Re Lomax Leisure Ltd

Thursday, 22 April 1999

Introduction

This application raises, amongst other points, a difficult and not unimportant on which there is conflicting authority, namely, whether it is open to a landlord to forfeit a lease by peaceable re-entry when the tenant is a company in administration or in respect of which an administration petition had been presented.

The Facts

The facts, which I take substantially from the skeleton argument prepared by Mr Peter Shaw of counsel, are as follows.

The petitioner, Lomax Car Parks Ltd ("Car Parks") applies first for an administration order in respect of the business assets and affairs of Lomax Leisure Ltd ("the company") ; secondly, that Mr Nicholas John Miller, an insolvency practitioner, be appointed as administrator; and thirdly, that upon making the administration order, the company be granted relief from forfeiture in respect of a lease ("the lease") granted by RAT Holdings Ltd ("RAT") to the company on 4th December 1998, of premises at 77a and Vaults, Charterhouse Street, London EC1 ("the premises") .

The company was formed for the purpose of acquiring a lease of the premises and developing them for use as a nightclub. The shareholders are six individuals, one of whom Ralph Munding, is a director of RAT and another of whom, Mr Dominic Sullivan, is a director of Car Parks.

In April 1988 in anticipation of the grant of the lease, the company entered into a contract with Marapaul Southern Ltd ("Marapaul") with a 21 week construction programme for works ("the works") to convert the premises into a nightclub. The contract sum was £1.4 million. The funding was to be provided from shareholders' funds, from a brewery loan, and from a loan from the company's bank, the National Westminster Bank ("NWB") .

There were various delays to the development, largely because it turned out that the ultimate freeholder of the site was not London Underground Ltd ("LUL") , RAT's landlord, but LUL's landlord, the Corporation of London, from whom consents for the works and for the change of use were required, and also because Marapaul became insolvent and entered into a creditors' voluntary arrangement. In addition to these problems, NWB considered that the lease offered inadequate security, and was not prepared to lend money unless certain of its provisions were amended.

By November 1998, all the shareholders' existing funds had been exhausted and they were asked to provide further loans. All of them, apart from Mr Munding, complied. On 4th December 1998, after all the terms had been finally agreed, the lease was granted. The provisions of the lease were what one might expect in a modern building lease of commercial premises. Thus the company covenanted with RAT to carry out the works by a certain date, in September 1999, to keep the RAT informed of certain matters, to effect certain insurances, and not to assign the lease until the works are completed. The lease also contained a proviso for re-entry in the event of non-payment of rent or breach of covenant on the part of the company.

At around the same time, namely December 1998, the company required yet further funds to meet the on-going cost of the works. In the absence of any further monies from the shareholders, Car Parks contends that it advanced to the company over £165,000 between December 1998 and March 1999, and a further £20,000 on 8th April 1999.

In March 1999, Marapaul was replaced as contractor by Blenheim House Contractors ("Blenheim") . The total cost of the works had now risen to over £3.4 million.

The present position, described in Mr Sullivan's affidavit of 9th April 1999 and the Rule 2.2 report prepared by Mr Miller, is that there is an immediate cash crisis in the company. It has no further funds. There are arrears of rent (including interest and VAT) due to RAT in the sum of £116,000, and one stage payment is currently due to Blenheim. Last month, one of the investors, who I have not so far mentioned, Mr Stephen Stamp, offered to advance substantial further sums to the company to enable it to complete the works. This offer was made on the basis that the shareholding structure be revised in order to reflect Mr Stamp's increased investment. No agreement to that effect was reached between the shareholders, although the majority of the shareholders, including Mr Stamp and Mr Sullivan, supported the proposal, but a minority, including Mr Munding, did not.

On 7th April 1999, Car Parks issued the instant petition for an administration order on the basis that, unless the company's business is sold to a third party capable of funding the works, the lease would be forfeited, and the company would inevitably go into liquidation. Following the issue of the petition, RAT purported to forfeit the lease by peaceably re-entering on the premises on 14th April. This was on the ground of the arrears of rent, and also on the basis of eight other different breaches of covenant which had been specified in a notice pursuant to section 146 of the Law of Property Act 1925 served on the company by RAT on about 19th February 1999.

The Issues

Car Parks proposes that an administration order be made initially for a limited period of two months. The primary purpose of the order would be to allow attempts to be made to sell the business or assets of the company, including in particular, the lease. Mr Stamp has already put the proposed administrator in funds to the extent of £250,000, with a view to discharging the arrears of rent (which expression includes interest and VAT) and also to meet the ongoing cost of the works for the two month period. He is also proposing, and prepared to undertake, to advance a further £150,000 to the proposed administrator. This will enable the costs of the administration and other outgoings, such as professional fees and contingencies, to be met for the two month period. As I understand it, it is envisaged that Mr Stamp would have a priority claim to repayment of the £400,000 if and when the business or assets are sold.

Car Parks suggest that there is a realistic prospect that the business may be sold, and indeed Mr Stamp has indicated that he would propose to form a new company through which he would make an offer for the acquisition of the company's assets, including the lease, to enable the works to be completed. It may well be that some of the other shareholders will have an interest in the new company.

It is appreciated by Mr George Bompas QC, who appears with Mr Shaw for Car Parks, that the lease cannot be assigned until the works are complete, but he points out that this would not prevent the administrator from entering into a sale of the business and an agreement to assign the lease once the works are completed.

It appears to be of importance for commercial reasons that the nightclub should open by September 1999 in order to take advantage of the projected millennium celebrations. It is also said that a sale of the business would need to be concluded swiftly.

RAT, the landlord, has not only purported to re-enter peaceably; it has also presented a petition to wind up the company on the ground that it has not paid the rent and is insolvent. The winding up petition was presented on 16th April and is due to be heard on 9th June.

The issues raised by the arguments by Miss Jane Giret who appears for RAT are as follows:

1. Has Car Parks the necessary status to make the application to present the petition and seek appointment of an administrator?

2. Has RAT validly re-entered the premises?

3. Ought the administration order be made?

4. If RAT has validly re-entered, and the administration order ought to be made, is it appropriate to give relief from forfeiture at this stage?

I shall deal with those four questions in turn.

The status of Car Parks

Section 9(1) of the Insolvency Act 1986 ("the 1986 Act") provides:

"An application to the court for an administration order shall be by petition presented either by the company or the directors, or by a creditor or creditors …"

The evidence in support of the contention that Car Parks is a creditor, is to be found in two affidavits of Mr Sullivan and exhibits thereto. I conclude on the evidence that Car Parks is a creditor of the company and hence entitled to petition for an administration order. This is because I am satisfied that it advanced money to the company, that the money was not advanced as a gift, and, as no other term was agreed, it was a loan which is repayable on demand. First, this is what Mr Sullivan, who is a director both of Car Parks and of the company, says on oath. Secondly, it is clear that the sums of money to which he makes reference have been paid to the company as can be seen from its records. Thirdly, it is clear that Car Parks gave written instructions to its bankers to transfer at least £75,000 in two tranches to the company; there is no reason to think that instructions to pay the other sums were not given orally. Fourthly, while it is true that some of these payments made to the company are entered in the company's records in a column referring to "loans by shareholders", it is equally clear that some of the sums are entered into under "loans from non-shareholders". I am satisfied that the entries under...