Federal court grants ‘pandemic leave’ to Colette chain’s administrators

One of the first cases to look at the impact of the Covid 19 pandemic has been the proceedings taken by the administrators of the Colette Group, a fashion accessories retailer with 138 stores in Australia and NZ shopping centres at time of entering into administration on 31 January 2020, that is, before the pandemic hit Australian retailing.

Following their appointment the Administrators continued to trade the business while deciding to permanently close 38 underperforming stores (which they were legally able to do).  They were then (in February) of the view that the best outcome for the Colette Group and its creditors would be the sale of the remaining business or a recapitalisation of the business and sought interest from third parties.

Sales however collapsed due to the introduced Covid 19 government measures and like other Australian retailers, on 26 March 2020 the Administrators closed all of the Colette Group retail stores to protect the health of all employees and the community.    By that time also all interested parties in purchasing the business had withdrawn from the process (at least pending the subsiding of the COVID-19 related market uncertainty).

The Administrators therefore remained in possession of 93 closed Australian stores (all subject to leases) which they declared to be ‘mothballed’ rather than permanently closed. The Administrators told Justice Markovic of the Federal Court that they did not consider that it would be economically viable to recommence trading in the midst of the COVID-19 pandemic and to do so would risk the health of employees. The leases are held with 17 different landlords with a total monthly rental bill of approximately $1.3 million, excluding outgoings.

Before closing stores the Administrators requested a 100% rent reduction from all of the landlords until a binding sale agreement was executed for the sale of the business or, if a sale was not achieved, the commencement of winding down of operations. However the response from the landlords was negative with only a 9% decrease in rent being negotiated across the portfolio.

Application was made to the Federal Court on 1 April for the Administrators to be excused from their personal liability for the accruing rent for the period 1-14 April despite the leases remaining in place.  Ordinarily if an administrator chooses to keep the lease on foot he or she remains liable for the rent (under the Corporations Act).  Instead what was proposed was that the rental arrears would accrue and the Landlords would be ordinary unsecured creditors of the company.

Due to the uncertainty as to the duration and extent of the impact of the COVID-19 pandemic, this “mothballing” was considered by the Administrators the option likely to realise the most value for the Colette Group’s business.  This is because post COVID-19 they will have the option of undertaking a managed wind down or re-engaging with interested parties to facilitate a sale or recapitalisation.  It was argued therefore that this would be in the best interests of the creditors as a whole.

The Court agreed and granted the order which allows the closed stores to remain in the possession of the Colette Group without the risk of the Administrators incurring personal liability for the rent.  Critical in the decision was the assessment that it is unlikely that the landlords would be able to re-lease the premises during this period in any event due to the pandemic. There would be no value to the landlords in any alternative scenario and in fact ultimately the landlords may benefit if the stores are able to reopen and renewal of leases negotiated taking into account the arrears.

This appears to have been recognized by the major landlords – Vicinity did not object or consent to the application, Scentre Group partly consented and GPT went along with it provided the stores remained closed to trade.

In summary Justice Markovic accepted that the Administrators’ decision was made in the context of:

(1)    the COVID-19 infection rate in Australia continuing to increase daily so that it is presently unclear when it will be safe to recommence retail operations;

(2)    other major jewellery, clothing, footwear, stationery and department store retailers taking action similar to that proposed by them;

(3)    the uncertainty about the availability or reach of any stimulus package to underwrite commercial rent or any legislative intervention;

(4)    the Administrators’ largely unsuccessful attempts to negotiate rent reductions with the Landlords; and

(5)    the fact that notice has been given to the Landlords.

It is noted that this application pre-dated the Federal Government’s announcement on 7 April of the National Mandatory Code of Conduct for commercial leases although presumably this would not have affected the outcome.  The amount of rent owing at the end will however be impacted by the application of the principles of the Code.  Also the order only applies to the 2 weeks of rent and was due back before the Federal Court on 15 April 2020 however there has been no confirmation on whether this stay has been extended.

Copy of the judgement is here for those interested

https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2020/2020fca0472