Landlord and tenant — Insolvency of tenant by assignment — Whether voluntary arrangement under Insolvency Act 1986 precluded landlords from recovering rent from original tenant and/or a tenant by assignment
By a lease
dated April 9 1979 W granted M, the first defendant, a 25-year lease of office
premises. On May 19 1986 M assigned the lease to C, the third defendant. On
February 18 1991 an administration order under the Insolvency Act 1986 was made
in respect of C and later a voluntary arrangement was entered into with C’s
creditors; W had notice of the meeting of creditors held prior to the voluntary
arrangement. At the same time W was negotiating the sale of the reversion to
the plaintiffs, the contract was made prior to the voluntary arrangement and
the transfer afterwards. The plaintiffs claimed arrears of rent and service
charge against M, as original tenant, and against C, as an assignee. Both M and
C denied liability contending that: (1) the plaintiffs’ only rights are rights
under the voluntary arrangement and those have the effect of inhibiting
immediate recovery; (2) those rights are binding upon the plaintiffs against
both M and C; but (3) if for any reason the arrangement does not give M the
right to resist recovery on the grounds that the arrangement is effective as
between M and the plaintiffs, C can and will apply for an injunction
restraining the plaintiffs from pursuing M.
matter of construction of the voluntary arrangement, the arrangement only
covers rent and service charges already actually due and owing at the scheme
date, accordingly the plaintiff landlords were entitled to proceed against M
and C. Although that disposed of the main issue the judge answered further questions
posed by the parties. (2) W was bound by the voluntary arrangement because it
received notice and was entitled to attend the meeting of creditors: see
section 5(2) of the Insolvency Act 1986. (3) If, contrary to the construction
at (1) above the voluntary arrangement comprehends future rents, as opposed to
accrued rents, the arrangement, which in effect modified the obligations under
the lease, was binding on the plaintiffs as successors in title to the
reversion to the lease. (4) If the plaintiffs were so bound, and the
arrangement included future rents, C is released by the arrangement from
liability to pay future rents and can seek an injunction to enforce the benefit
of the scheme. (5) On the assumption that future rents were within the arrangement,
M was released from liability as original tenant because of the deemed
modification of the lease, however it was not released by accord and
satisfaction.
The following
cases are referred to in this report.
Baynton v Morgan (1888) 22 QB 74
British
Equitable Bond & Mortgage Corporation Ltd, In
re [1910] 1 Ch 574
Centrovincial
Estates plc v Bulk Storage Ltd (1983) 46
P&CR 393; [1983] 2 EGLR 45; [1983] EGD 556; 268 EG 59
City of
London Corporation v Fell [1994] 1 AC 458;
[1993] 3 WLR 1164; [1993] 4 All ER 968; (1993) 92 LGR 1; [1993] 2 EGLR 131;
[1993] 49 EG 113, HL
Deanplan
Ltd v Mahmoud [1993] Ch 151; [1992] 3 WLR
467; [1992] 3 All ER 945; (1992) 64 P&CR 409; [1992] 1 EGLR 79; [1992] 16
EG 100
European
Life Assurance Society, Re (1869) LR 9 Eq
122
EWA Re, A Debtor [1901] 2 KB 642; 70 LJKB 810; 85 LT 31; 49 WR 642,
CA
Hockley
(William) Ltd, In re [1962] 1 WLR 555;
[1962] 2 All ER 111
Maritime
Transport Overseas GmbH v Unitramp (‘The
Antaios’) [1981] 2 Lloyd’s Rep 284
Matthey v Curling [1922] 2 AC 180
Naeem (a
bankrupt), In re [1990] 1 WLR 48
Prenn v Simmonds [1971] 1 WLR 1381; [1971] 3 All ER 237, HL
RA
Securities Ltd v Mercantile Credit Co Ltd
[1994] 2 EGLR 70; [1994] 44 EG 242
Stonegate
Securities Ltd v Gregory [1980] Ch 576; [1980] 3
WLR 168; [1980] 1 All ER 241, CA
Weg
Motors Ltd v Hales [1961] Ch 176; [1962] Ch
49; [1961] 3 WLR 558; [1961] 3 All ER 181, CA
This was an
appeal of a preliminary issue in proceedings by the plaintiffs, Burford Midland
Properties Ltd, against the first and third defendants, Marley Extrusions Ltd
and Chancery plc, for rent arrears. Wessex & City Investments Ltd, the
original landlord, was made second defendant.
Mark Warwick
(instructed by Green David Conway & Co) appeared for the plaintiffs;
Jonathan Karas (instructed by Thomason Snell & Passmore, of Tunbridge
Wells) represented the first defendant; Peter Sheridan QC (instructed by
Rosling King) represented the second defendant; Rosalind Nicholson (instructed
by D J Freman) represented the third defendant.
Giving
judgment, JUDGE COOKE QC said: I have before me a preliminary issue
directed by the chief master by an order of January 27 1994, which is, put
shortly, whether a voluntary arrangement under the Insolvency Act 1986 by
Chancery (as I will call them), the tenant by assignment of certain premises
prevents the plaintiffs, an assignee of the reversion, from pursuing claims
under the lease against: (1) Marley, the original tenant, and/or (2) Chancery
as tenant by assignment and, if so, to what extent. The issue in fact raises a
series of questions which have been posed by counsel and I propose to answer
all of them, irrespective of whether, in view of some of the answers which I
have reached, all are necessary to the result.
The facts can
be comparatively shortly stated. On April 9 1979, Wessex (the second defendant)
entered into a lease with Marley (the first defendant) whereby Wessex let to
Marley the eighth floor of a block called Tricorn House, Hadley Road, Edgbaston
(the premises), for 25 years from the Christmas quarter day of 1978. The rent
under the lease was, following the final relevant review, £13,900 pa. On May 19
1986 Marley assigned the lease to Chancery, the third defendant.
Chancery were,
and are, a well known banking enterprise who in 1990–91 had got into
difficulties. An administration order was made on February 18 1991 under the
Insolvency Act 1986. The order was made with a view to seeing if a scheme could
be devised and in due course a voluntary arrangement was entered into by the
creditors pursuant to Part I of the Insolvency Act. I shall need later to come
to the scheme in some detail.
While the
scheme was in gestation, Wessex was in the process of selling the reversion to
the present plaintiffs and the dates on the pleadings would indicate that the
negotiations and the contract were prior to the arrangement becoming effective
and that the actual transfer was after. For the purpose of the arrangement,
Wessex was accepted as being a creditor for an estimated sum, but it is clear
from a short piece of evidence I heard that this estimate was specifically for
the purpose of giving their debt some value rather than relating to a part of
the debt; it is not of much significance beyond that.
Following
completion of the purchase and the implementation of the arrangement, the
plaintiffs attempted to recover as it fell due the rent and service charges for
the subsequent quarters both from Chancery and from Marley as original tenants.
It was met by a refusal from both. The lease has now, in circumstances which do
not matter, been forfeited.
Both Chancery
and Marley resist the claim on the grounds that: (1) the plaintiffs only rights
are rights under the arrangement and those have the effect of inhibiting
immediate recovery; (2) those rights are binding upon the plaintiffs against
both Chancery and Marley; but (3) if for any reason the arrangement does not
give Marley the right to resist recovery on the grounds the arrangement is
effective as between Marley and the plaintiffs, Chancery can and will apply for
an injunction restraining the plaintiffs from pursuing Marley.
I should say
for the sake of completeness and emphasise that I am only concerned with rent
arising due after the critical date in the arrangement. Rent becoming due
before then has been dealt with under the arrangement in ways with which I am
not concerned.
I am concerned
to answer two fundamental questions: namely (a) does the arrangement affect
rent which becomes payable after what I will call ‘the arrangement date’; (b)
if it does, then does it do it in any way which affects the rights and
liabilities between the plaintiffs, the assignee of the reversion and Marley,
the original tenant?
It is perhaps
easiest to start with what the position would have been had Chancery simply
defaulted at the relevant date and the plaintiffs decided, for whatever reason,
not to pursue Chancery or not to pursue it alone. In that case, the law would
have been totally clear. Generally speaking, assignment does not discharge the
covenanted liabilities of the original tenant. The landlord can always sue the
original tenant on the covenant to pay rent and the tenant can seek to recover
that rent from the assignee. If the assignee is not good for the money, the
ultimate loss rests on the original tenant: see a line of authority having as
its most recent expression, so far as I know, City of London Corporation
v Fell [1993] 3 WLR 1164* at p1168G.
*Editor’s
note: Also reported at [1993] 2 EGLR 131.
Under section
141 of the Law of Property Act, the assignee of the reversion can sue the
original lessee not only prospectively but in respect of arrears accrued due at
the date of the assignment. So here, says Mr Mark Warwick, the plaintiffs can
recover from Marley both the post-arrangement date arrears as they stood at
completion on December 23 1991 and all the rent payable to it from and after
completion. Nobody doubts that proposition is accurate and it is for the
parties to show that the arrangement effectively inhibits the plaintiffs from
enforcing those rights.
With that
preliminary, I turn to the arrangement itself. The voluntary arrangement as an
institution is a creature of Part I of the Insolvency Act 1986. Under the old
law, the Companies Act 1948, the effective choice on insolvency was either a
section 206 scheme, which was slow and cumbersome and required the intervention
of the court (not least because the court usually had to be persuaded to
adjourn the winding-up petition while that was done with all the damages that a
pending petition could do to a company’s prospects of survival) or the
winding-up petition itself, the effect of which was a very blunt and
economically wasteful instrument, where a company might be insolvent but stood
a chance for survival in the long term.
The object of
the legislation is to provide a swift and comparatively informal arrangement
whereby the majority of the company’s creditors can bind the minority to some
arrangement (and there are many) inhibiting the immediate enforcement and/or
total enforcement of the debts, thereby avoiding a creditors free for all and
giving the company often a period in which it can trade untrammelled by the
need for payment of the debts comprised in the arrangement. Not unusually, as
here, such an arrangement comes about when a company has already been regulated
by an administration order.
The Act
provides that the scheme shall become binding on all creditors (in essential)
if more than 75% in value of the creditors present and voting approve it, but
subject to a right of application to the court. It is of course binding on the
creditor whether or not he attends the meeting.
There is no
doubt whatever on the facts (and nobody seeks to assert the contrary) that
Wessex had notice of the meeting, that the requisite majority approved the
arrangement and that nobody applied to the court to cancel it. That being so,
the arrangement is beyond argument binding upon Wessex for whatever it does.
With that I
turn to the detailed arrangement. In short summary, what it did was to convert
a percentage of each debt into B shares in
instalments being paid on fixed dates over that period. The date as at which
the liabilities were fixed (I use this deliberately neutral expression to cover
a controversial concept) was February 18 1991, the date of the administration
order (‘the arrangement date’). The pure regime of the arrangement affected
liabilities that as of the arrangement date were treated as ascertained. Those
debts defined as unascertained caught up, as it were, by means of a formula as
and when they became ascertained, if indeed they did, at a date prior to the
conversion date. The conversion date was, at the earliest, October 1 1996.
The
definitions of the arrangement are critical and I turn to these next.
Unascertained
Liabilities From time to time those of the
liabilities which are not ascertained liabilities but which subsequently become
so at a date prior to the conversion.
Ascertained
Liabilities Subject to clause 7(i) [which does not
matter] and to the extent not yet paid, those are liabilities which are from
time to time both
(a) liquidated in amount and ascertained in
value; and
(b) such as would but for the provisions of this
voluntary arrangement be presently due and payable.
Liabilities
From time to time to the extent that they are still
subsisting, any and all liabilities of Chancery at 18th February 1991 are
creditors howsoever such liabilities arise and whether at that date they were
liquidated or unliquidated, their value ascertained or otherwise, present or
future, contingent or otherwise, but excluding preferential debts.
Those last few
lines require underlining, because they are critical to this case.
Creditors Any creditor of Chancery as at 18th February 1991 bound by the
voluntary arrangement by virtue of the provisions of the Act whose claims were
at that date liquidated or unliquidated, ascertained in value or otherwise present
or future, contingent or otherwise, including, wherever the context permits,
but subject always to Clause 5.6, the successors and assigns of any such person
as aforesaid.
I should also
look at clause 4 of the arrangement, which is critical in a number of ways and
I think there is no alternative but to read it in full so far as at least
clause 4.1 and clause 4.2 are concerned:
4.1. The
provisions of clauses 5, 6 and 7 shall have effect in full and final settlement
of all claims against and obligations of Chancery present and potential in
relation to the liabilities including, without limitation, in respect of
damages, interest, costs or any other matters relating to the liabilities
whether such claims or obligations are liquidated or unliquidated, their value
ascertained or unascertained, future or present, contingent or otherwise
— a form of
language that is already familiar to readers of the arrangement —
4.2.
Accordingly, except with the prior written consent of the supervision committee
or with the written consent given prior to entry into force of the creditors
committee, any claim by any creditor against any person other than Chancery or
the Deposit Protection Board is hereby, for the benefit of Chancery, prohibited
to the maximum extent permitted by law if such claim would or might lead to the
recovery by such creditor or such person of monies equal or corresponding to
all or part of the liabilities of such creditor when the direct or indirect
effect of such claim would be or was likely to be to increase the aggregate
amount from time to time becoming payable by Chancery (a) whether pursuant to
this voluntary arrangement or howsoever; and (b) whether in consequence of a
claim by such person against Chancery or for any other reason.
I need not go
into clause 4.3. I pause to say that clause 4.1 is oddly drafted in that it
purports to repeat part of the definition of ‘liabilities’ but by reference to
claims and obligations relating to the liabilities: it does not aid clarity;
but I doubt that it makes much material difference to the point I have to
decide. I shall have to come back to clause 4.2 in more detail later.
I can now come
to the issues themselves and I propose to define those in the same way as Miss
Rosalind Nicholson and Mr Jonathan Karas did in their submissions to me on
behalf of Chancery and Marley.
Question
1: What is the effect of the arrangement on the obligations of Chancery to
those bound by the arrangement; in particular, does it extend to the rent
accruing due after the arrangement date?
This to my
mind must be the fundamental question. It is Chancery and Marley’s case that
all rent falling due under the lease until at least the conversion date (in the
event the liability was terminated by forfeiture) is caught by the arrangement,
so that the landlords do not get paid their rent according to their covenant,
but receives it partly in B shares and partly in rescheduled instalments so
arranged in accordance with the catch up provisions as being an unascertained
liability. And it follows that the landlords and all those similarly bound are
obliged to accept that regime.
In the
original argument as opened by Miss Nicholson, it seemed to me this point was
taken to be a point of no great difficulty and that the difficulties in the
case perhaps lay elsewhere; however, Mr Peter Sheridan QC launched a powerful
attack on the whole concept, to which he directed almost the whole of his
argument. To my mind, it is this aspect of the case that gives the greatest
trouble.
I go back in
trying to find what liabilities are caught by the arrangement to the definition
clause which I have already quoted. Running through the definitions, there is
one common thread which needs to be isolated at once. It is this: the central
importance of the arrangement date. The creditor thus is any creditor as at the
arrangement date and his assigns and liabilities are liabilities at the
arrangement date. So if somebody is not a creditor at the arrangement date or a
liability is not a liability at the arrangement date, the arrangement does not
affect them.
If those words
stood alone (which unhappily they do not), I would have very little difficulty
with this case. In the ordinary sense of liability, ie something which the
company is liable to pay, the company was not at the arrangement date liable to
pay future rent: it might be liable to pay it at some time in the future, but a
statement of the assets and liabilities of the company as they stood then would
not have included it. Adopting a simple test, a writ issued for the rent on the
date of the arrangement date would be struck out as disclosing no cause of
action. But, say Miss Nicholson and Mr Karas, it does not in fact end there.
The definition of liabilities, repeated mutatis mutandis in clause 4.1,
includes liabilities that were not liabilities at the arrangement date because
of the critical words ‘present or future, contingent or otherwise’. I pause to
say that these are two pairs of alternatives: ‘future’ and ‘contingent’
are not alternatives. A contingent debt is pretty well inevitably a future
debt, but not necessarily the only type of future debt.
On the basis
of this, what they say is that a future debt is any debt which may, in the
future, be payable to a creditor who is within the scheme. I think Mr Karas in
argument accepts this could not extend so far as a debt incurred on a wholly
new contract and that must plainly be right; but he does say that it is any
debt arising in respect of an existing obligation, even though the date for
performance of the obligation (on either side it must be) has not arrived.
Contingent and
prospective debts are a concept that is not unfamiliar in the law of company
insolvencies; thus under a succession of Companies Acts a contingent or
prospective creditor has been a competent petitioner and in testing in
appropriate cases whether a company is able to pay its debts, account is taken
of contingent or prospective debts. I think ‘prospective’ and ‘future’ must
really be taken to have the same meaning.
I was referred
to two authorities under the 1948 Act: In re William Hockley Ltd [1962]
1 WLR 555 Pennycuick J (as he then was) and Stonegate Securities Ltd v Gregory
[1980] Ch 576, a decision of the Court of Appeal. In Hockley at p558,
Pennycuick J said:
The
expression ‘contingent creditor’ is not defined in the Companies Act, but must,
I think, denote a person towards whom under an existing obligation, the company
may or will become subject to a present liability upon the happening of some
future event or at some future date (see Buckley … 13th ed, notes at pp460 to 462).
In Stonegate
at p579E, Buckley LJ says:
‘contingent
creditor’ means a creditor in respect of a debt which will only become due in
an event which may or may not occur; and a ‘prospective creditor’ is a creditor
in respect of a debt which will certainly become due in the future, either on
some date which has been already determined or on some date determinable by
reference to future events.
It is, I
think, useful to look at the passage in Buckley LJ which Pennycuick J must be
taken to have cited with approval. What the textbook says in the notes to
section 223 of the 1948 Act is that contingent and prospective liabilities are
those:
under
contracts and engagements already existing, and not [the] liabilities which the
company may incur in the future in carrying on its business.
It must be
remembered that the context of the note is a section directed to solvency as
opposed to insolvency and it is therefore no surprise when the note goes on to
say that:
The Court
will not in any case take into account the possible liabilities or profits
which may accrue in respect of future business.
That is amply
supported by the authority which it cites: In re British Equitable Bond
& Mortgage Corporation Ltd [1910] 1 Ch 574 and the old case of Re
European Life Assurance Society (1869) LR 9 Eq 122. In the latter case the
court put the test rather vividly, saying one should look at the company as if
it had completed business on the relevant day and did not intend to do any
more.
Oddly, no authority
has been discovered by counsel, despite considerable industry, that relates
directly to the position of rent under an existing lease in the context of
these definitions, although one authority to which I was referred may point
that way and I will come to it in due course.
As the
authorities stand, I think the following is clear: (1) a future prospective
debt cannot include a debt that arises out of a future transaction; (2) that it
can and will include a debt that arises out of an existing transaction as a
result of which the basic liability is incurred which depends on the reaching
of a future date or the happening of a future event to make it payable if it is
ever to be payable. Where there is less clarity is whether a prospective future
debt includes a liability under a subsisting series of obligations when the
future event goes to the whole root of the obligation. Thus one might contrast
a case where goods are delivered but the price is paid 50 days from delivery (a
clear future debt within the definition) and a case where under a contract
there is an obligation to supply goods at a future date and the obligation to
pay is only to arise when the goods have been supplied. Or, to put it in
another way, the debt only becomes a debt when the consideration for it has
been supplied and the obligation has been completed, even though there is a
future obligation to supply the consideration.
For my part, I
would have thought even for 1948 Act purposes one would readily see the latter
case as being outside the category of prospective debts, and that because what
one is really concerned with is what (time and contingency apart) the company
is known to owe at the relevant date as opposed to what the company will owe at
a future date when it receives some benefit which at present it does not have —
for example, continued possession under a subsisting lease and the continued
benefit of the landlords’ covenant.
In a way this
is, I suppose, a digression though I think a helpful illustration given that
the basic object of an arrangement is to create a moratorium or composition
with the creditors at the relevant date, those creditors being usually and
inevitably the creditors who will be proving in the liquidation if there was no
arrangement and the company was wound up. I would incline anyway to construe
the expression in conformity with what, as I have indicated, I think is the
right way of construing the Companies Act approach rather than as something
that is radically different.
To my mind, a
more general approach to construction of such terminology (but which would
produce a result in line with the way in which I think the Companies Act cases
are formulated) is ask the question, ‘What is a debtor and what is a creditor?’
and indeed, ‘What is a debt or liability?’ Inevitably I would have thought the
answer to that question must be: ‘An obligation to pay that is no longer
dependent on executory matters on either side but where subject only either to
date or to some uncertain inhibiting factor it is fully crystallised’. I
cannot, to my mind, see how something that depends on future executory matters
can be properly called a debt or liability or somebody who will be entitled to
payment only when executory matters have been performed can properly be called
a creditor: he has not got there yet.
If that is
right, where would liability for future rent under a lease fit in? This is a
right, essentially one of property tied into a bundle of rights and
obligations, the enjoyment of the estate for a period by the tenant and also consideration
of the landlords’ covenants. The obligation to pay a service charge, which is
in general terms the indemnity for the performance of the landlords’ covenants,
is a fortiori this. I cannot see it is any different from the executory
contract scenario that I have just postulated.
Some help is
given in general terms by Hoffmann J’s decision In re Naeem (a bankrupt)
[1990] 1 WLR 48, a case of a voluntary arrangement in a personal insolvency
where the court concluded that an arrangement relating to arrears of rent
related only to the landlord’s rights qua creditor and did not affect
his property rights qua landlord. The reasoning must, I would have
thought, point to the conclusion that in terms of defining a creditor there is
a difference between a right to be paid something that has accrued due and has
become a debt and a right in respect of something that is an obligation (a
fortiori I would have thought an executory obligation) relating to and
arising out of property.
I am conscious
that these general principles, which seem to me to be of central importance,
were really not much touched on in argument and have occurred to me in the
course of preparing this judgment, but although they may suffer from the lack
of that refinement that reasoned argument might have given them, I do not
myself feel much doubt that they afford a means of general guide to one’s
approach. Necessarily, of course, much may turn on the words used and their
context.
I turn now to
this case. Mr Sheridan made powerful submissions to me on basic principles of
construction and those submissions, to my mind, support the approach which I
have suggested above may be the way of construing such expressions in a
Companies Act context and suggest strongly that it ought to apply to this
arrangement. I hope it is no discourtesy to his substantial and helpful
submissions if I can really take the point quite shortly.
He says this
arrangement, like any other commercial arrangement, ought to be construed as
follows: (1) in its surrounding factual matrix and having regard to what is
objectively its aim (Prenn v Simmonds [1971] 1 WLR 1381); (2) in
accordance with business commonsense; and (3) producing a reasonable
result rather than an unreasonable one: see, inter alia, The Antaios
[1981] 2 Lloyd’s Rep 284. As to (3), I think it could only arise where there is
some element of ambiguity so that the court has the opportunity of choosing
between the reasonable and unreasonable result. If it is clear on the plain
language the parties have agreed to do something silly, there is, I think, not
a lot the court can do about it.
Before
considering Mr Sheridan’s approach, I start by trying to see, using the
language and applying by analogy the Companies Act approach to which I have
referred, what the expressions used may mean. For this purpose, one has to look
at more than just the bare definition section, defining liabilities alone. A
number of things are clear from clause 6.3 as a whole. Thus, (1) liabilities
are at February 18 1991, ie the arrangement date; (2) creditors are creditors
at that date; (3) as and when liabilities are ascertained prior to the
conversion date they enter the scheme; (4) the conversion date is five years
hence at least; (5) what turns an unascertained liability into an ascertained
liability is that it becomes presently due and payable but not that the company
becomes liable to pay it.
One then looks
at clause 4.1 where what the scheme is expressed as doing is to create a full
settlement of all claims against Chancery, ‘present and potential’, in relation
to the liabilities, necessarily liabilities at the arrangement date. It then
goes on, of course, with a
contingent. Why it has to distinguish claims relating to liabilities and the
liabilities themselves is a mysterious oddity of drafting that, as I have said,
may not matter.
Just trying to
see what the ordinary language might mean — I find considerable difficulty in
saying that as at the arrangement date the company has a liability (defined as
a liability at the arrangement date) to its landlords for rent when that rent
has not become due in any sense at the arrangement date but is payable in the
future in respect of a quarter’s, a future quarter’s, enjoyment of the estate
created by the lease. I have in mind the distinction drawn in Naeem. Nor
can one see why it obviously fits into a compromise of liabilities (whether or
not immediate or definitely payable) of the company at the arrangement date
when there is no suggestion of compromising the rights, including the covenant
under the lease, which continue to be performable in consideration of, inter
alia, the rent.
Essentially
compromise of debts as I see it is a concept whereby the only obligation is the
debt itself. Therefore the ambit of the compromise relates to the way in which
the debt may be paid or postponed, while compromise of a future payment which
is in consideration of other executory obligation would, one would think,
involve compromise of those obligations which this arrangement does not.
Clearly and on its face, it assumes the non-existence of any other obligation,
which is consistent entirely with a debt where all obligations have been
performed and all that is left is payment of money on some date and in some
eventuality. So therefore the scheme makes at best dubious sense, defining the
liabilities as including future rents/service charges and makes better sense
defining debts/liabilities (as I have suggested in general terms, as a matter
of language, dehors) any special meaning or context in the arrangement
those expressions ought to be defined.
Thus far and
applying these considerations, I could not see how with any ease or consistency
future rents, as opposed to past rents, would fit into either the definitions
or the compromise.
Mr Sheridan’s
submissions are entirely in line with and supportive of this approach and I can
really take them very briefly.
(1) It is part
of the factual matrix that the explanatory document sent with the arrangement
makes it clear that the object of the exercise is to enable the company to
trade for five years according to a business plan and secure that its existing
debts will be dealt with in a tightly structured way, which will not unduly
interfere with its ability to trade. If it is not legitimate to look at the
explanatory documents, this can I think be gathered in any event from the
arrangement itself.
(2) The other
side of the coin must inevitably mean that for the five-year period it is
business as usual: trade will take place, current trade debts will be paid as
and when they fall due.
(3) Part of
the trading business pattern of the post-arrangement world will be the
continued occupation of business premises with the landlords performing their
covenants and the tenant paying the rent and service charges.
In that
factual matrix and given that objective of the scheme, ‘How can it be’, says Mr
Sheridan rhetorically; ‘that the current rent relating to current occupation
and, a fortiori, the service charge relating to current services, which
is future payment for what is presently the executory performance of the
landlords’ obligations should be frozen in time and the landlords be made to
give the tenant continuing credit, some of it in the form of B shares, continue
to perform all their obligations under the lease and take the risk that the
company will be able to pay at the postponed date? That is totally inconsistent
with the concept and purpose of the scheme’. I agree with Mr Sheridan. In that
context, the company’s construction makes little sense.
For the same
reason if in the end there is an ambiguity, which I do not think there is, the
tenant’s construction makes commercial nonsense because it forces giving
continuing future credit for obligatory future services within what is meant to
be a moratorium scheme with business as usual and the landlords’ construction
makes commercial sense, ie it is consistent with drawing a line at the
arrangement date and thereafter trading normally.
For all these
reasons, I adopt the landlords’ construction; I reject the tenant’s
construction. I accordingly hold that the arrangement only covers rent and
service charges already actually due and owing at the scheme date.
I pause to say
that just before I delivered this judgment I was very helpfully referred by Mr
Sheridan to a decision RA Securities Ltd v Motor Car Credit Co Ltd
a decision of Jacob J (unreported May 27 1994*). That appears to be entirely in
line (though the reasons are somewhat different) with what I have said and
gives me some comfort at least that I have reached the right conclusion.
*Editor’s
note: Reported at [1994] 2 EGLR 70.
That is, in
fact, enough to dispose of the application, but I am conscious that this matter
may well go further and in any event the parties may wish to know where they
might be, so I was asked by counsel and I propose to express a conclusion on
each of the questions which was raised.
Question
(2): Was Wessex bound by the voluntary arrangement?
In my
judgment, there can be only one answer and nobody sought to argue the contrary.
Section 5(2) of the Insolvency Act provides that once a creditor has notice of
the meeting being a creditor entitled to vote at it then, subject to the right
to apply to the court, it is bound by the arrangement if the arrangement is
approved. Wessex received notice of the meeting. This was the unchallenged
evidence of Mr Masney, who gave evidence before me. A spot value — again Mr
Masney’s evidence — was put on its debt in order to entitle Wessex to vote.
Wessex did not
actually attend the meeting or give a proxy. This does not matter. What matters
is the notice and its entitlement to attend. Accordingly, the meeting having
approved the arrangement, Wessex was bound, subject only to its right to apply
to the court under section 9. No such application was made; Wessex is
accordingly finally and irretrievably bound to whatever the arrangement bound
it to.
Question
(3): Is Burford bound by the arrangement?
The
arrangement purports to bind successors and assigns. It cannot, of course,
directly bind them as parties because they are not parties, but the provision
of the arrangement clearly shows that the arrangement is not merely something
personal between the contracting parties but affects the rights intended to be
assigned.
I find no
difficulty at all in the concept that any assignee of the benefit of a contract
which has been modified by an arrangement would take the contract as
effectively so modified.
It was,
however, submitted to me that where, as here, there has been no specific
assignment of the benefit of the contract but there has been assignment of the
reversion, the arrangement will, as a matter of property law, bind the
purchaser.
Mr Karas
referred me to section 142 of the Law of Property Act 1925 which subjects the
reversion to the burden of what might loosely be called ‘landlord’s covenants’.
And he submits (which I accept) that an obligation to bind the reversion need
not be contained in the lease: see Weg Motors Ltd v Hale [1962]
Ch 49. For my part, however, I think this makes rather heavy weather of it. I
would have thought the more obvious approach is not to take this as a
landlords’ covenant to accept payment of rent by a peculiar route, but rather
to treat it as a modification of the tenant’s covenant to pay rent, the benefit
of which would pass under section 141, so that an assignee could enforce the
tenant’s covenant only as modified.
Referring
again to In re Naeem, it is to be remembered that the proposition found
by the court was that an arrangement relating to arrears related only to the
landlords’ right qua creditor and did not affect their property. As is
obvious from what I have already said, I would not dissent from this, but of
course one is assuming against my construction that the arrangement comprehends
future rents and I think it follows that these, as opposed to accrued arrears,
must be in the nature of rights under the covenant in the lease and will
transmit to an
being for section 141.
Burford I am
told (and there is no evidence to the contrary) denied that it had notice of
the arrangement. In my judgment, notice is irrelevant: it is no prerequisite to
the passing of liability under the sections.
Question
(4): Assuming Burford to be bound, is Chancery released and, if so, to what
extent?
I must of
course again make the assumption that my construction is wrong and that
post-arrangement instalments of rents are capable of being within the
arrangement. I think it is beyond argument that once the rents are within the
arrangement Chancery’s liability to pay them is necessarily within the
arrangement and not otherwise. It is clear the whole object of the arrangement
is to release Chancery from liability for whatever debts are within the
arrangement to prevent a creditor from recovering payment from a third party
when the effect of so doing is to give the third party a right of recovery
against Chancery.
It is for this
reason that clause 4.2 appears in the arrangement. This clause attracted a good
deal of criticism in argument, and I am not surprised. I do not think I need
read it in full again, but it should be borne in mind in the remaining part of
this section of the judgment. In particular (a) and (b) at the end seem to be a
typical draftsman’s ‘sweep-up’ device when he does not quite know what he might
be talking about. To remind oneself of that, it is: amounts falling due and
payable by Chancery (a) whether pursuant to the arrangement or otherwise; and
(b) whether in consequence of a claim by such person against Chancery or for
any other reason.
I can see that
there could well be substantial construction problems on the outside edges of
this clause, though I do not doubt the proposition that a creditor thereby
agrees with Chancery that it will not pursue a third party if the effect of
making such a successful claim would give the third party rights of recovery
against Chancery in respect of that debt, ie to put it in practical terms, the
creditors within the scheme cannot use their rights against third parties to
cause Chancery to pay the full amount, albeit indirectly. This is a right which
enures specifically to the benefit of Chancery. I do not think it is a right
which the third party can directly take advantage of: he is not a party to the
scheme, nor is he anybody’s assignee. So only Chancery, as a party to the
scheme, can enforce it and of course it is for Chancery’s benefit that it can
be enforced. So, as it were, by the back door Chancery can effectively limit
its liability to the claims directly within the arrangement. Such enforcement
will be necessarily by way of injunction and I cannot see why, all other things
being equal, such an injunction should not be granted.
Question
(5): To what extent is Marley released from liability for debt?
Making again
the general assumption that future rents are within the arrangement, the
question would divide into two: (a) is there, in effect, modification of the
lease; and (b) is there accord and satisfaction?
I will take
(a) first. It was submitted that an assignee can by arrangement with his
landlords alter the terms on which he holds the estate and that this having
been done the estate, so altered, binds the original tenant. On first sight,
this is a startling proposition. Examination of authority shows it to be firmly
settled in the last decade by four first instance decisions, the lead decision,
perhaps one might say, being Centrovincial Estates plc v Bulk Storage
Ltd (1983) 46 P&CR 393* and having as its ancestor an old decision of
the Court of Appeal in Baynton v Morgan (1888) 22 QB 74.
*Editor’s
note: Also reported at [1983] 2 EGLR 45.
I would for my
part be concerned as to the full extent of the doctrine, notably as to how far
it can be said that an assignee can actually increase the burden on the
original tenant as opposed to decrease it. It is clear that I ought to follow
these authorities: they are four first instance decisions in the High Court,
all consistent with each other, all in line with the seminal authority of Baynton
v Morgan and nobody can point to anywhere where it might be said to be per
incuriam. If these authorities are to be doubted, I think that doubt is for
the Court of Appeal and not for me.
Once given the
construction for which the tenant contends, then I think it has to follow that
the mode of recovery of rent under the lease has been varied for the future and
the only sensible way of construing it is as a variation of the lease. If once
one gets that far, then necessarily the lease as altered binds and can be taken
advantage of by the original tenant as well as the assignee. I therefore hold
on this ground that were there such an alteration as is contended for Marley
could qua tenant directly take advantage of it by way of defence.
Then (b)
accord and satisfaction. Does the arrangement amount to an accord and
satisfaction which discharges both debtors? The basic principle long
established is that where there are joint debtors the release of one releases
both. It is curious the point appears not to have been argued in relation to
the situation of original tenant and assignee prior to the decision of Judge
Baker QC, sitting in this division, in Deanplan Ltd v Mahmoud
[1993] Ch 151*. From that authority I get the following propositions. (a) The
principle is the same whether the debt is joint, joint and several or several
with each liable to perform the same obligation. (b) Original tenant and
assignee necessarily fall into the third of these categories. (c) Accordingly,
a release of the assignee is a release of the original tenant. As one would
expect with a novel decision, it has not been without its critics. I was
referred in argument to an interesting article in the Solicitors Journal
of December 17 1993 at p1272, which Mr Warwick adopted as his argument. The nub
of the criticism rests upon whether the law does in truth recognise a class of
non-cumulative several covenants. If one assumes that it does not, then (so the
article recites Prof Glanville Williams’ argument in his work on Joint
Obligations) the covenant must be regarded as joint and several. There can
be no doubt the covenants exist and if they are joint and several then the
principle, that release of one releases both, must obviously apply. But the
article, and therefore Mr Warwick, then argues that on the authority of Baynton
v Morgan, the seminal authority for the variation of lease cases I
referred to earlier, unless the liability was regarded as joint variation by
the assignee could not discharge both.
*Editor’s
note: Also reported at [1992] 1 EGLR 79.
So far as it
is material to my decision, I think there are two answers. (i) The dictum
of Younger LJ (as he then was) in the Court of Appeal in Matthey v Curling
[1922] 2 AC 180 at p208, which recognises that an original lessee may have a
defence that the assignee has been absolved from performance is at least
supportive of the view reached by Judge Baker that accord and satisfaction does
extend to this group of obligations. (ii) Baynton v Morgan does
not actually decide that which Mr Warwick must argue it does in order to get
his argument home. All it decides is that the assignee has the power to assign
again, which includes surrender of part, something very different from a
discharge of liability and which (I agree with Judge Baker at p161 of Deanplan)
has little to do with this part of the discussion.
Thus far I see
no reason why I should feel any concern about following the decision in Deanplan,
which, in the absence of some clear indication it was wrong, I would normally
do with a first instance decision in the High Court and I am going to follow
it.
This is not at
all the end of the matter because there remains a point of real substance. Not
everything that at first sight discharges a debt necessarily meets the criteria
of an accord and satisfaction. In Re EWA, A Debtor [1901] 2 KB
642, cited at length in Deanplan at p168, Collins LJ (as he then was) at
pp648–9 says:
It is clear
that, although a document in terms purports to release one of two joint
debtors, yet it may contain in terms a reservation of rights against the other
joint debtor. Where you find those two provisions you construe the document,
not as a release, but merely as an undertaking not to sue a particular
individual, and the result is that the right to proceed against the co-debtor
is reserved and can be put in force against him.
As far as I am
aware this remains good law; it is also clear
that in fact discharged would be to invite Mr Bumble’s well known strictures on
the law.
With that, I
turn to the relevant clause. I have already referred to clause 4.1, the
drafting of which was subjected in argument to some well reasoned abuse. If, as
I think, the accord and satisfaction point is in general a good one, then one
would hardly need clause 4.2 at all. In fact, the draftsman has sought by a
rather cumbersome ‘belt and braces’ scheme to protect codebtors and by doing so
has, I think, exposed them to more danger than is necessary. The critical
provision is the inhibition on suing a codebtor except with the prior written
consent of the supervision committee.
No criteria
for consent are stated, although it is hard to think of a situation where such
consent would (in accordance with the purposes of the arrangement) be given, it
remains it could be given in any case. If the consent is given, then the
codebtor could be sued. What to my mind can this be but a reservation of
rights, ie the creditors say: ‘We reserve the right, subject to permission,
which we may be able to obtain, to sue the codebtor. If we do not get permission,
we will not sue.’ This is not a total discharge. A total discharge can only
mean no suit in any circumstances. Here, in some circumstances, there can be a
suit. In my judgment, this is a reservation of rights and it follows that, as
regards the position of codebtors, the arrangement is to be construed as an
agreement not to sue the assignee with rights, albeit limited, being reserved
against the original tenants. If, therefore, I had to answer this question I
would conclude it in favour of the landlords.
I think and
hope I have now dealt with all the points. It remains for me to express my
indebtedness to all four counsel who have argued this matter with considerable
interest and difference of approach and I will now hear them on the form of the
order which I am asked to make and as to costs.
After a
discussion on costs, JUDGE COOKE QC said: I will now deal first of all
with how to dispose of the proceedings substantively.
The
preliminary issue as formulated by the master is whether and if so to what extent
the voluntary arrangement which is identified there prevents the plaintiff
pursuing claims under the lease identified in para 1 of the amended statement
of claim. I propose to answer that by saying that the voluntary arrangement as
defined in the order will not prevent the plaintiffs pursuing claims arising
under the lease identified in para 1 of the amended statement of claim. That is
all I need say about that.
It is always
attractive when a preliminary issue is raised and having been determined in a particular
way gives a fairly strong indication that there may be no further dispute left
in the action for the court to go ahead and try to dispose of the entire
action. Commonly, of course, that happens in claims under Part II of the
Landlord and Tenant Act 1954. But I am mindful of this. The master’s order in
fact says that until the issue has been determined all further proceedings in
the action, except for the purpose of determining the issue be stayed, and that
there is not any degree of consensus for that stay to be removed. If there was
agreement to remove it, I would of course remove it and deal with the matter by
consent in some short and summary way.
In practical
terms I am told in any event by the two tenant defendants that there may be
some issue on quantum, although, quite frankly, Mr Karas is not able to
tell me what it is; but there it is. One can see such an issue might arise.
The larger
temptation, perhaps, is to do what Mr Sheridan wants me to do, which is to
dismiss his clients from the action at this stage, the preliminary issue having
totally disposed of the question of liability against him and that he should go
away with his costs. But, tempted though I am to take that course, and
practical though it might be to do so, I think I am not going to give in to
temptation and I ought to follow, strictly speaking, the master’s order for all
or for none. That being so, I do not propose to do more substantively than
simply dispose of the preliminary issue.
We then come
to the question of costs, which in the nature of things can only at this stage
be the costs of the preliminary issue and I am not concerned with the costs of
the action, which will fall to be dealt with by somebody else at some other
time. So far as the preliminary issue is concerned, the plaintiffs have
undoubtedly succeeded. The two tenant defendants have undoubtedly failed. That
being so, it seems to me that Mr Warwick is entitled as against Chancery and
Marley in any event to a joint and several order for the costs of the preliminary
issue, and I make that order. Mr Sheridan, who is for the assignor defendant,
who is there because the plaintiffs have sued it in the alternative, also seeks
its costs either against Chancery and Marley direct or against the plaintiffs
in the confident expectation the plaintiffs will pass the bill on down the
line. Short of technicalities, the riposte made to that by the tenant
defendants is the nice riposte that, although Mr Sheridan’s client was
represented, it was really making common cause with the plaintiffs and there
was no need for it to be here separately.
I think that
does, with respect, ignore the fact that although there is a common argument,
nevertheless the plaintiffs and Mr Sheridan’s client are in very different
positions on the pleadings; they cannot effectively, I think, have their
interests properly represented even for the purposes of the preliminary issue
by the same counsel. They are actually on opposite sides of the record and
between them there is hostile litigation. That being so, I think Mr Sheridan’s
client will both be entitled to be represented on this hearing and to put its
own case, which it did. Having done so and having succeeded, I think it must
have its costs and Chancery and Marley will have to pay those on a joint and several
basis as well.
