Re Atlantic Computer Systems Plc

JurisdictionEngland & Wales
CourtCourt of Appeal (Civil Division)
JudgeLORD JUSTICE NICHOLLS
Judgment Date25 July 1990
Judgment citation (vLex)[1990] EWCA Civ J0725-7
Docket Number90/0755
Date25 July 1990

[1990] EWCA Civ J0725-7

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF JUSTICE

CHANCERY DIVISION (COMPANIES COURT)

(MR. JUSTICE FERRIS)

Royal Courts of Justice.

Before:

Lord Justice Neill

Lord Justice Nicholls

Lord Justice Staughton

90/0755

(1) Aib Capital Markets Plc
(2) Allied Irish Banks Plc
(Applicants) Respondents
and
(1) Atlantic Computer Systems Plc
(2) John Francis Soden
(3) Richard Boys-Stones
(Respondents) Appellants
and
(1) Norwich Union Insurance Group (Equipment Leasing) Ltd.
(2) Norwich Union Equipment Finance Ltd.
(3) East Lease Limited
(4) Norwich Union Leasing Ltd.
(5) Norwich Union Finance (No. 3) Ltd
(Applicants) Respondents
and
(1) Atlantic Computer Systems plc
(2) John Francis Soden
(3) Richard Claude Boyes-Stones
(Respondents) Appellants

MR. MICHAEL CRYSTAL Q.C.. and MR. R. ADKIN (instructed by Messrs. Wilde Sapte) appeared on behalf of the (Allied Irish Bank companies) Respondents.

MR. MICHAEL CRYSTAL Q.C., MR. DAVID MABB and MR. MARK PHILLIPS (instructed by Messrs. Allen & Overy) appeared on behalf of the (Norwich Union companies) Respondents.

MR. PHILIP HESLOP Q.C., MR. GABRIEL MOSS Q.C., MR. VICTOR JOFFE and MR. ROBERT MILES (instructed by Messrs. Cameron Markby Hewitt) appeared on behalf of the (Company in administration and its Administrators) Appellants.

LORD JUSTICE NICHOLLS
1

This is the judgment of the court in a case which raises some important points concerning administrations under Part 2 of the Insolvency Act 1986. We shall need to add more detail at a later stage, but for the moment we can use a broad brush when setting out the essential facts. Atlantic Computer Systems plc, to which we shall refer as "the company", is the major operating company in the United Kingdom of a large and complex group of companies, the "Atlantic group", with interests in computer leasing. There are about 120 companies in the group, of which the majority are active trading companies. We were told that this group is, or was, the third largest leasing business in the world.

2

The ultimate parent of all these companies is British and Commonwealth Holdings plc. Earlier this year B & C stopped providing financial support for the Atlantic group. The company ceased to be able to pay its debts. On 18th April 1990 Mr. Justice Hoffmann made an administration order in respect of the company, specifying purpose (d) in section 8 (3) of the Act as the purpose which making an administration order would be likely to achieve, viz., a more advantageous realisation of the company's assets than would be effected on a winding-up. Two partners in Price Waterhouse, Mr. J.F. Soden and Mr. R.C. Boys-Stones, were appointed joint administrators. The order was made on the application of Atlantic Computer Services Group plc, which is the company's immediate parent, and which is itself a substantial creditor of the company.

3

The 2,500 existing leases granted by the company in respect of computers fall into several different categories. For present purposes we need refer to only two categories. In both these categories the capital cost of acquiring the computers was provided by a bank or other financial institution ("the funder"). In the first category, which comprises some 632 cases on the administrators' calculations, the computer is owned by the funder and let to the company under a hire-purchase agreement. The company in turn, and as was intended by the funder, then let the computer to the "end user" under a further lease ("the sub-lease"). In the second category, which comprises some 76 cases, the procedure was similar save that the arrangement between the funder and the company was a lease (a "head lease") as distinct from a hire-purchase agreement. For present purposes nothing turns on the distinction between these two categories. The fundamental feature, common to both categories, is that the computers are the property of the funder. In many instances in the first category, the hire-purchase agreement provided for the company to assign to the funder the stream of income to which the company was entitled under the sub-lease. But here also, for the purpose of the initial questions which arise for decision, nothing turns on the presence or absence of this additional feature. Among the funders in one or both of these two categories of transactions are companies in the groups headed respectively by Norwich Union Life Insurance Society and Allied Irish Banks plc. We shall refer to the companies in these respective groups as "Norwich" and "AIB".

4

A few days after the administration order was made the administrators sent a circular to the end users notifying them of the administration order and telling them that payments due under the sub-leases should continue to be made to the company. Thereafter invoices were sent out periodically by the administrators. Substantial payments have been received by the administrators since 18th April. The money is set aside in designated bank accounts. Up to 8th June the administrators received from end users sums in excess of £1.7 million. Approximately £220,000 of this was in respect of sub-leases of computers owned by Norwich, and about £7,000 in respect of sub-leases of computers owned by AIB. The income stream from end users has now substantially dried up. Most end users have stopped paying. Some of them have said they will not pay until the company confirms that it will meet all its obligations under the sub-leases.

5

As to the head leases (in which expression we include hire-purchase agreements between funders and the company), substantial payments have fallen due, and are continuing to fall due, from the company to the funders, including Norwich and AIB. When the administration order was made the arrears owing to Norwich and AIB were about £976,000 and £Ir116,000 respectively. Over the 3-month period from 18th April to 18th July the indebtedness accruing due to Norwich and AIB respectively was about £1.1 million and £520,000. But since the date of the administration order no payments have been made by the administrators to Norwich or AIB, or to any other funders, in respect of head leases. And the administrators have declined to consent to Norwich and AIB exercising their rights to terminate the head leases.

6

The first question: administration expenses.

7

It is in these circumstances that the first question arises. The administrators have received and retained money payable under the sub-leases in respect of computer equipment which is the property of the funders. Are the administrators obliged, as Norwich and AIB contend, to pay as expenses of the administration all the sums falling due under the head leases? Mr. Justice Ferris upheld this contention. The core of his reasoning is to be found in the following passage in his judgment. Having considered certain authorities, he said:

"I think that the principle comes to this. If in the course of a corporate insolvency the liquidator or receiver uses or realises property belonging to a third party for the benefit of the corporation, then the proper price for that use or realisation, and also any liabilities such as rates or taxes which arise from such use or realisation, are to be treated as an expense of the winding up or receivership and paid accordingly. Where the use or realisation is based upon a contractual right, the proper price is that provided for by the contract. I think that this principle is based not upon any provision of the legislative regime governing the winding up or receivership but upon the fact that this is an ordinary consequence of the use of property belonging to another, and that the legislation does nothing to relegate the claim for payment on the part of the owner of that property to that of an unsecured creditor whose debt became due before the insolvency. If this is right, as I think it is, it would be strange if a similar principle did not apply to administrations under Part II of the 1986 Act."

8

The appeal came on speedily, before the formal order embodying the judge's decision had been drawn up. We were shown a draft order, agreed by the parties, which contains declarations to the effect that the rentals and supplemental rentals accruing due under the head leases from the date of the administration order were payable as an expense of the administration. Likewise with insurance payments, contractual interest and damages payable for breach of covenant to insure or maintain the equipment. The joint administrators have appealed against that decision.

9

The issue raised by this part of the appeal calls for a consideration of the relevant provisions of the 1986 Act. However, we must deal first with two preliminary matters which formed the basis of much of the argument presented to us on the proper interpretation of the Act.

10

The use of property by a liquidator: the "liquidation expenses" principle.

11

The first preliminary matter is to identify the principles to be distilled from the authorities relating to liquidation expenses on which the judge mainly relied. The relevant authorities go back over a hundred years to the Companies Act 1862. This Act established company law in a form which has continued unchanged in its essence up to the present. The cases in question arose out of the provision in that Act, section 87, which was the distant predecessor of section 130 (2) of the 1986 Act. Section 130 (2) provides that when a winding-up order has been made or a provisional liquidator appointed "no action or proceeding shall be proceeded with or commenced against the company or its property except by leave of the court and subject to such terms as the court may impose". Over the years the courts have...

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