Hindcastle Ltd v Barbara Attenborough Associates Ltd
|Lord Keith of Kinkel,Lord Griffiths,Lord Browne-Wilkinson,Lord Lloyd of Berwick,Lord Nicholls of Birkenhead
|22 February 1996
|Judgment citation (vLex)
| UKHL J0222-2
|House of Lords
 UKHL J0222-2
Lord Keith of Kinkel
Lord Lloyd of Berwick
Lord Nicholls of Birkenhead
House of Lords
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT IN THE CAUSE
For the reasons given in the speech to be delivered by my noble and learned friend Lord Nicholls of Birkenhead, which I have read in draft and with which I agree, I would dismiss this appeal.
I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Nicholls of Birkenhead, for the reasons he gives I would dismiss this appeal.
For the reasons given in the speech of my noble and learned friend Lord Nicholls of Birkenhead I too would dismiss this appeal.
I agree that the appeal should be dismissed for the reasons to be given by my noble and learned friend, Lord Nicholls of Birkenhead. I add a short speech of my own only because I have found the case to be one of some difficulty.
At an early stage of the hearing I formed the view that , and , could not well stand together, despite Sir Robert Megarry V.-C.'s attempt to reconcile the decisions in , and Millett L.J.'s further attempt at reconciliation, on rather different grounds, in the court below. If the decisions cannot be reconciled, the question becomes which of the two decisions should be preferred.
For much of the hearing I was attracted by Mr. Oliver's argument that the reasoning in was the more convincing. The key feature of that decision, as Mr. Simon Goldblatt Q.C. pointed out in his remarkable extempore judgment at first instance, is that both A. L. Smith M.R. and Cotton L.J. regarded the case as being concluded by the passage which the former quoted from the judgment of Lindley L.J. in :
"Now the operation of those clauses in the simple case of a lease is not very difficult to ascertain. If there is nothing more than a lease, and the lessee becomes bankrupt, the disclaimer determines his interest in the lease under subsection 2. He gets rid of all his liabilities, and he loses all his rights by virtue of the disclaimer. There is no need of any provision for vesting the property in the landlord, but the natural and legal effect of subsection 2 is that the reversion will become accelerated."
A. L. Smith M.R. put the point as follows in :
"In other words, the effect of the subsection is that in such a case the lease is put an end to altogether as between the lessor and the bankrupt lessee, the intention being that the bankrupt shall be altogether free from any obligation arising under or in relation to it; and, consequently, no other person being interested in the lease, it ceases to exist. As the lease is determined, no rent can, subsequently to the disclaimer, become due under it: the reversion on the term is in effect accelerated; and the lessor gets back his property, and can let it to another tenant for ought I know, at a higher rent."
A.L. Smith M.R. then went on to consider the position of a guarantor for the original lessee. He gave two reasons for rejecting the argument that the guarantor remained liable, even though no more rent could fall due from the bankrupt lessee. The first depended on the need to release the bankrupt from liability to indemnify the guarantor. I do not find that ground convincing for the reasons to be given by my noble and learned friend. Lord Nicholls. But the second ground was a straightforward application of the ordinary law of principal and surety. If the lease has ceased to exist, to use the language of A. L. Smith M.R., how could the surety be liable for rent which has not yet fallen due? A surety is normally only liable for the defaults of the principal debtor. But the lessee cannot make default after disclaimer, for he is no longer liable to pay the rent. The lease has come to an end by operation of law.
Collins L.J. said, at p. 666:
"I think that what the Legislature intended in such a case as this was that the lease should be determined by the disclaimer as between the lessor and the lessee, and therefore incidentally as regards the surety, with the result that the bankrupt lessee is discharged and incidentally the surety also …"
A little later he said:
"If disclaimer under the present law operates in the language of Lindley L.J. to 'accelerate the reversion', the condition of the surety's liability in this case must necessarily fail …"
Perhaps the clearest exposition of the point is to be found in the short judgment of Romer L.J. at p. 667. He regarded the release of the guarantor as "necessary for the purpose of releasing the bankrupt" because that is the inevitable result in law of bringing the lease to an end. If the lease has ceased to exist as between lessor and lessee, it cannot be treated as if it continued to exist for the purpose of making the surety liable. So to hold would be to impose on the surety a different kind of liability.
"For the defendant has agreed to be liable as surety for the payment of rent by a lessee under a lease: and yet the appellant seeks to make him liable to pay money, though there is no rent payable, no lease, and no person in the position of lessee."
The next step in Mr. Oliver's argument was that if the surety for the original lessee is released by a disclaimer on the part of the original lessee's trustee in bankruptcy, the same must apply where the lease has been assigned, and it is the assignee who has become bankrupt. If the assignee's trustee in bankruptcy disclaims the lease, it ceases to exist just as surely as if it is disclaimed by the trustee in bankruptcy of the original lessee; and if the lease has ceased to exist, the assignee's guarantor must necessarily also be released under the ordinary law of principal and surety, since to hold him liable would be to impose on him a different kind of liability.
Mr. Oliver accepted that it would be possible to devise a form of guarantee under which the surety would undertake an independent liability in the event of disclaimer. Clause 5(2) in the licence dated 22 April 1987 is just such a provision. But it is clear from the language of clause 5(2) that the parties contemplated such independent liability as arising under a new lease on the same terms as the old, which was to take effect on the date of the disclaimer, and was to be delivered to the lessor after execution by the surety. It is difficult to see how a new lease could be brought into existence unless the old lease has ceased to exist.
Finally, Mr. Oliver returned to consider the position of the original lessee, where it is the assignee's trustee in bankruptcy who disclaims. Mr. Oliver argued that the original lessee's position must be the same as that of the surety of the bankrupt assignee. If the lease has ceased to exist, it must have ceased to exist for all purposes. The original lessee cannot be liable for rent if there is no lease. By the same token, the original lessee's guarantor, and the guarantor of any intermediate assignee would also be released.
If Mr. Oliver's argument be correct, it would follow that was wrongly decided. Alternatively, Mr. Oliver sought to distinguish . on the ground that section 23 of the Bankruptcy Act 1869 (32 & 33 Vict. c. 71) is in very different terms from section 55 of the Bankruptcy Act 1883 (46 & 47 Vict. c. 52), as the Court of Appeal in were at pains to emphasise.
It will be apparent from this inadequate account of Mr. Oliver's argument that it all depends on his underlying proposition that disclaimer has a dual effect. It determines the rights, interests and liabilities of the bankrupt tenant. But it also determines the leasehold estate, not only in the case of the original lessee's, bankruptcy, but alternately any subsequent assignee becomes bankrupt. The question is thus whether this dual effect is indeed the consequence of section 178(4) of the Insolvency Act 1986. In order to answer this question it helps to go back to the language of the Act of 1869.
Section 23 of the Act of 1869 provided:
"When any property of the bankrupt acquired by the trustee under this Act consists of land of any tenure burdened with onerous covenants … the trustee … may … disclaim such property, and upon the execution of such disclaimer the property disclaimed shall … if the same is a lease be deemed to have been surrendered on the same date …"
In Ex parte Walton: In re Lew . Sir Georse Jessell M.R. held that the words "deemed to be surrendered" were to be given a narrow construction. He said, at p. 754:
"Therefore it seems to me that the section must be read as meaning that the property is to be disclaimed inter se. so as not to interfere with the rights of third parties, and only for the benefit of the bankrupt and his estate; so far, that is, as respect any rights and liabilities between the trustee and the person who is entitled to the benefit of those obligations which attach to the property; so far only as is necessary in order to relieve the bankrupt and his estate and the trustee from liability."
James L.J. said, at pp. 756–757:
"That being the sole object of the statute, it appears to me to be legitimate to say, that, when the statute says that a lease, which was never surrendered in fact (a true surrender requiring the consent...
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