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Testing the competition

11 September 2013

External administrators would be only too familiar with a provision found in guarantees (and other transactional documents); that is, a clause preventing a guarantor proving in an external administration in competition with another creditor in whose favour the guarantee is given. But is there more to these clauses than meets the eye?

In a recent case , the plaintiffs, as joint and several administrators of Retail Adventures Pty Ltd (Administrator appointed) (RAPL) and Retail Adventures Holdings Pty Ltd (Administrators Appointed) (RAHPL) sought directions under section 447D of the Corporations Act. Bicheno (the ultimate holding company of both RAPL and RAHPL) proposed a DOCA with a single DOCA fund for both administrations. However, the administrators concluded that the DOCA would result in a lower return to creditors than under liquidation and did not recommend that creditors accept the proposed DOCA, identifying several risks to creditors. RAHPL was RAPL's largest creditor with a debt comprised, relevantly, of secured debt of approximately $36,000,000 and $68,000,000 in subordinated convertible notes. At any meeting of creditors of RAPL, the votes of RAHPL would determine any resolution on the value of votes cast.

A significant landlord creditor of RAPL was Sypkes Securities Pty Ltd (Sypkes). Each Sypkes lease contained a guarantee whereby RAHPL guaranteed the obligations of RAPL. They also included a restriction on the ability of RAHPL to "prove in competition with" Sypkes. There were other leases containing a provision in substantially similar terms. The administrators of RAHPL intended to withdraw RAHPL's informal proofs lodged in the administration of RAPL. Due to the impact that the voting rights of RAHPL would have, the administrators sought directions under section 447D from the Federal Court with a view to obtaining some protection against any accusations of acting unreasonably by making such a decision.

After a brief discussion of the principles regarding section 447D, Jacobson J turned to the issue of whether the restrictive provisions in the guarantees were sufficient to exclude RAHPL from simply voting in the administration of RAPL. The Court accepted that, ordinarily the phrase "proving in competition" would connote the lodgement of a proof of debt for the purpose of obtaining a distribution or dividend in the winding up of a company. The Court referred to earlier authorities supporting that construction.

However, Jacobson J noted that the clause in each lease must be considered in its full context. In this particular case, the provision prevented RAHPL from proving "in competition with the Landlord if a liquidator, provisional liquidator, receiver, administrator or trustee in bankruptcy is appointed in respect of the Tenant..."

His Honour went on to note that the clause extended the circumstances in which RAHPL was prevented from proving in competition with the landlord to a wider range of insolvent events (beyond liquidation), including the appointment of an administrator. Citing an earlier decision of Austin J , the Court noted a distinction between a proof of claim for the purposes of voting at a meeting of creditors and a proof of debt for the purposes of obtaining a distribution under a deed of company arrangement. This was held to be so on the basis that distributions to creditors are not payable out of an administration. The Court noted that whilst there was some force in the submission that proving for the purposes of voting is not proving in competition with the landlord, it ultimately concluded to the contrary. The Court held that competition with the landlord arose from the assertion of an entitlement to attend a meeting and to vote, irrespective of whether RAHPL intended to or would vote in a contrary manner to the landlord. His Honour held that "the objective purpose of clause 23.8 [of the lease] considered as a whole is to prevent RAHPL from asserting a claim or right which may have the effect of competing with the landlord's right to recover monies due to it from RAPL..." (emphasis added).

This decision was decided on the particular provision of the lease in question and it remains to be seen whether or not the rationale will be adopted or distinguished. In any event, it is important for external administrators (and particularly administrators) to carefully assess each such provision in any document, particularly where it will affect the ultimate future of the company.

1 Strawbridge, in the matter of Retail Adventures Pty Ltd (Administrators Appointed) -v- Retail Adventures Pty Ltd (Administrators Appointed) [2013] FCA 891

2 Derwinto Pty Ltd (in liq) -v- Lewis (2002) 42 ACSR 645 at [39]

For more information, please contact:

Mark Madsen | PartnerĀ 
Mullins Lawyers
t (07) 3224 0241
f (07) 3224 0333

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