Hindcastle Ltd v Barbara Attenborough Associates Ltd and Others
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE MILLETT,LORD JUSTICE ROSE,THE PRESIDENT |
| Judgment Date | 15 June 1994 |
| Judgment citation (vLex) | [1994] EWCA Civ J0615-5 |
| Court | Court of Appeal (Civil Division) |
| Date | 15 June 1994 |
| Docket Number | QBENI 93/1688/E |
[1994] EWCA Civ J0615-5
IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
(Mr. Simon Goldblatt QC)
Before: the President Lord Justice Rose Lord Justice Millett
QBENI 93/1688/E
MR. D OLIVER QC and MS C WALTON (Instructed by Messrs. Stallards, London EC1Y 4SE) appeared on behalf of the Appellants, Second and Third Defendants
MR. J ARKUSH (Instructed by Messrs. Chethams, London W1M 1DL) appeared on behalf of the Respondent
Wednesday, 15 June 1994
LORD JUSTICE MILLETTThis is an appeal with the leave of the Judge by the Second and Third Defendants from two Orders both dated 14 October 1993 of Mr. Simon Goldblatt QC sitting as a Deputy High Court Judge of the Queen's Bench Division whereby he gave summary judgment under RSC Ord.14 for arrears of rent due under a lease after the lessee had gone into insolvent liquidation and the liquidator had disclaimed the lease.
The Second Defendant is an intermediate assignee of the lease which entered into a direct contractual relationship with the lessor. The Third Defendant is a surety which guaranteed the contractual obligations of the Second Defendant. The First Defendant is the original lessee under the lease. The Deputy Judge gave judgment against all three Defendants, but the First Defendant, which I understand is now also in liquidation, has not appealed.
The question for decision is whether the disclaimer of a lease under section 178 of the Insolvency Act 1986 by the liquidator of a company which has taken an assignment of the lease operates to determine the liability of the original lessee and any surety for the original lessee, for the position of an intermediate assignee of the lease which has entered into direct contractual relationship with the lessor is indistinguishable from that of the original lessee. Although in form the appeal is an appeal from the decision of Mr. Simon Goldblatt QC, it is, in reality, an appeal fifteen years out of time from a decision of Sir Robert Megarry VC in 1979, and it has been argued by the same counsel who appeared for the unsuccessful party in that case.
The lease was granted on 20 October 1983 for a term of 20 years from 12 September 1983 at an initial rent of £13,626 per annum with periodic upwards only rent reviews. It was made between the Respondent as lessor and the First Defendant as original lessee. It was not assignable except with the consent of the lessor. In 1987 it was assigned to the Second Defendant pursuant to a Licence to Assign which contained a covenant on the part of the Second Defendant with the lessor to pay the rent and observe and perform the covenants in the lease during the remainder of the term thereby granted. The Third Defendant joined in the Licence to Assign in order to guarantee the performance of the obligations thereby undertaken by the Second Defendant. The obligations of the Third Defendant as surety were limited to expire after the end of ten years from the date of the lease.
In 1989 the Second Defendant assigned the lease to Prest Limited ("the Company"). The assignment was made with the lessor's consent. In 1990 the Company and the lessor agreed that the rent payable under the lease in accordance with the rent review provisions should thenceforth be £37,500 per annum. None of the Defendants took any part in the negotiations which led to the revised rent. On 31 October 1992 the Company went into creditors' voluntary liquidation. On 8 December 1992 the liquidator gave notice of disclaimer of the lease pursuant to section 178 of the Insolvency Act 1986. No one has applied for a vesting order under section 181 of the Act and the time limit for doing so prescribed by the Insolvency Rules has now expired, though it may of course be extended by the Court. Writs were issued by the lessor claiming arrears of rent in respect of different rental periods. The writs were issued on 28 January 1993 and 22 July 1993 respectively, and summary judgment in both actions was entered against all the Defendants following Mr. Goldblatt's judgment in November 1993.
The effect of a disclaimer by the liquidator of an insolvent company is laid down by section 178 of the Insolvency Act 1986, and in particular by subsections (4) and (6) thereof. Subsection (4) provides:
"A disclaimer under this section -
(a)operates so as to determine, as from the date of the disclaimer, the rights, interests, and liabilities of the company in or in respect of the property disclaimed; but
(b)does not, except so far as is necessary for the purpose of releasing the company from any liability, affect the rights or liabilities of any other person."
Subsection (6) provides:
"Any person sustaining loss of damage in consequence of the operation of a disclaimer under this section is deemed a creditor of the company to the extent of the loss or damage and accordingly may prove for the loss or damage in the winding up."
Provisions in identical terms are contained in section 315 of the Insolvency Act 1986 in relation to disclaimer by the trustee in bankruptcy of an individual bankrupt.
Provisions to the like effect have been contained in every Companies Act since the right to disclaim onerous property was first extended from personal to corporate insolvency by the Companies Act 1929, and in every Bankruptcy Act since the Bankruptcy Act 1883. The Insolvency Act 1986 introduced two changes primarily of a procedural character, though having some substantive effect. Before the Act the liquidator of an insolvent company needed the leave of the Court to disclaim in all cases, whereas a trustee in bankruptcy did not need such leave in most cases, and in particular did not need leave to disclaim a lease unless the bankrupt had sublet the premises or mortgaged the lease and the lessor, sublessee or mortgagee had objected to the disclaimer after being given notice thereof. The changes introduced by the 1986 Act brought the law and practice of disclaimer in corporate insolvency into line with that prevailing in personal bankruptcy. They were not without substantive effect, however, for the Court had normally refused leave to disclaim where this would prejudice the lessor by discharging a surety from liability. Under the 1986 Act, however, the lessor has no opportunity to object to the disclaimer taking effect.
Mr. Oliver QC, who appeared for the Second and Third Defendants, acknowledged that the changes introduced by the Insolvency Act 1986 did not affect the consequences of a disclaimer, which are laid down by section 178(4) and (6) in substantially the same terms as the corresponding provisions of the Bankruptcy Acts of 1883 and 1914. For ease of exposition I shall, throughout the rest of this judgment, refer to the relevant provisions of the earlier legislation by the numbers of the corresponding provisions in the Insolvency Act 1986, that is to say, subsection (4) or subsection (6).
The consequences of disclaimer of leasehold property have been considered by the Courts on a number of occasions. The leading authorities, which consist of one decision of the House of Lords on the effect of the Bankruptcy Act 1869 and one decision of this Court on the effect of the Bankruptcy Act 1883, established that there is a clear distinction between the case where the lease was still vested in the original lessee immediately before the disclaimer (which is not the present case), and the case where it is vested in an assignee of the original lessee (which is). The burden of Mr. Oliver's submissions was that there is no relevant distinction to be drawn between the position of a surety for the bankrupt original lessee and the original lessee with an unbroken chain of indemnity from the bankrupt assignee. Each of them is liable to the lessor and is entitled to be indemnified by the bankrupt's estate. I shall deal in turn with the two situations as they appear from the relevant authorities.
1. Lease vested in the original lessee
Disclaimer by the trustee in bankruptcy of the lessee determines the lease and the lessee's obligations thereunder, with the result that the liability of any surety for the lessee is necessarily discharged. This was decided in Stacey v. Hill [1901] 1 KB 660, a decision of this Court. Two grounds for the decision can be detected:
(i) No other person being interested in the lease, the determination of the lessee's rights and liabilities thereunder —including his right to possession —has the effect of determining the lease altogether and accelerating the reversion. The effect of determining the liability of the lessee is to discharge the surety, for the secondary liability of a surety cannot survive the extinction of the primary guaranteed debt.
(ii) Subsection (4)(b) does not have the effect of preserving the liability of the surety, because the existence of the surety's right of indemnity by the principal debtor makes it necessary to release the surety if the bankrupt's estate is to be released from liability.
Two points may be noticed. (1) The first and main ground for the decision, in which all three Lord Justices concurred, was that the determination of the lessee's rights and obligations had the effect of determining the lease. The lessee's right to possession being determined, and there being no one else with a similar right, there was no obstacle to the lessor's resumption of possession with a view to re-letting the property. Strictly speaking, it was unnecessary to decide that the lease was...
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