In a recent case, Ford (Administrator), in the matter of The PAS Group Limited (Administrators Appointed) v Scentre Management Limited  FCA 1023, the Court considered whether monies payable under a lease agreement by a company in administration ought to be paid in priority to other unsecured debts if the administrators were not personally liable for the monies in that period.
This was an application brought by the administrators of a group of 19 companies known as the PAS Group Limited (PAS Group).
The PAS Group constituted an Australian-based fashion group which operated retail and wholesale segments of the market as well as online. The group operated 161 retail stores and leased 166 different premises.
On 29 May 2020, Martin Francis Ford, Stephen Graham Longley and David Laurence McEvoy (Administrators) were appointed as administrators of the PAS Group.
On 9 June 2020, the Administrators obtained orders to extend the statutory “no personal liability” period provided in section 443B(2) of the Corporations Act 2001 (Cth) (Act) from five business days from the commencement of the administration (29 May 2020) to 22 June 2020 (Standstill Period).
The Administrators now sought a declaration that any rent and any other monies payable under any lease agreement by the PAS Group in the Standstill Period constituted an unsecured debt and was not entitled to priority over other debts pursuant to section 556(1) of the Act. The Administrators estimated the total rent payable during the Standstill Period as approximately $1.385million.
Scentre Management Limited (Scentre), the defendant in the proceedings, represented the landlord creditors of the PAS Group.
Scentre argued the declaration should not be granted as the rent incurred by the PAS Group during the Standstill Period was an expense properly incurred in carrying on the business of the PAS Group within the meaning of section 556(1)(a) of the Act, and would thus be paid in priority to all other unsecured debts or claims in accordance with the so-called Lundy Granite principle.
The precise question put before the Court by the parties was:
“[W]hether, as a result of the Administrators’ conduct of the administration, the rent incurred by the PAS Companies during the period 29 May to 22 June 2020 would be a debt or claim entitled to priority under s 556(1) of the Corporations Act in any subsequent winding up …”
Section 443A of the Act provides:
(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 … leased, used or occupied …
Section 443B of the Act sets out an administrator’s personal liability in respect of, among other things, lease agreements entered into by a company prior to the administrator’s appointment if the company continues to occupy the property.
The Lundy Granite Principle is derived from an old English case, In Re Lundy Granite Co. ex p. Heavan (1871) 6 Ch App 462. It stands for the proposition that, where an administrator or a liquidator uses or retains leased premises for the benefit of the administration or liquidation, the rent is payable as an administration or liquidation expense properly incurred in carrying on the company’s business.
The Administrators argument for the monies being an unsecured debt was essentially as follows:
- The Administrators were not personally liable for any monies under any lease agreement during the Standstill Period due to the orders made on 9 June 2020.
- As the Administrators are not personally liable, the amounts owing under the lease agreements are an ordinary unsecured claim.
- The rent incurred in the Standstill Period is not a debt “incurred” as required by section 556(1)(a) of the Act.
- This is because the Administrators did not do anything which caused the PAS Group to incur rent in the Standstill Period and cannot be taken to have elected to retain the property for the benefit of the administration until the Standstill Period has ended.
- If rent in this case was to be treated as an expense in any administration, then that would constitute a “super priority”, inconsistent with the intention of the voluntary administration scheme.
- The Lundy Granite Principle does not apply to the Standstill Period rent because section 443B of the Act replaced the principle.
The Court declined to make the declaration sought by Administrators. It held that: