Property Law uk

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Insolvency

The following matters are dealt with on this page:
  • Administration - can a landlord commence proceedings against the tenant?
  • Rent payable as an administration expense.
  • CVA prejudicing the landlord - Powerhouse
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Administration

Can a landlord commence proceedings against the tenant?

Innovate Logistics Limited (in administration) v Sunberry Properties Limited
[2008] EWCA Civ 1321

Summary

In considering leave (under the Insolvency Act 1986) to commence proceedings against a company in administration the court must balance the need of the administrators to conduct the administration in the interests of all the creditors against the interests of individual creditors. It is for the applicant seeking leave to show that it is equitable for him to be given leave.

Facts

Innovate Logistics (T) is the tenant of premises under a thirty year lease dated 18 December 1998. Sunberry Properties (R) is the landlord. Rent is payable quarterly in advance at a rate of £1,225,530 pa. The lease also contains a covenant against assignment and parting with possession or occupation of the whole or any part of the premises, together with a proviso for re-entry for breach of covenant, non-payment of rent and on the passing of a resolution of the T’s directors to present a petition for an administration order in respect of T.

On 30 June 2008, T went into administration. On the same day, T’s administrators entered into a sale of T’s business as a going concern. One of the underlying purposes of the sale was to ensure that outstanding contracts could be fulfilled and existing book debts recovered at full value, for the benefit of all the creditors. The lease was excluded from the sale, but the administrators granted the purchaser an occupational licence of the demised premises for 6 months, with monthly payments (equal to the monthly passing rent under the lease) payable by the purchaser to T. The administrators agreed to pass these payments to L.

L asked the administrators to terminate this illegal licence and they refused. Under paragraph 43 of Schedule B1 of the 1986 Act, where a company is in administration,
    "(6) No legal process (including legal proceedings, execution, distress and diligence) may be instituted or continued against the company or property of the company except (a) with the consent of the administrator, or (b) with the permission of the court"
Accordingly, L sought leave of the court to commence legal proceedings against T to bring the occupational licence to an end. Permission was granted on 15 July 2008. T appealed.

Issue

The main issue on the appeal was whether the judge at first instance had taken the wrong approach to the relevant provisions of the Insolvency Act 1986 in not following the guidance set out in Re Atlantic Computer Systems plc [1992] Ch 505.

Decision

Court of Appeal allowed the appeal. The appeal court held that although leave to bring proceedings would normally be given to a landlord to exercise its proprietary rights if this was unlikely to impede the statutory purpose of the administration, the court nevertheless had to balance the legitimate interests of L against those of T’s other creditors. In other words, a balance must be struck between the need to allow the administrators to conduct the administration in the interests of creditors as a whole, and the desirability of addressing the interests of individual creditors.

One of the main purposes of this administration was a continuation of the collection of book debts by the purchaser running into (potentially) millions of pounds which may have allowed a distribution to unsecured creditors. In order to achieve that it was essential for the purchaser to occupy the property and perform the existing contracts; to terminate the occupation would be to prejudice the interests of unsecured creditors.

The mandatory order would prevent the debt collection, and in addition, L would benefit financially from a continuation of the purchaser’s occupation of the premises since T was unable to pay the rent.

The Court of Appeal held that the judge:
  • Had not properly understood the purpose of the administration (in concluding that it would not be impeded by L’s action) and
  • Had not performed the necessary balancing act (in failing to take into account the importance of realising the book debts) and
  • Had failed to ascertain whether L had proved that it was inequitable for the court to refuse permission.
The administrators were ordered to pay all sums received from the purchaser by way of licence fees to L.

Citation

Stanley Burnton LJ at para 66:
    "As to the exercise by the Court of its discretion under paragraph 43 of Schedule B1 to the Insolvency Act 1986, it is inherent in the provisions of subparagraphs (4) and (6) that administration may preclude a landlord from enforcing the terms of his lease. He can enforce them only with the consent of the administrator or the permission of the court. When considering whether to grant or to refuse leave, the court has regard to the consequences of the administration and of the order sought for the persons affected by them: in other words, it follows the guidance given in Atlantic Computers."
Comment

Although this case is good news for administrators seeking to grant occupational licences as part of the sale of the company’s ongoing business, it is important to note that the landlord in this case was not prejudiced.

One note of caution comes from Mummery LJ’s comments that a landlord has no automatic contractual right to receive rent as an expense of an administration; rather it is a matter for the court’s discretion (para 59). This contrasts with Neuberger LJ’s obiter comments in Thomas v Ken Thomas Ltd [2006] EWCA Civ 1504.

See also Somerfield Stores Limited v Spring (Sutton Coldfield) Limited [2009] EWHC 2384 (Ch) where the tenant was given permission to pursue a claim for a new tenancy where the landlord had objected on ground s30(1)(f).

No grounds for believing that administrator would obtain a premium if there was an assignment

Forfeiture allowed

Lazari Investments Limited v Saville
[2015] EWHC 2590 (Ch)

Summary

A landlord of a shopping centre was granted permission to forfeit a lease of shop premises where granting such permission did not impede an administration order made against the tenant company. There were no grounds for believing that the administrators would be able to achieve a premium by assigning the lease. In carrying out the balancing act between landlord and creditors, the sum that may have been achieved on an assignment was a significant factor, as was the length that the administration had been running for. The less an administrator could achieve on assignment, the weaker the argument that the lease should not be forfeited.

Facts

The landlord (L) applied to forfeit a lease it had granted to a tenant (T). L owned a shopping centre, from which T had run a restaurant. The first to third respondents had been appointed as T’s administrators. They applied to assign the lease to a subsidiary of the tenant, STL, in 2014. The landlord refused on the basis that, inter alia, STL was not of sufficient financial standing and that T had not offered an authorised guarantee agreement (AGA) as required under the lease. The respondents applied again for consent to assign the lease to STL. The landlord asked for clarification on a number of issues, but got no response, and refused to give consent. The landlord then asked the administrators for confirmation of steps taken to market the lease to entities other than STL but received no response. In response to the instant application, the administrators gave evidence that another company (W) had offered to acquire the leasehold interest for a premium of £250,000 and that such offers demonstrated that the lease had significant value. The landlord said that it would have accepted W as an assignee, but that W had confirmed that the lease was not suitable as it had not been aware that the landlord had terminated an outdoor seating licence.

L applied for permission to forfeit the lease. L submitted that forfeiture would not impede the purposes of the administration and, in any event, the balance came down in favour of granting permission to forfeit because otherwise L would suffer financial loss by being denied the opportunity to grant a new lease at a higher rent to a new tenant.

The administrators submitted that the purposes of the administration would be impeded by forfeiture because the leasehold interest was a valuable asset, which would allow the administrators to achieve a better result for the tenant’s creditors.

Issues
  • Whether the forfeiture would impede the purposes of the administration;
  • If the purpose of the administration was impeded, where the balance lay between the landlord and the tenant’s creditors’ interests; and,
  • Whether forfeiture should be by peaceable re-entry, or by way of court proceedings.
Decision

The High Court granted L’s application. It followed the case of Atlantic Computer Systems Plc, Re [1992] Ch 505, and considered that the higher the lease’s value in the hands of the administrators, the more likely it was that the purpose of the administration would be impeded by the grant of permission.

In relation to the first issue, the Court held that the purpose of administration would not be impeded by granting the landlord the relief it sought because, in the instant case, there were no grounds upon which to believe that the administrators would be able to achieve a premium by assigning the lease. The judge accepted that the leasehold interest had some potential premium value, but the administrators were unable to unlock that value due to the landlord’s lawful exercise of its rights, including the right to terminate the outdoor seating licence and to require the provision of an AGA. The Insolvency Act 1986 was to provide a moratorium to enable administrators to retain or realise assets on behalf of creditors, which involved postponing the enforcement of substantive rights. However, the law did not go so far as to suggest that a lessor was not entitled to rely on rights which it could invoke without legal process, even if it would further the purpose of the administration not to rely on them.

On the second issue, the Court considered that the balancing exercise which the court has to perform if the grant of permission would impede the purpose of the administration came down in favour of granting the landlord the permission it sought. The forfeiture’s effect on the administration only came into play at this second stage. The administrators had taken the risk that their attempts to obtain the landlord’s consent to assign the lease would fail, and by the time of the hearing they were not able to demonstrate that other avenues were available. Fairness did not require that the administrators should be allowed a further opportunity to market the leasehold interest in order to realise the benefit of the lease for creditors. In the meantime, the landlord has lost the opportunity to lease the property to a new tenant on financially advantageous terms, which was a “significant loss” to the landlord. Richard Spearman Q.C. (sitting as a Deputy Judge of the Chancery Division) said:
    “The guidance in Atlantic Computers recognises that administration is intended to be only an interim and temporary regime, and includes the statement that the proprietary interests of a landlord should not be prejudiced by the way in which the administration is conducted save to the extent that this may be unavoidable and even then this will usually be acceptable only to a strictly limited extent.”
In the instant case, the chronology counted against the administrators and their stance in the litigation did not accord with the guidance.

On the final issue, the Court held that, in the circumstances of the case and because it was unable to identify any purpose of the administration which would be served, it was not appropriate to limit the landlord to forfeiting by legal proceedings.


Rent payable by administrator

Two cases

Goldacre (Offices) Limited v Nortel Networks UK Limited (in administration)
[2009] EWHC 3389 (Ch)

Summary

Rent for premises which are being used for the beneficial outcome of an administration, must be paid as an expense of the administration.

Facts

Nortel (“T”) is the tenant under two long leases but has gone into administration. The administrators are using the premises (or part of the premises) for the more efficient conduct of the administration and have paid rent in respect of those premises. There are sub-tenants of other parts of the premises and L has served notices on the sub-tenants under s6 of the Law of Distress Amendment Act 1908.

Issue

When a tenant goes into administration, the tenant remains liable to the landlord under the covenants under the lease. However, a landlord’s remedies on default are subject to the statutory moratorium that arises on administration. It is therefore helpful if the landlord can obtain rental payments from the administrator.

The question before the court, therefore, was whether the administrators should pay future rent under the leases.

Decision

In a short judgement, HHJ Purle QC (sitting as a High Court judge) looked at the House of Lords decision in Re Toshoku Finance UK Ltd [2002] UKHL 6, that rates are payable as an expense of the winding up, in the case of a liquidation, where the liquidators make use of or retain leasehold premises for the benefit of the liquidation, and that payment of such was not a matter of an exercise of discretion.

HHJ Purle went on to hold that, given that the statutory definition of administration expenses (Insolvency Rules, rule 2.67) mirrors almost exactly the definition for liquidation expenses, where leasehold premises are retained or used for the benefit of the administration, the administrators should pay the rent as an expense of the administration and it should not be a matter for the exercise of discretion by the administrators of the court (Exeter City Council v Bairstow [2007] 4 All ER 437).

He went on to hold that the whole of the quarter’s rent would be payable by the administrators as the lease provides that rent is payable in advance and there is therefore no ability to apportion under the Apportionment Act 1870.


Leisure Norwich (II) Ltd v Luminar Lava Ignite Ltd
[2012] EWHC 951 (Ch)

Summary

An administrator is obliged to pay rent for premises occupied or used by him for the purposes or benefit of the administration but only where the rental payment date falls after the date of the administration.

Facts

T traded from a number of leasehold premises as tenant under four leases which all provided that rent was payable quarterly in advance. T became insolvent and went into administration. A few days later the administrators confirmed an intention to trade from the premises for some time even though they were not in a position to pay rent. L then asked the administrators for leave to forfeit the leases by peaceable re-entry and the administrators refused.

(This request for consent to forfeit was necessary because of the effect of the statutory moratorium imposed under Paragraph 43(4) of Schedule B1 of the Insolvency Act 1986 which precludes a landlord from exercising a right to forfeit a lease by peaceable re-entry other than with the consent of the administrator of the company tenant concerned or order of the court)

L commenced proceedings and consent was given. L sought an order compelling the administrators of T to pay all the rent that was outstanding under the leases, as an expense of the administration (r2.67, Insolvency Rules 1986).

Issue

Whether the administrators were obliged to pay rent? The dispute was as to whether the obligation to pay rent arises only where the rent falls due after the commencement of the insolvency process (in this case the date of the administration) or whether the obligation exists even where the rent fell due before this.

Decision

The High Court dismissed the landlord’s application. The court noted that the Insolvency Act 1986 and the Insolvency Rules 1986 created two distinct categories of liability.
  • Claims that were provable in any distribution of the assets of the insolvent company. The definition of what constituted a provable debt is drawn widely and includes any payment obligation that fell due before the company went into a formal insolvency process (rules 12.3(1) and 13.12, IR 1986).

  • Expenses of the insolvency process. Classically, these were obligations incurred after the commencement of an insolvency process, in the course of that process. However, where, as a consequence of the insolvency process, assets belonging to a third party are retained by the insolvent company for the benefit of creditors, the cost of that use, which was otherwise a provable debt, could become an expense of the insolvency process. If the relevant liability did rank as an expense, the court, endorsing the decision in Goldacre (Offices) Ltd v Nortel Networks UK Ltd (In Administration) [2009] EWHC 3389 (Ch) (above), noted that the entire liability ranked as an expense. But there was no scope for a liability that had fallen due for payment before the start of the insolvency process to become an expense of that process.
The court rejected L's application for leave to appeal. It remains to be seen if L will apply to the Court of Appeal for permission.

Comment

The decision is consistent with Goldacre and endorses the view that, where a lease provides that a company must pay rent quarterly in advance, the administrators of that company, if appointed after a quarter day, can enjoy the remainder of the quarter in effectively rent-free occupation of the premises.

Insolvency practitioners will no doubt welcome the judgment, which provides some commercial assistance to them in carrying out their functions. Landlords will take a very different view. In practice, it is possible that administration appointments will be timed to take effect shortly after a quarter day, to allow the administrators as long a period of rent-free occupation as possible.

Where a lease provides for rent to be paid in arrears, some uncertainty remains. The court was clear that, when the rent falls due in the course of an insolvency process, the rent relating to the period from the commencement of the insolvency process would rank as an expense. What is not clear is whether the pre-insolvency rent would also rank as an expense.


CVA prejudicing landlord

Powerhouse

Prudential Assurance Co Ltd v PRG Powerhouse Limited
[2007] EWHC 1002 (Ch).

Summary

In these proceedings the creditors of PRG Powerhouse Ltd challenged the validity of a company voluntary arrangement ("CVA") for Powerhouse which had been approved at a meeting of creditors. The High Court held that the CVA was effective to release Powerhouse's parent company from liability in respect of guarantees provided by it to landlords of premises let to Powerhouse. The judge (Etherton J) went on to hold that the CVA therefore unfairly prejudiced the interest of the landlords as creditors of Powerhouse within the meaning of s6 of the Insolvency Act 1986

Section 6 of the 1986 Act

It is this section that gives the court the power to revoke a CVA where there is unfair prejudice to a creditor:
    "6(1) Subject to this section, an application to the court may be made .. on one or both of the following grounds, namely ..
      (a) that a voluntary arrangement .. unfairly prejudices the interest of a creditor, member or contributory of the company;

      (b) that there has been some material irregularity at or in relation to either of the meetings.
    6(4) Where on such an application the court is satisfied as to either of the grounds mentioned in subsection (1) .. it may do one or both of the following, namely ..
      (a) revoke or suspend any decision approving the voluntary arrangement .. or, in a case falling within subsection (1)(b), any decision taken by the meeting in question ..;

      (b) give a direction to any person for the summoning of further meetings to consider any revised proposal the person who made the original proposal may make or, in a case falling within subsection (1)(b), a further company or (as the case may be) creditors' meeting to reconsider the original proposal."
Does a CVA prejudice a creditor

The following points emerge from the judgment (paras 71 to 75):
  • Whether a CVA unfairly prejudices the interests of a creditor under IA s.6 is to be judged on the information available at the time the CVA was approved;
  • Any CVA which leaves the creditor in a less advantageous position than before the CVA - looking at both the present and the future - will be prejudicial;
  • There is no single and universal test for judging unfairness in this context. It is necessary to consider all the circumstances, including, in particular, the alternatives available and the practical consequences of a decision to confirm or reject the arrangement;
  • In broad terms, the unfairness may be assessed by a comparative analysis from a number of different angles. They include "vertical" and "horizontal" comparisons. Vertical comparison is with the position on winding up (or, in the case of individuals, bankruptcy). Horizontal comparison is with other creditors or classes of creditors. Another way of looking at it is to make a comparison with the position if, instead of a CVA, there had been a formal scheme of arrangement under CA s.425 (compromise or arrangement between a company and its creditors or members), on which the different classes of creditors would have been required to meet and vote separately.
This case

Having regard to those principles and all the relevant circumstances the judge was "in no doubt that the CVA in the present case is unfairly prejudicial to the Claimants, as Guaranteed Landlords, within IA s.6. The CVA leaves the Guaranteed Landlords in a worse position than without the CVA, having regard both to the present and also future possibilities. The Guaranteed Landlords would have the benefit of the Guarantees, but for the CVA. Those Guarantees were of value, and would have been enforceable both now and in the future" (paras 97 and 98).

And at paras 107 and 108:
    "In summary, the Guaranteed Landlords are the class or group of unsecured creditors that would suffer least, if at all, on an insolvent liquidation of Powerhouse, but they are the class or group that is most prejudiced by the CVA, under which their claims against Powerhouse and PRG, as surety, are to be compromised by payment of a dividend that places no value on the very rights (i.e. the Guarantees) which improved their position over all other unsecured creditors and which were intended to and would benefit the Guaranteed Landlords on the insolvent liquidation of Powerhouse. Such an illogical and seemingly unfair result could not have been achieved if there had been a formal scheme of arrangement under CA s.425. It is common ground that, under such a scheme, the Guaranteed Landlords would have been in a class of their own, separate from other unsecured creditors. Moreover, the scheme would not have needed to include, and would not have included, creditors who were to be paid in full. Accordingly, as was accepted by Mr Morgan, the Guaranteed Landlords could and would have vetoed any such scheme. The only reason a different result has been achievable with the CVA is that all creditors form a single class for the purposes of a cva, and that class includes every creditor entitled to a notice of the meeting to approve the cva, including creditors who would be paid in full. In effect, the votes of those unsecured creditors who stood to lose nothing from the CVA, and everything to gain from it, inevitably swamped those of the Guaranteed Landlords who were significantly disadvantaged by it."

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