Goldacre (Offices) Ltd v Nortel Networks UK Ltd ((in Administration))
| Jurisdiction | England & Wales |
| Judge | JUDGE PURLE |
| Judgment Date | 07 December 2009 |
| Neutral Citation | [2009] EWHC 3389 (Ch) |
| Court | Chancery Division |
| Date | 07 December 2009 |
| Docket Number | Case No.536 of 2009 |
[2009] EWHC 3389 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
Before: His Honour Judge Purle Qc
(Sitting as a High Court Judge)
Case No.536 of 2009
MR. S. JOURDAN QC and MISS. B. LEAHY (instructed by Olswang LLP) appeared on behalf of the Applicant.
MR. W. TROWER QC and MR. D. ALLISON (instructed by Herbert Smith) appeared on behalf of the Respondent.
In this case I have to decide whether the rent that is soon to fall due, and future rent thereafter, in respect of property held by the respondent company (now in administration) in Harlow is payable as an expense of the administration. There are two long leases, both pre-dating the date of the administration. The premises in question have, since the date of the administration, been used to an extent by the administrators for the more efficient conduct of the administration and rent has been paid to date, albeit late so far as the last September quarter was concerned. It is accepted on behalf of the administrators that interest in respect of that late payment will be paid. The real issue therefore is a future one, but the problem is a pressing one because the commercial needs of the applicant, who is the landlord of the premises in question, require an immediate decision. Moreover, the administrators wish to know where they stand, as that may inform their future conduct of the administration. I would ideally have wished to take more time to prepare this judgment, but the parties expressed a preference for speed of decision rather than perfection of language. I have nevertheless reached a clear view and have, in approving the transcript, taken the opportunity of refining my reasoning.
Although the administrators are using part of the premises in respect of both of the demises in question, they are only using part and it is a relatively small part. There are, in addition, sub-tenants in respect of other parts. As regards those sub-tenants, notices have been served under section 6 of the Law of Distress Amendment Act 1908, having the effect of transferring the company's right to receive rent to the landlord. As it happens, some rents are still coming in to the administrators, as I understand the position, but they are passing those over to the landlord. In those circumstances, it cannot be said that the company in administration is, in any realistic sense, in receipt of rents and profits, so that possession of the premises in that sense can be ignored. What I am concerned with is the relative minor use that the administrators are making of the properties in question.
Mr. Jourdan, for the applicant landlord, submits that upon established authority once the administrators decide, as they have done, to continue to use any part of the properties for the beneficial outcome of the administration, they are liable to pay the rent as it falls due in full as an administration expense. He says that this follows nowadays from the insolvency rules that were adopted following the enactment of the Enterprise Act 2000, and that the previous decision of Blackburne J in In Re Salmet International Ltd. [2001] BCC 796 should not be followed in relation to this administration, which is governed by the Insolvency Rules 1986 as now amended. He prays in aid the more recent decision of David Richards J in Exeter City Council v Bairstow [2007] 4 All ER 437; [2007] 2 BCLC 455; [2007] BCC 236. In that case David Richards J, after a careful analysis both of the rules and of the previous decision of the House of Lords in In Re Toshoku Finance UK Plc [2002] 1 WLR 671 (which related to a company in liquidation) held that the expenses regime set out in the rules is mandatory in the case of administrations as well as liquidations. David Richards J was struck—in my judgment, rightly so—by the closeness of the wording between what is now rule 2.67 (applicable to administrations) with the wording in rule 4.218 considered by the House of Lords in Toshoku. He held, in accordance with his ruling, that rates in an administration are payable as an administration expense. He also expressed the view that that was so in respect of unoccupied as well as occupied property, though that is no longer so as a result of subsequent delegated legislation which came into effect on 1 st April 2008. The House of Lords in Toshoku held that corporation tax was payable in a liquidation as a liquidation expense, as it was made necessary by statutory enactment, notwithstanding that the income which was taxed was only deemed income and not income in fact received by the company in liquidation.
I agree with Mr. Jourdan's submission that the matter is now to be considered exclusively by reference to the rules and that if the rental liability falls within the rules, then that is payable as a matter of mandatory obligation, not as a matter of discretion, either on the part of the administrators or on the part of the court.
Toshoku , though a case on corporation tax, considered what is referred to sometimes as the salvage principle, sometimes as the Lundy Granite principle, and sometimes as the liquidation expenses principle. The main speech in the House of Lords was given by Lord Hoffmann, all other four Law Lords agreeing, though in Lord Hobhouse's case with uncharacteristic diffidence. Lord Hoffmann, in a masterly analysis of the previous law, traced the history of the Lundy Granite principle (so named after In Re Lundy Granite Co., ex p. Heavan (1871) 6 Ch App 462). Under that principle, liquidators are held liable to pay rent as a liquidation expense where the liquidators make use of or retain, for the benefit of the liquidation, possession of leasehold premises. Express reference was made and approval given to the judgment of Lindley LJ (a judge of at least as great eminence in this field as Lord Hoffmann) in In re Oak Pitts Colliery Co., (1882) 21 Ch D 322. At para.26 of his speech, Lord Hoffmann referred to the following citation of Lindley LJ at p 330:
“When the liquidator retains property for the purpose of advantageously disposing of it, or when he continues to use it, the rent of it ought to be regarded as a debt contracted for the purposes of winding up the company, and ought to be paid in full like any other debt or expense properly incurred by the liquidators for the same purpose…”
Lord Hoffmann continued in para.27:
“My Lords, it is important to notice Lindley LJ was not saying that the liability to pay rent had been incurred as an expense of the winding up. It plainly had not. The liability had been incurred by the company before the winding up for the whole term of the lease. Lindley LJ was saying that it would be just and equitable, in the circumstances to which he refers, to treat the rent liability as if it were an expense of the winding up and to accord it the same priority.”
That principle (if it applies in administrations at all) plainly applies to the present case and has effectively been acknowledged as applicable by the payment of rent hitherto. As Lord Hoffmann went on to explain, although the rule emerged historically in the context of the exercise of a discretion (whether or not to allow forfeiture proceedings to be brought or distress to be levied) it has evolved into a principle which, as he put it in para.38, “does not involve an exercise of discretion any more than the application of any other legal principle to the particular facts of the case”. He held that the rules—and in that case he was concerned with rule 4.218—applicable to liquidations were to be construed to include debts which, under the Lundy Granite principle, were deemed to be expenses of the liquidation, and concluded that ordinarily this meant that debts such as rent under a lease would be treated as coming within para.(a) of rule 4.218(1), but that the principle might possibly enlarge the scope of other paragraphs as well.
Paragraph (a), as it then stood, referred to “expenses properly chargeable or incurred by the official receiver or the liquidator in preserving, realising or getting in any of the assets of the company”. In a liquidation, therefore, upon the authority of Lord Hoffmann and the remainder of the House of Lords, rent, where the Lundy Granite principle applies, will ordinarily fall within (a) and will be payable mandatorily.
So far as administration is concerned, the relevant rule, as I have said, is rule 2.67(1). Two subparagraphs have been highlighted before me, (a) and ( f). 2.67(1) contains a list of expenses payable in the following order of priority: (a) refers to “expenses properly incurred by the administrator in performing his functions in the administration of the company”; (f) refers to “any necessary disbursements by the administrator in the course of the administration (including any expenses incurred by members of the creditors' committee or their representatives and allowed for by the administrator under rule 2.63, but not including any payment of corporation tax in circumstances referred to [in a later subparagraph which I need not consider]”. Given the closeness of the opening words of rule 4.218(1) (a) as it stood at the time of Toshoku (and indeed as the rule now stands, though the relevant part is now para.4.218(3) (a) (ii) and a number of other words have been added) to the opening words of rule 2.67(1) (a), my inclination would be to regard rent as falling within rule 2.67(1) (a). It seems to me that that subparagraph, were the matter free from authority, would be apt to refer to all of the expenses incurred by the...
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