In its recent judgment involving
Background
Decision
In refusing to grant the declaration sought by the administrators, the Court emphasised that the leased premises were used by the administrators to actively trade
Consequently, it followed that in any liquidation of
Key takeaways
- While the
PAS Group decision concerned the treatment of rental payments under real property leases, it has broad application to payments under equipment leases and contracts for goods and services during a Standstill Period (Standstill Period Debts). - The primary impact of this decision is likely to be felt in relation to insolvencies of groups with a substantial leasehold footprint or that have a heavy reliance on equipment leases (e.g. airlines, mining services businesses and retail or hospitality groups) where the quantum of the Standstill Period Debts may be sufficiently substantial to materially alter distributions to other creditors. In such a context, the
PAS Group decision introduces a significant additional consideration into an administrator's deliberations as to whether continued post-appointment trading of a business is in the best interests of all creditors. This may in turn disincentivise restructuring efforts where continued trading is an integral component of the proposed restructure. - While a DOCA may exclude the operation of clause 4 of Schedule 8A of the Corporations Regulations 2001 (Cth) and therefore the priority waterfall in section 556 (as well as 560 and 561) of the Corporations Act4, a DOCA that does so and delivers an inferior outcome for creditors to whom Standstill Period Debts are owed (when compared with the priority return in an immediate winding up) is susceptible to challenge on the grounds that it is oppressive or unfairly prejudicial to, or unfairly discriminatory against, those creditors.5
- In applying to the court for a Standstill Period and electing to keep certain real property or equipment leases or service contracts on foot during that period, administrators will need to carefully assess any potential deed proponent's capacity and willingness to fund Standstill Period Debts and whether any proposed DOCA affords those debts the priority that they would enjoy in a liquidation. This last consideration will be particularly significant in circumstances where the body of unsecured creditors features a significant proportion of creditors to whom Standstill Period Debts are owed, particularly from the perspective of ensuring that an administrator's recommendation of a DOCA to creditors is resistant to subsequent challenge or criticism. In such a scenario, it is more likely that a viable DOCA may need to provide for priority treatment of Standstill Period Debts.
Footnotes
1. Ford (Administrator), in the matter of
2. 2020.
3. 2020.
4. Subject to the requirements of s 444DA of the Corporations Act.
5. See s 445D of the Corporations Act.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Mr Pravin Aathreya
Level 25,
NSW 2000
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