Category Archives: Insolvency

Receivers owed no duty of care directly to bankrupt mortgagor

Where a mortgagor is subject to the appointment by the mortgagee of a receiver over the mortgaged property the receiver owes a duty to the mortgagor to look after the property if and to the extent that the mortgagor retains an interest in what remains of the property after the mortgage debt and the receiver are paid off {the equity of redemption).

Where the mortgagor becomes bankrupt, the mortgagor ceases to have any such interest. The equity of redemption becomes vested in their trustee in bankruptcy. Though the mortgagor retains a legal liability under the mortgage, that is limited in nature and duration. Upon his discharge from bankruptcy it is automatically extinguished. The mortgagor walks free from the mortgage and the benefit of the equity of redemption stays vested in the trustee in bankruptcy for the benefit of the general creditors.

In the event of a surplus in the bankruptcy, then under section 330(5) of the Insolvency Act 1986, the trustee must return that surplus to the bankrupt: But the bankrupt has no right to the mortgaged property as such and his interest in any possible surplus can be and is protected by the duties which both the receivers and the mortgagee will owe the trustee in bankruptcy as to their management of the property and its realisation.

The creditors and the bankrupt mortgagor have a shared interest that the property should be managed and disposed of for the best price reasonably obtainable but that does not mean that they are owed any duty by the receivers.

In the Court of Appeal case of Purewal v Countrywide Residential Lettings Ltd & Anor [2015] all the foregoing factors were in play. The residential property had been subject to water damage but the receivers had failed to take timely action to stop the problem, which the mortgagor had told them about, or to claim the insurance proceeds in time. On getting the property back the mortgagor had spent £16000 fixing it.

The court said no legal precedents suggested the receivers’ duty being owed to a bankrupt mortgagor nor was there any justification for imposing such a duty. The mortgagor has ceased to have any interest in the equity of redemption and his ultimate entitlement under s. 330(5) to any surplus in the bankruptcy did not require the imposition of a duty to anyone beyond the trustee in bankruptcy so the receivers were not liable to him.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

In public interest to wind up empty rates mitigation scheme

Section 45 of the Local Government Finance Act 1988 imposed a national non-domestic business rate (“NNDR”) upon hereditaments if 4 conditions are satisfied. For a start the hereditament must fall within a class prescribed by regulations. Regulation 3 of the Non Domestic Rating (Unoccupied Property) (England) Regulations 2008 (“2008 Regulations”) prescribed all non-domestic hereditaments apart from those exempted by Regulation 4. Regulation 4(k) of the 2008 Regulations exempted:

“Any hereditament…whose owner is a company which is subject to a winding up order made under the Insolvency Act 1986 or which is being wound up voluntarily under that Act”.

In the High Court case of Secretary of State for Business Innovation And Skills v PAG Management Services Ltd [2015] PAG Management Services Limited (“PAG Management”) was incorporated to manage and coordinate a NNDR mitigation scheme to exploit this exemption for the benefit of associated companies in its Group and third party clients.

The scheme operated as follows:

1 PAG Management incorporated a special purpose vehicle (“SPV”);

2 PAG Management’s client companies immediately granted leases of the vacant properties to the SPV;

3 The leases were outside the business tenancy protection given by the Landlord and Tenant Act 1954. There was no premium. Usually they were for a 3 year term at a rent of £1 per annum terminable on 7 days’ notice. A director of one of the major scheme users, recognised this was “unfeasibly short” for a business tenant in actual occupation;

4 At the same time as the leases were granted the landlord waived the right to receive sums under the leases;

5 At the same time as the leases were granted the SPVs were placed in members’ voluntary liquidation. This was possible because the landlords’ waiver enabled the directors of the SPVs to make a statutory declaration of solvency;

6 The SPVs were now exempt from NNDR as companies in members’ voluntary winding up;

7 In each case PAG Management’s client company (the landlord) was not in occupation of the hereditament. The existence of the lease precluded its right to occupy;

8 The members’ voluntary liquidation proceeded slowly;

9 Under a fee agreement the Landlord paid PAG Management a percentage (15% – 40%) of the NNDR saved at a result of the lease being in place; and

10 The landlord refurbished and/or marketed the property. If a tenant was found the lease to the SPV was terminated and the new tenant took occupation, without any “empty rates” having been paid in the meanwhile.

The Secretary of State sought the winding up of PAG Management on a number of grounds. The successful one’s were an amalgam of “abuse of the insolvency legislation” and “lack of commercial probity having regard to the elements of the scheme”.

The court said the business of PAG Management necessarily involved:

– the creation of companies which existed for no purpose other than immediately going into liquidation.

– the creation of assets for no purpose other than their being held by those companies in liquidation but recoverable by the freeholder if the freeholder could turn them to advantage;

– PAG Management making arrangements for effective control over the liquidations to facilitate the maintenance in being of those assets; and

– the exercise of that control to secure that the liquidations continue rather than get concluded to shelter the assets so that PAG Management might earn fees.

This ran counter to the true purpose of liquidation which was the collection, realisation and distribution of assets in satisfaction of the claims of creditors and the entitlements of members.

Any adjustments legislation made to third party rights (including tax exemptions) were made to achieve that purpose.

There was a clear public interest in ensuring that the real purpose of liquidations was not subverted by treating a company in liquidation as a shelter (and seeking to prolong its continuation as such).

This misuse of the insolvency legislation demonstrated a lack of commercial probity. It its own way it also “subvert[s] the proper functioning of the law and procedures of bankruptcy”.

The business of PAG Management involved creating artificial leases incorporating elements of pretence, and the use of placemen to distance PAG Management’s owners and managers from the liquidation process. This suggested an awareness that necessary elements of PAG Management’s business might be thought improper and have to be disguised. These elements supported the court’s holding that PAG’s business lacked commercial probity.

PAG Management itself was an active and solvent business. That business involved the promotion of an NNDR mitigation scheme. Of itself the promotion of tax mitigation schemes was not an inherently objectionable activity.

But in the course of so doing:

– it used artificial leases having no commercial reality and containing some terms which were mere pretences;

– having procured that the companies it had created entered liquidation, it had delayed appointing new officeholders.

These would not of themselves be of sufficient weight to warrant a winding up. But PAG Management’s business model involved a misuse of the insolvency legislation and it was just and equitable to wind up the company. The court should exercise its discretion conferred by 124A of the insolvency Act 1986 to wind the company up.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Construction: performance bond could be replaced by payment into court

What if a construction contract requires the contracting party to provide the Employer with a performance bond but bond providers are unwilling to supply that bond?

Does the court have any alternative to ordering specific performance of an obligation which has turned out to be impossible to fulfil?

The reason why the original performance proves impossible is often that the contracting party does not have the property or other rights it needs to perform.

Old cases show that where there is an obligation between the parties and it proves impossible to perform it when the time comes for it to be performed, then, if specific performance would otherwise have been ordered by the court, the court will seek to order different specific performance so as to provide the customer with equivalent rights by replacing the performance originally contracted for with other performance.

The High Court case of Liberty Mercian Ltd v Cuddy Civil Engineering Ltd & Anor [2014] was the latest chapter in a long running litigation and that was very much the scenario here.

It would have been possible for Cuddy Civil Engineering Ltd (“CCEL”) to provide a Liberty with a performance bond had it responded to Liberty’s request to produce one during the course of the construction project. The main difficulty in obtaining it now arose because of the subsequent termination of the construction contract and underlying disputes between the parties.

The court ordered that CCEL should pay the sum of £420,000 into court as substituted performance for the provision of a performance bond on terms approximating to the terms of the performance bond CCEL had originally contracted to provide.

In addition there was Quantum, an insolvent subcontractor. Quantum had since been dissolved, but were capable of being restored to the register of companies.

In the construction contract CCEL had contracted to provide Liberty with a warranty from Quantum.

Here, the court ruled it appropriate to grant specific performance, against CCEL, to enforce that obligation.

This was because there was evidence that any such warranty might nevertheless be backed by professional indemnity insurance covering Quantum. So a warranty from Quantum would not necessarily have been useless.

This blog has been posted out of general interest. It does not remove the need to get bespoke legal advice in individual cases.

Mortgagee could enforce mortgage just to pressurise

If a lender is enforcing a mortgage it should do so to recover it’s debt. Usually this will be by selling or letting the property.

It cannot do so for a collateral purpose.

Most mortgages entitle a lender to recover, also, the costs it incurs in enforcing the mortgage.

In The Co-Operative Bank Plc v Phillips (2014) the bank had a legal charge which stood second to Barclays Bank’s first mortgages over the properties.

The Co-Operative Bank Plc (“Coop”) had no realistic chance, or therefore intention, of recovering the borrower’s indebtedness by selling or leasing the properties.

It withdrew the enforcement proceedings.

Mr Phillips claimed the bank had merely brought the proceedings to frighten family members into paying. Indeed his daughter had raised £50,000 to pay to the bank. He said this was an invalid collateral purpose entitling him to recoup his costs from the bank on the much more generous “indemnity basis”.

The High Court took a broader view. Whilst there was no prospect, or intention, of the bank recouping itself by a sale or letting of the properties, it was quite entitled to take proceedings to bring pressure on the family to pay money to the bank. The bank was merely seeking to get its money back, which was the whole purpose of mortgages. So Mr Phillips’ claim to indemnity costs failed.

Nevertheless, as there was no realistic prospect of a sale or letting, the legal costs the bank had caused to be incurred by enforcing the charge were not “properly incurred” as the legal charge’s cost recoupment clause had stipulated. This may seem strange to some, given the court’s earlier ruling that the proceedings were a legitimate tactic to enforce the legal charge’s purpose of getting the money back.

As such the bank was neither entitled to recoup it’s own legal outlay through the legal charge, nor was it entitled to recoup, through the legal charge, the legal costs the court had awarded Mr Phillips against the bank when the bank withdrew its proceedings against him.

This blog has been posted out of general interest. It does not remove the need to get bespoke legal advice in individual cases.

Zurich insurance claim survived accepting insolvent developer’s repudiation

In Bache & Ors v Zurich Insurance Plc [2014] the new property buyers benefited from an insurance policy which said:

“We will pay where, due to the developer’s bankruptcy, liquidation or fraud, the developer fails to complete the construction of the new home in accordance with the requirements and the buyer loses a deposit paid to the developer under the terms of the purchase contract for the new home, we will at our option

(a) Pay the reasonable cost of completing the home to the original specification; or

(b) Pay to the buyer the amount of any such lost deposit.”

The Claimants treated the non-commencement and non-completion of Block A as repudiatory and sought recovery of their deposits.

Zurich refused to pay out because the vendor was in administration and not yet in liquidation. Though it did later go into liquidation.

Looking at the commercial purpose underlying the insurance the High Court declined to accept as significant a temporal difference between those purchasers, such as the Claimants, who treated the non-commencement and non-completion of Block A as repudiatory, and those purchasers who did not do so but simply waited until the liquidation.

Zurich had paid and would pay out on the latter. This implied that the timing was important. However, the court rejected this as a distinction without a commercial difference.

The reality was that the construction project was never going to be completed by the vendor – particularly during the recession. There was no obvious or logical reason why there should be a distinction between the two types of purchaser i.e. the purchaser who was prepared to wait or who could not be bothered to do anything about the failure to complete the work and the purchaser who felt that he or she could not wait, possibly, for a very long time.

A purchaser in the latter category could only try to secure the recovery of his or her deposit by accepting any repudiation on the part of the developer vendor.

The commercial reality, envisaged as at the date of the insurance policies in question, was that the purchasers’ right to secure the return, by the vendor, to the purchasers of the deposits would only arise on either a repudiatory failure by the vendor to start or complete the development, or a refusal or inability on the part of the vendor to complete the long leases.

In practice the latter case would only arise where the flat construction had been substantially completed. So the parties to the policy must be taken to have foreseen the possibility of the deposits being recoverable by the purchasers from the vendor if the latter had repudiated the agreements for lease by being unable or unwilling to proceed with construction of the flats.

Furthermore the policy wording had to be construed in this way to enable it to fulfill its commercial purpose for it would be relatively uncommon that the formal bankruptcy or liquidation caused the developer’s inability to complete the construction. Mostly the developer’s inability to complete will be the actual or impending insolvency of the developer which will lead to either a creditor or lender or the developer itself putting the developer into liquidation.

Whilst the final liquidation of the developer would finally rule out any theoretical possibility of the developer actually completing the development, the underlying cause of the failure to complete the development would be the actual or impending insolvency of the developer beforehand.

The court did accept that the insolvency of the vendor was not in itself an event which engaged the policy. The relevant section of the policy was not engaged unless and until there was a bankruptcy, liquidation (including dissolution) or fraud. Otherwise, there would have been no need to mention those contingencies.

However the fact that the insured purchasers have accepted a repudiation on the part of the developer vendor was not in any way a bar to recovery under the policy after liquidation had occurred because the failure of the developer “to complete the construction” was not reliant on their being “a subsisting contractual obligation”. That would require an unnecessary gloss on the word “fail” and in effect require the addition of words. The words: “the developer fails to complete the construction” meant simply that the developer did not complete the construction. It tied in with the Introduction to the policy which summarised the commercial purpose of the relevant part of the policy. If there was an ambiguity as to what “fails to” meant then it should be construed in favour of the insured.

The case would have been decided the same whether or not the developer was insolvent at the time of the acceptance of the repudiation.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Bankrupt son’s assets not shielded from creditors by trust

Property held by a bankrupt on trust for another person does not form part of the bankrupt’s assets that can be seized and sold by their trustee in bankruptcy for creditors.

In the absence of evidence to show a different interest, the starting point is that the beneficial interest in the assets is the same as the legal interest. The onus is on the person asserting the separation of legal and beneficial interests to prove it by convincing evidence.

If it’s alleged that the interest arises by way of a common intention trust, the whole of the circumstances must be looked at to determine whether such an interest exists, and (if relevant) the extent of it.

The necessary intention may be found from express words spoken or written, or by inference from the actions of the parties (as in the case of a resulting trust found on the basis of contribution to the purchase price).

But in deciding what inferences are to be drawn from conduct, the court must look at the relevant conduct as a whole.

In the High Court case of Thandi v Sands & Ors [2014] a son had become bankrupt in 2011. His father now alleged that the properties he owned were held by that son on bare trust for the father and so did not form part of the assets owned by the son beneficially as well as legally.

The father said that the son had executed a declaration of trust in his favour in 2003 to that effect.

Whilst the court accepted that the father had provided all or substantially all the finance for buying the initial properties, the court found that the declaration of trust had only been executed in 2006.

The court was wary of the parties’ evidence of their intentions as given in court regarding it as self serving evidence of subjective intention to substantiate a trust that they thought would assist them to keep the family assets away from the son’s creditors.

The most reliable evidence of the father and son’s actual intentions was what could be inferred from what they actually did. Whilst the father chose to have the properties all transferred to, or purchased in the name of his son, the son holding them on trust was by no means the only possible intention, particularly in the context of the acquisition and management of family assets and family wealth.

It was equally possible that the father had intended to build up a portfolio of assets that his son would own, or that would be regarded as assets of the family to be dealt with in future as they might agree or as the father might secure using his influence as head of the household.

Neither such arrangement would have given rise to a trust in the father’s favour.

The contemporary objective evidence clearly showed that all the properties were, from purchase, treated as belonging to the son beneficially.

They were presented in that way to third parties whenever the true beneficial ownership might be relevant. Those third parties included various mortgage companies he applied to with statements of his assets, income or status as a sole trader. In particular, the major applications to Mortgage Express and Nationwide were on that basis. Also his tax returns were consistent only with his being the beneficial owner of the income arising from those properties, and therefore with him and not his father being the beneficial owner of those properties.

No trust was recorded on the title of any of the properties, nor was there any evidence that any of the solicitors were told of any trust at the time they were bought.

So the assets were not held on trust for the father and were owned by the son beneficially as well as legally. As such they vested in the trustee in bankruptcy and were available to that trustee to sell to pay the proceeds to the secured and unsecured creditors respectively.

This blog has been posted out of general interest. It does not remove the need to get bespoke legal advice in individual cases.

Landlord liable for rates in respect of disclaimed lease

Under section 65(1) of the Local Government Finance Act 1988 (“the 1988 Act”) the owner of a hereditament or land is the person “entitled to possession of it.” So whether someone is liable for the rates during any relevant period depends on whether it was entitled to immediate possession of the whole Property during that period.

In the High Court Appeal case of Schroder Exempt Property Unit Trust & Anor v Birmingham City Council [2014] the Appellants were the freeholders of the Property. They granted a 10 year lease of the Property to Woodward Foodservice Limited (“WFL”). The lease required the tenant to pay all outgoings including rates. Clause 10.1 of the lease gave the Appellants a landlord’s right of re-entry in the event of default, which was to include a failure to pay rent or entering administration or receivership.

WFL assigned the lease to W F Group Limited, with the Appellants’ consent, but it guaranteed W F Group Limited’s obligations to the Appellants under the lease in an Authorised Guarantee Agreement.

W F Group Limited went into liquidation, and were wound up on 20 April 2011. The liquidator disclaimed all interest in the Property on the same day, under section 178 of the Insolvency Act 1986 (“the 1986 Act”).

The Appellants continued to call on WFL, as guarantor under the Authorised Guarantee Agreement, to make good the default of W F Group Limited in paying the rent, and WFL had made the payments demanded. The Appellants had not exercised any right to go into physical possession of the Property.

The Council demanded rates from the Appellants for the period after the disclaimer. These were not paid; and so the Council got a liability order for approximately £590,000. The Appellants now challenged this.

After the assignment of the lease and before the disclaimer, W F Group Limited was the tenant and the person entitled to immediate possession. After the disclaimer, the lease ceased to exist and the Appellants’ reversion was brought forward. So, the Appellants as freeholders became entitled to immediate possession.

But WFL remained liable to make good the defaults of the former tenant, not because the lease continued in any respect, but because section 178(4) of the 1986 Act operates to ensure that in the event of the tenant’s default the guarantor’s covenant continues and the third party guarantor remains contractually liable to the landlord.

So, the guarantor must continue to make good the former tenant’s default in paying rent under the disclaimed lease until the landlord exercises his right to immediate possession by physically taking possession.

In summary:

i) WFL did not “pay rent under the terms of the lease” – the lease had gone – it made payments under its contractual covenants to make good the former tenant’s default (as bound to do under the guarantee). The lease was deemed to continue for that sole purpose.

ii) When the lease was disclaimed, the Appellants’ right of re-entry under the lease disappeared with the rest of the lease.

iii) The Appellants right to immediate possession arose on disclaimer, the later re-taking of physical possession merely exercised that existing right.

iv) The respective positions of the Appellants and WFL differed. The Appellant had an immediate right to possession, which they may or may not exercise.

WFL did not have an immediate right to possession. Though, it could exercise its statutory right under section 19 of the Landlord & Tenant (Covenants) Act 1995 to call for a lease, which lease would give it an immediate right to possession, at the expense of the right currently “enjoyed” by the Landlord.

So the Appellant was the owner within the meaning of sections 45(1)(b) and 65(1) of the 1988 Act, and therefore liable for non-occupied rates for the Property.

In the High Court case of RVB Investments Ltd v Bibby [2013], a landlord (RVB) sued the guarantor under a disclaimed lease and was successful in its claim for the business rates in respect of the Property. So the presence of a guarantor may enable the landlord to recoup outlay on rates to the local authority.

This blog has been posted as a matter of general interest. It does not remove the need to get bespoke legal advice in individual cases.

No right to further payment clause did not oust adjudication, arbitration or litigation

The ACA Standard Form of Contract for Term Partnering 2005, amended in 2008, was specifically devised for situations where one party is required to carry out a series of relatively minor but repetitive or cyclical tasks over a substantial period.

The contract provided that it would terminate automatically if either party became insolvent or was placed into administration or liquidation.

Is the insolvent Service Provider entitled to any further payment for work carried out, and if so to what extent?

In such cases, clause 13.9 of the contract provides that the Client “… shall not be bound to make any further payment” to the Service Provider.

In Lovell Partnerships Ltd & Anor v Merton Priory Homes [2014] the Claimant was employed to carry out building, repair or related services for a local authority. The Claimant was placed into administration on 8 September 2010.

Merton said that, following a termination caused by insolvency, then provided there was no bad faith, any loss lay where it fell and the Claimant was not entitled to any further payment whatsoever.

However, the court found that the words “any further payment” in clause 13.9 had been a reference to a payment that could arise as of right under the contractual machinery of clause 7 once certain conditions were fulfilled.

It upheld the Claimant’s case, that clause 13.9 suspended the Claimant’s entitlement to any further payment to which they, as Service Provider, would or might otherwise be entitled under that contractual machinery.

So on the insolvency of the Claimant, Merton did not have to make any further payment to the Claimant under clause 7.

However, the clause did not prevent the Service Provider from pursuing separately, by way of adjudication, arbitration or litigation, any rights or obligations that had accrued to it by the date of termination. But, in any such adjudication, arbitration or litigation Merton would be entitled to set off against the Claimant’s claim any cross claim, for example, for damages for defective work.

The explanation for this was that Clauses 13.8 and 13.9 had to be read together. They covered different insolvency situations. Clause 13.8 conferred a right to swift payment under clause 7 where it was the Client, and not the Service Provider, who was insolvent. On the other hand Clause 13.9, was concerned with the Service Provider becoming insolvent.

It provided that the Service Provider should not benefit from the swift payment machinery under clause 7 because that machinery gave the Client no further right of set-off following the prior issue of its valuation.

That would have been very unsatisfactory in circumstances where the other party was insolvent as it would have served only to swell the pot for other unsecured creditors who would thereby be being “preferred” to the Client.

In some cases there may be no commercial objection to a contractual scheme that leaves a loss to lie where it fell in the event of one party’s insolvency.

But it was not obvious that the parties would have intended that approach to apply to accrued rights to sums which had fallen due for payment before the insolvency occurred but which had remained unpaid.

This blog has been posted out of general interest. It does not remove the need to get bespoke legal advice in individual cases.

Fruitless unsecured member claim in LLP administration insufficient to put administrators through examination

In Berntsen & Anor v Tait & Anor [2014] the administrators of Coniston Hotel (Kent) LLP (the “LLP”) sought an order that the Applicants’ proceedings be struck out and that the Applicants’ claim be dismissed.

The Applicants were the LLP’s members. The LLP’s hotel, the Coniston Hotel, at Sittingbourne needed further funds to enable it to complete works and to open for business. The LLP’s Bank, National Westminster Bank PLC, was not prepared to lend more without personal guarantees from one or both Members. The Members would not give them.

The Members put the LLP in Administration with the Respondents appointed as Administrators.

The Administrators sold the Hotel to West Register Limited, an associated company of the Bank.

The Claimants alleged that the Hotel was worth in excess of £7 million and had been sold for £4.25 million, which was an undervalue. They could not criticise anything specific in the marketing and sale process itself but said that the marketing process was a “sham” leading to a sale to a predetermined purchaser, which for non specific reasons, was part of a conspiracy to defraud by members of the Bank, the Valuer and the Administrators. Those who suffered from the alleged conspiracy were the LLP and, indirectly, therefore, the Members.

Rejecting the undervalue and conspiracy claims as “unviable”, and ordering the proceedings to be struck out, the court said the costs would have been significant and Members had evidenced an inability to pay the Respondents’ costs.

The final allegation, under paragraph 75 of Schedule B1 to the Insolvency Act 1986, was that the Administrators had handled the Administration badly. But their pleading had not identified any of that mishandling. However in order for the Members in this case to bring the claim, whether in the capacity of Members or as creditors, they had to show they had a “sufficient interest” in the remedy which was being sought. Here that remedy was that the Administrators pay compensation to the LLP, which might mean the Administrators remitting some or all of their fees (£130,000). However those fees could only be distributed, first to the secured creditors i.e. the Bank. As the Bank was owed over £1 million any such recovery by the LLP would be for the exclusive benefit of that secured creditor. Nothing would be paid to unsecured creditors. or the Members. So the Members did not have the necessary pecuniary interest in the remedy they were seeking. to qualify to make that claim. Their human interest in seeing the Administrators subjected to a trial did not give them standing to bring an examination claim. So the court dismissed that claim also.

This blog has been posted as a matter of general interest. It does not remove the need to get bespoke legal advice in individual cases.

The Game is Up for Insolvency Practitioners -v- Landlords

If rent is payable in arrear and the tenant company goes into administration or liquidation the administrator or liquidator must pay the rent as an expense of the liquidation or administration for any period during which he retains possession of the property for the insolvency work. If appropriate that liability will be apportioned by time so as to reflect, the amount of the benefit.

Where in contrast the rent is payable in advance , its been a vexed question whether part of an instalment of rent payable in advance can be treated as an administrators’ expense payable by administrators in the event of insolvency.

Two first instance decisions decided that it could not.

In Goldacre (Offices) Ltd v Nortel Networks UK Ltd [2009] it was decided that if a quarter’s rent (payable in advance) fell due during a period in which administrators kept the property for the purposes of the administration, the whole of the quarter’s rent was payable as an administration expense even if the administrators gave up occupation later in the same quarter.

In Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd [2012] it was decided that where a quarter’s rent payable in advance fell due before administration none of it was payable as an administration expense even if the administrators kept possession for the administration. The rent was merely provable as a debt in the administration.

As a result of those decisions it had become more common for companies to enter administration on the day after a quarter day, so avoiding the administrators’ liability to pay full rent even if they kept possession of the leasehold property.

So where the business was sold quickly to a phoenix company that company could effectively trade for the first three months with no rent having to be paid to the landlord.

It might be thought that if landlords managed to establish that part of an instalment of rent payable in advance could be treated as an administration expense, then the same principle should work both ways. On that basis, if rent payable in advance fell due during the period when the administrators kept possession, it would also have to be apportioned in favour of the landlord to the extent that they remained in possession during the quarter.

In Pillar Denton Ltd & Ors v Jervis & Ors [2014] one of the Game group of companies (“GSGL”) was the tenant of many hundreds of leasehold retail properties from which the group traded. On 25 March 2012 approximately £10 million of rent became due under the various leases. It went unpaid. The group went into administration on the next day.

Some stores were closed down immediately, but others stores continued trading continued in other stores and they were quickly sold to Game Retail Ltd. Approximately £3 million of the March rent remained outstanding in respect of those stores.

The Court of Appeal decided that rent payable in advance should be dealt with in the same way as rent payable in arrear so that the administrators must pay rent at the rate payable under the leases for the duration of their keeping possession of the let property for the benefit of the winding up or administration. They said that the rent is to be treated as accruing from day to day.

Those payments would be payable as expenses of the winding up or administration.

The extent of the period would be a question of fact in each case and not just decided according to which rent days occur before, during or after that period.

This blog has been posted out of general interest and it does not remove the need to get proper legal advice in individual cases.