Landlords, Leases & Insolvency
GENERAL LEASES AND INSOLVENCY
The rights and responsibilities of the insolvency practitioner in respect to a pre-existing lease are different by appointment type. For example, if you or your client has had experience with a liquidator, you should not expect the same rules to apply in a voluntary administration.
PPSR
It is assumed in these comments that the lease is properly supported by contract documentation and is properly registered on the PPSR (if applicable) as these are necessary preconditions for enforcing any rights. It is a prudent idea to have received legal advice and to periodically review security documentation.
In addition, landlord clients may need to make PPSR registrations over chattels even though they may be disclosed in the lease agreement to retain ownership.
LANDLORDS, LEASES & LIQUIDATIONS
It is worth noting that standard property leases will have a termination clause in the event of liquidation and a clause requiring the consent of the landlord to hold an onsite auction. Accordingly if your client is the landlord to a company in liquidation, this can give some ability to your client to impose conditions on the liquidator prior to consenting to an auction being held. Such conditions may include leaving the property in a clean manner. Any attempt to have onerous make-good provisions may backfire as the cost of compliance may be significant resulting in the liquidator moving the plant and equipment to an offsite auction location and/or abandoning unwanted plant and equipment. In these circumstances any clean-up cost which would be recoverable by the landlord pursuant to the lease would rank as an ordinary unsecured claim in the liquidation.
VOLUNTARY ADMINISTRATION
This is generally only a short term appointment and the Voluntary Administrator has extraordinary power to keep the business assets together (if they wish to) with the aim of the company’s business continuing in existence after the Voluntary Administration[1].
The Voluntary Administrator can restrict a lessor’s right take possession of an asset[2]. The Voluntary Administrator should decide within the first five business days of their appointment if they require the use of the asset; and if they do, they should pay the lessor from the sixth business day onwards on the same basis as the company previously did until the conclusion of the Voluntary Administration[3]. If the Voluntary Administrator provides notice that they do not require to use the asset, then they are not liable to make payments and should make the asset available for the lessor to take control or possession as soon as practicable[4].
The powers of the Voluntary Administrator can therefore be particularly relevant where security of tenancy is necessary to maximise the value of the company’s business and assets and where the lease may otherwise be determined by an insolvency appointment.
LIQUIDATION
The general purpose of the liquidation is the orderly winding-up of the company’s assets in accordance with creditors’ rights. A liquidator does not have rights to deny possession against a lessor, subject to two caveats: (1) a liquidator has control of the company and must ensure the claims of the lessor are enforceable before permitting them to enforce their rights; and, (2) a liquidator is able to adopt a profitable contract if that is in the company’s interests.
A lessor can require a liquidator to determine if they wish to disclaim a contract within 28 days by providing notice[5]. The liquidator is not required to make payments under the lease unless they have adopted the contract or unless the expense has a nexus to preserving, realising or getting in property of the company, or in carrying on the company’s business. A liquidator may also negotiate an agreement with a lessor to use a leased asset, in which case they will make payments according to that agreement.
RECEIVERSHIP
The receivership does not affect the lessor’s rights as against the company. The receiver can however give notice within 7 days of their appointment that they do not wish to exercise property rights, in which case the lessor can take control or possession and the receiver avoids any personal liability (although the company is still liable pursuant to the terms of the contract)[6]. If the receiver decides to exercise property rights, they are then liable for the expenses which accrue whilst the company is subject to their control[7]. This may not extend to a liability which merely crystallized during their appointment but accrued prior to their appointment.
SUMMARY
This blog contained a brief summary of legal landscape for leases in Voluntary Administration, Liquidation and Receivership. Knowing the legal landscape can provide you or your client with a commercial advantage. You should feel free to contact us for general insolvency advice or information if the issue arises.
[1] Section 435A of the Corporations Act 2001
[2] Section 440B
[3] Section 443B
[4] Section 443B
[5] Section 568
[6] Section 419A
[7] Section 419A