumstances, that the lessors could re-let the leased premises in the near future.

14    Mr McCallum deposed that if the extension was granted, the administrators would not cause the Company to meet its rental obligations. Mr McCallum further deposed that the Company has no funds to enable payment of rent and other amounts payable under the leases, and the administrators are not prepared to accept personal liability if there are no funds in the Company from which the administrators would be indemnified.

15    Case law recognises the significance of paying heed to an administrator’s own considered view of what is in the best interests of creditors. Here, the administrators have formed the considered opinion that excusing the administrators from paying the rent and other amounts falling due during the extension period would be consistent with the objectives of Pt 5.3A of the Act because it would allow the administrators to reopen the Company’s stores and trade from them where possible, which will enhance the prospect of selling the business of the Company as a going concern and, if it is not possible to sell the business of the Company as a going concern, to sell as much of the Company’s stock as possible at retail prices, thereby maximising the dividend payable to the Company’s creditors, if, and when, the Company is wound up.

16    The lessors were all on notice of this application, albeit the notice they were given was very short. There was no opposition by any of the lessors to the extension of time save that the lessor of the New South Wales premises was concerned that any order affecting that lease not constitute an admission either that the Company occupied the premises or had a right to occupy the premises. There was no objection by the administrators to qualifying the orders to reflect that position and that qualification appears in the orders made (paragraph 3 of the orders). Also, whilst one of the Victorian lessors was prepared to consent to an extension only to 22 July 2020, the lessor was content not to pursue opposition to a lengthier period at this stage, having regard to the provision for liberty to apply in paragraph 6 of the orders.

17    I accept an extension of time is consistent with the objectives of Pt 5.3A of the Act.

18    First, the quantum of the liabilities associated with the leasehold property is significant, at $215,000 per month, and the administrators would not be willing to incur the personal liabilities under those leases in the circumstances of an extension not being granted. This would result in the administrators vacating those premises.

19    Secondly, the administrators are seeking to pursue a sale of the business as a going concern at the same time as attempting to liquidate the present inventory stock. Such a sale would maximise returns to creditors, and save jobs. The administrators’ opinion, informed by their experience and the advice from the Retail Experts, is that the maintenance of the store network is necessary to facilitate the sale of that stock at reasonable prices given the stock is of no material value in the absence of a store network. It is therefore an essential part of the administrators’ strategy to realise potential returns for creditors.

20    Thirdly, based on the administrators’ opinion, the lessors will not be significantly disadvantaged by the extension and there was no opposition by the lessors to the orders in the form made.

21    Fourthly, given that an extension of time under s 443B of the Act maximises the prospect of preserving (either in whole or in part) the business of the Company with a view to a sale of the business as a going concern, it does appear to be in in the creditors’ best interests, including the best interests of the lessor creditors, as it also increases the prospect that any prospective buyer would take over the existing leases.

22    Fifthly, to the extent that the lessors are adversely affected, the orders have been framed in such a way to permit persons who are affected by the orders (such as lessors of the property) to apply to the Court for a variation.

23    In the circumstances, for the same reasons that justify the extension of time under s 443B, it is also appropriate to give the direction sought by the administrators that they are justified in causing the Company not to meet its rental obligations.

Extension of the convening period

24    Section 439A of the Act, which deals with the convening of the second meeting of creditors, relevantly provides:

(1)     The administrator of a company under administration must convene a meeting of the company’s creditors within the convening period as fixed by subsection (5) or extended under subsection (6).

(2)     The meeting must be held within 5 business days before, or within 5 business days after, the end of the convening period.

(5)     The convening period is:

(a)     if the day after the administration begins is in December, or is less than 25 business days before Good Friday—the period of 25 business days beginning on:

(i)     that day; or

(ii)     if that day is not a business day—the next business day; or

(b)     otherwise—the period of 20 business days beginning on:

(i)     the day after the administration begins; or

(ii)     if that day is not a business day—the next business day.

(6)     The Court may extend the convening period on an application made during or after the period referred to in paragraph (5)(a) or (b), as the case requires.

…

25    As the administrators were appointed to the Company on 1 July 2020, the convening period, if no extension were to be granted by the Court, would end on 29 July 2020.

26    The principles for extending the convening period are well established and set out in Strawbridge, in the matter of Virgin Australia Holdings Ltd (administrators appointed) (No 2) [2020] FCA 717 where Middleton J said at [64] and [65]:

The circumstances in which the Court will extend a convening period are well established. In making such an order, the Court must reach an appropriate balance between an expectation that the administration will be relatively speedy and summary, and the countervailing factor that undue speed should not be allowed to prejudice sensible and constructive actions directed to maximising a return for creditors: Mann v Abruzzi Sports Club Ltd (1994) 12 ACSR 611 (Young J); Re Diamond Press Australia Pty Ltd [2001] NSWSC 313 at [10] (Barrett J).

The approach to be adopted was recently set out by Thawley J in Farnsworth v About Life Pty Limited (Administrator Appointed), in the matter of About Life Pty Limited [2019] FCA 11 at [3]-[8], where his Honour endorsed the comments of Austin J in In the matter of Riviera Group Pty Ltd (admins apptd) (recrs & mgrs. apptd) [2009] NSWSC 585 (‘Re Riviera’) at [13] as to the categories of cases in which an extension is granted including, relevantly:

(1)     where the size and scope of the business in administration is substantial (citing Lombe, in the matter of Babcock & Brown Limited (Administrators Appointed) [2009] FCA 349; Worrell; In the matter of Storm Financial Ltd (Receivers and Managers Appointed) (Administrators Appointed) [2009] FCA 70; and ABC Learning Centres Limited, in the matter of ABC Learning Centres Limited; application by Walker (No 5) [2008] FCA 1947);

(2)     where the extension will allow sale of the business as a going concern, citing Lombe re Australian Discount Retail Pty Ltd [2009] NSWSC 110; Stewart, in the matter of Kleins Franchising Pty Ltd (administrators appointed) (ACN 007 348 236) [2008] FCA 721; Uni-Aire Security Pty Ltd (Administrators Appointed) ACN 085 430 619, in the matter of Uni-Aire Security Pty Ltd (Administrators Appointed) ACN 085 430 619 [2006] FCA 1423; and

(3)     more generally, where additional time is likely to enhance the return for unsecured creditors: Deputy Commissioner of Taxation v Scottsdale Homes No 3 Pty Ltd (No 2) [2009] FCA 190; Fitzgerald, In the matter of Primebroker Securities Limited (Administrator Appointed) (Receivers and Managers Appointed) [2008] FCA 1247; Ex parte Vouris; in the matter of Marrickville Bowling & Recreation Club Ltd (under Administration) [2008] FCA 622.

27    It is the administrators’ opinion that additional time is required until 20 October 2020 in order to provide an opportunity to pursue Scenario B by negotiating a sale of the business of the Company as a going concern and to pursue Scenario A by attempting to sell as much as possible of the Company’s stock by retail sale before creditors resolve to wind the Company up. The administrators consider that, in order to offer the business for sale as a going concern:

(a)    a three week marketing campaign should be undertaken to ensure the administrators take all reasonable steps to sell the business for its market value; and

(b)    an additional month will be required to negotiate and document a sale of the business, including negotiating to continue such of the leases as the purchaser wishes to continue and the licencing terms T.M. Lewin UK that owns the brand name “T.M. Lewin”.

28    I consider that it is in the best interests of the creditors of the Company for the convening period to be extended in order to enable the Company to be able to open the stores to trade for a limited period, which would in turn give the Company the opportunity to increase the assets available to creditors substantially through a sale of the stock for retail value and/or a sale of the Company’s business as a going concern. There is no apparent prejudice to creditors by the extension of the convening period and, in any event, provision is made in the orders for creditors to apply for the modification or discharge of the order extending time.

Associate:

Dated:    14 July 2020