Like many retailers, the administrators had stood down the Colette workforce under the Fair Work Act provisions and closed all stores as a result of the COVID-19 health concerns and government restrictions.

Moreover, direction was sought and obtained pursuant to s90–15 of Schedule 2 of the Insolvency Practice Schedule that the administrators were justified in not causing companies in the Colette Group to pay rent in relation to the retail stores for an initial two-week period and following this week’s hearing a further three-week period.

Reflections from counsel for the administrators

In conversation with Lawyers Weekly, Hamilton Locke partner Brit Ibanez – who, together with fellow partner Nicholas Edwards, act for Vaughan Strawbridge, Sam Marsden and Jason Tracy of Deloitte in their capacity as administrators of Colette – said that the successful application to the Federal Court was launched “against the backdrop of the impacts of COVID-19” on the retail business of Colette and direct effect on the sales process that was being undertaken by the administrators.

“In such circumstances, the administrators need time to assess the situation and to negotiate with key stakeholders like the landlords,” she explained.

If the orders being sought were not granted, Mr Edwards noted, administrators would have likely been forced to wind down the business and place the company into liquidation.

“At the present time, this would mean a significantly reduced return available to creditors, vacant stores and loss of jobs for all employees (and likely loss of the JobKeeper subsidy),” he said.

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When asked about recapitalisation or sale prospects for businesses in similar circumstances during the pandemic, Mr Edwards said that relief from personal liability obligations during a period of “mothballing” will “enable administrators to negotiate in good faith with landlords and other stakeholders, with the ultimate goal of maximising the return to creditors”.

This argument has been accepted by the court for now, he said.

“The administrators are firmly of the view that exploring these options is in the best interests of creditors and consistent with the objectives of the Corporations Act – that is to maximise the chance of the Colette business continuing in existence through a future sale or if that is not possible maximising the return for creditors,” he outlined.

“It should also be noted that no landlords appeared at either of the first two hearings to oppose the application (although one provided comments in writing) and the secured creditor continues to be supportive of the strategy being adopted.”

Ms Ibanez recounted that it was critical – as part of the application before the Federal Court – to work closely with administrators in order to understand the new government relief initiatives, such as JobKeeper, and also the mandatory code of conduct for leasing and its impact on the business.

“This is a moveable feast, and the administrators – just like every director and management team in corporate Australia – [are] trying to get across the impact of the pandemic, the subsidies that can assist and how the business can survive on the other side,” she said.

“Clearly, in the case of Colette, the administrators need to balance their duties to creditors against the ongoing uncertainty, and ensure that all actions they take are justified and based on best available information.

“It will be interesting to see whether and if Treasurer Josh Frydenberg considers general changes to the personal liability regime that applies to administrators during the COVID crisis.”

How lawyers should respond to this decision

The orders of Justice Markovic in these proceedings are not surprising in the circumstances, Ms Ibanez pointed out, and serve as an example of the court’s discretionary powers pertaining to the administration process when such requested changes are for the purpose of facilitating the underlying aims of Part 5.3A administration, she said.

“The orders are designed to ensure the business has every opportunity to be sold once the hibernation period finishes to maximise returns and benefits for all creditors, including the landlords,” she advised.

“The strategy involved early engagement with stakeholders, seeking a time period that was fair and reasonable to all parties and gave the administrators enough time to undertake the investigations necessary to progress a decision (in light of the government announcements during this time) and modelling the outcomes based on an immediate shutdown scenario versus the ‘mothballing’ approach and what option would be available for a managed wind-down, or DOCA or sale once the stores can be opened again and trading recommences.”

Mr Edwards added: “Lawyers advising administrators during the COVID-19 period need to be acutely aware of the personal liability position of the administrators, especially in the scenario where the underlying business is now revenue neutral.”

“This will be equally as important for businesses who consider and undertake strategic administration appointments to effect a restructure in order to emerge from hibernation.”