Insolvency — Disclaimer of lease — Determination of loss and damage to landlord under section 178(6) of Insolvency Act 1986 — Whether statutory discount for early payment of rent
By a lease dated January 9 1990 the
applicant landlord granted a 25-year term of office premises to a company at a
rent rising to £160,000 in the fourth year of the term and subject to review
after the fifth year. By 1994 the rent payable was very substantially in excess
of the current rental value of the property. On December 9 1994 the company
entered into members voluntary winding up; the applicant appointed the
respondent liquidators and they gave notice disclaiming the lease. The landlord
submitted a claim for a sum in excess of £5.3m (later revised to £3.5m) as
representing its loss and damage under section 178(6) of the Insolvency Act
1986 on the disclaimer of the lease. The respondents contended the sum should
be £200,000. In the court below Ferris J decided that the loss was the worth,
at the date of disclaimer, of rent, insurance rent, rates and other sums (if
any) payable by the tenant during the residue of the 25-year term, applying a
discount in respect of payments due in the future, less an amount to be
ascertained by a similar process in relation to a tenancy which might be
assumed would be granted following the disclaimer: see [1996] 2 EGLR 49. He
decided that the amount was £1.053m. The landlord appealed.
determined or treated as determined in a winding up or in bankruptcy, the
landlord is entitled to prove in principle for all the rent and other payments
which he would have been entitled to recover from the tenant for the residue of
the term, had the lease not been determined. The landlord must give credit for
the fact that, on the determination of the lease, he recovers the premises and
may relet them, although if he can only do so at a lower rent, he may recover
the difference. The effect of r 11.13 of the Insolvency Rules 1986 is that the
landlord is entitled to be paid, out of surplus funds available in the
liquidation, the full amount of the future rent reserved under the lease, less
the credit for the amount of the rent obtainable on reletting. No statutory
discount for early payment is applicable to the landlord’s proof for future
rent.
The following cases are referred to in
this report.
AE Realisations (1985) Ltd, In re [1988] 1 WLR 200; [1987] 3
All ER 83
Gooch v London Banking Association
(1886) 32 ChD 41
Hide, In re, ex parte Llynvi Coal and Iron Company
(1871) 7 Ch App 28
Hindcastle Ltd v Barbara Attenborough
Associates Ltd [1997] AC 70; [1996] 2 WLR 262; [1996] 1 EGLR 94; [1996] 15
EG 103
London & Colonial Co, Re (1868) LR 5 Eq 561
New Oriental Bank Corporation, Re [1895] 1 Ch 753
Panther Lead Co, Re [1896] 1 Ch 978; 65 LJ Ch
499; 44 WR 573
This was an appeal by the landlord,
Christopher Moran Holdings Ltd, against a decision of Ferris J ([1996] 2 EGLR
49) on an application by the landlord for the determination of the loss and
damage suffered under section 178(6) of the Insolvency Act 1986 following the
disclaimer of a lease by the respondent liquidators, Vivien Murray Bairstow and
Nigel Ruddock.
Terence Etherton QC and Peter Griffiths
(instructed by Memery Crystal) appeared for the appellant; Richard Adkins QC
and Edward Cole (instructed by Lawrence Graham) represented the respondents.
Giving the judgment of the
court at the invitation of Nourse LJ, MUMMERY LJ said: This is the
judgment of the court. The question on this appeal is: what is the correct
method of calculating the extent of the loss or damage payable in a voluntary
liquidation to the landlord in consequence of the disclaimer of the lease by
the liquidators of the tenant company under section 178 of the Insolvency Act
1986? The issue was formulated in a more tendentious form by Mr Etherton QC, in
his excellent submissions on behalf of the landlord, Christopher Moran Holdings
plc, as: at what price can a solvent company (put into voluntary liquidation by
its members) buy off its obligations to the landlord under the lease?
The resolution of the issue turns on the
construction of the relevant provisions of the 1986 Act and of the Insolvency
Rules 1986 (SI 1986/No 1925).
Section 178 confers on the liquidator of
a company being wound up in England and Wales, the power, by the giving of the
prescribed notice, to disclaim ‘any onerous property’.
Subsection (3) provides:
The following is onerous property for the
purposes of this section —
(a) any unprofitable contract, and
(b) any other property of the
company which is unsaleable or not readily saleable or is such that it may give
rise to a liability to pay money or perform any other onerous act.
It is common ground that ‘onerous
property’ may include ‘any property of a leasehold nature’.
Subsection (4) spells out the
consequences of a disclaimer by providing that it:
(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.
The disclaimer of a lease thus brings the
term of years to an end, releases the tenant company from all future liability
to pay rent and entitles the landlord to reoccupy or relet the premises.
Subsection (6) is the critical provision:
Any person sustaining loss or 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.
Two preliminary comments help to explain
the purpose and context of these provisions:
(1) Purpose of disclaimer provisions
As stated by Lord Nicholls in Hindcastle
Ltd v Barbara Attenborough Associates Ltd [1997] AC 70* at
pp86H–87D:
*Editor’s note: Also reported at [1996] 1
EGLR 94
The fundamental purpose of these
provisions is not in doubt. It is to facilitate the winding up of the
insolvent’s affairs … Unprofitable contracts can be ended, and property
burdened with onerous obligations disowned. The company is to be freed from all
liabilities in respect of the property. Conversely, and hardly surprisingly,
the company is no longer to have any rights in respect of the property. The
company could not fairly keep the property and yet be freed from its
liabilities.
Disclaimer will, inevitably, have an
adverse impact on others: those with whom the contracts were made, and those
who have rights and liabilities in respect of the property. The rights and
obligations of these other persons are to be affected as little as possible.
They are to be affected only to the extent necessary to achieve the primary
object: the release of the company from all liability. Those who are prejudiced
by the loss of their rights are entitled to prove in the winding up of the
company as though they were creditors.
(2) Legislative history
The legislative origins of section 178
are summarised in an earlier passage in the speech of Lord Nicholls in Hindcastle
(supra) at pp85H–86B:
Sections 178 to 182 of the Insolvency Act
1986 are a group of sections governing the disclaimer of onerous property by a
liquidator of a company that is being wound up. Similar provisions, in sections
315 to 321, apply to trustees in bankruptcy. The differences between the two
sets of provisions are not material to the purposes of this appeal. The
ancestor of the disclaimer provisions in their present form is the Bankruptcy
Act 1883, replaced subsequently by the Bankruptcy Act 1914. Disclaimer in
corporate insolvencies was introduced in the Companies Act 1929. Again, and
save as mentioned below, the differences between the Act of 1883 and its
successors and the current statutory provisions are not material for present
purposes.
Those comments explain the relevance of
the earlier decisions on the bankruptcy legislation concerning the rights of a
landlord to prove for rent in a bankruptcy (a) where the lease has not been
disclaimed and (b) where the lease has been disclaimed. Vinelott J held in In
re AE Realisations (1985) Ltd [1988] 1 WLR 200 at p204G that ‘decisions on
the Act of 1883 and on the Act of 1914 are … of direct authority on the
construction’ of the equivalent provisions for disclaimer by the liquidators of
companies.
Before consideration of the construction
of section 178(6) and the effect of the authorities, we turn to the facts and
the course of the proceedings in this case.
Facts
On January 9 1990 the landlord granted a
lease of a self contained office building at 48 Gray’s Inn Road, London WC1
(the property), to the company Park Air Services plc (then named United
Guarantee plc) for a term of 25 years from September 29 1989, at an initial
rent of £140,000 pa for three years, rising to £160,000 pa in the fourth and
fifth years of the term, and with upward-only rent reviews at September 29 1994
and at five-year intervals thereafter.
The events of 1994 are summarised in the
judgment of Ferris J (now reported in [1996] 1 BCLC 547*) at p550c–f:
*Editor’s note: Also reported at [1996] 2
EGLR 49
By 1994, if not before then, it had
become apparent that the rent of £160,000 then payable under the lease was very
substantially in excess of the current rental value of the property. According
to the landlord’s expert in these proceedings it is four times the likely rent
now obtainable in the open market, even disregarding such matters as possible
rent-free periods or other inducements which might have to be offered in order
to obtain a tenant. According to the respondents’ expert the property is
over-rented to the extent of five times the current market rent. During 1994
the company tried unsuccessfully to find a purchaser for the lease. On December
9 1994 the company entered into members voluntary winding up and Mr Bairstow
and Mr Murray, the respondents in these proceedings, were appointed
liquidators. On the very same day, December 9 1994, they gave notice of
disclaimer of the lease.
In a statement of affairs of the company
as at December 8 1994 the directors put the surplus assets of the company,
after satisfying the liabilities disclosed in the statement, at some £6.7m. The
disclosed liabilities do not include anything in respect of future liabilities
under the lease and, not surprisingly, the lease is not treated as an asset
having any positive value. The amount of the surplus is, however, such that,
whatever the loss or damage which may be proved for under Section 178(6), the
liquidators are certain to be able to pay 100 pence in the pound to all
creditors, including the landlord, and the argument before me has proceeded on
the basis that this is the case.
A dispute then arose as to the amount of
the landlord’s proof.
The landlord, through its solicitors,
submitted a proof of debt for a sum in excess of £5.3m in respect of the loss
or damage claimed under section 178(6). When the liquidators rejected the proof
for that amount, the landlord appealed and submitted new calculations in
support of a figure of more than £3.5m, alternatively for a figure a little
under £2.8m. The liquidators estimated the amount for which the landlord was
entitled to prove as just under £200,000.
On the landlord’s appeal, launched by an
application dated April 6 1995, against rejection of its proof, an order was
sought, pursuant to r 4.83 of the 1986 Rules, that the decision of the joint
liquidators not to admit the landlord’s proof for £5,350,178 for the whole
amount claimed or for part of that amount be reversed or varied. The landlord
also claimed:
a determination pursuant to Section 112
of the Insolvency Act 1986 as to whether the joint liquidators should admit the
landlord’s proof for the whole amount claimed or for part of that amount and,
if part of that amount, as to how much should be admitted.
Ferris J heard that appeal, which lasted
for four days, in October 1995. Rival valuers gave evidence in support of the
figures advanced by them and, as the judge commented at p551a:
… no fewer than seven different bases of
calculation have been canvassed with varying degrees of enthusiasm.
The judge delivered a reserved judgment
on the main points on December 21 1995 and a further judgment on the rate of
interest payable and on costs on February 9 1996.
The appeal to this court is against the
order dated February 9 1996 in which it was declared that:
(1) The landlord is deemed a creditor of
Park Air Services Plc (‘the company’) in the sum of £1,053,000 due and payable
on 9 December 1994 and, accordingly, is entitled to prove for that sum in the
winding up of the company, and
(2) The landlord is entitled to interest
at 8% per annum on the sum of £1,053,000 in respect of the period from 9
December 1994 to the date of payment of the said sum.
The judge also ordered that the joint
liquidators should pay the landlord the interest within 28 days, that there
should be no order as to costs and that the landlord should have leave to
appeal.
Judgment
The judge approached the issues in the
case under two main heads: (A) the basis on which the loss or damage is to be
quantified and (B) the figures applicable to this particular case.
As to (A) , his view was that there was:
… no material difference between
corporate and individual insolvency or between disclaimer by the liquidator of
an insolvent company and disclaimer by the liquidator of a solvent company.
That is common ground on this appeal.
After reviewing the authorities, the judge commented:
The older authorities proceed on the
basis that one takes the difference between the rent reserved by the disclaimed
lease and the rent obtainable in the market after the disclaimer. It is fair to
comment, however, that the arguments which were raised against the proofs in
the reported cases were very different from those which have been raised before
me. Moreover the decisions make no discount or other allowance for the fact
that, if the lease had remained on foot, periodical gales of rent would not
have fallen due until some time in the future, in some cases well into the
future.
After summarising the submissions and
expressing views on the effect of r 11.13 of the 1986 Rules (to which we return
later in this judgment), the judge analysed in detail the various bases
propounded for the calculation of the loss and damage under section 178(6). He
observed:
In each case the calculation starts by
evaluating what the landlord would have been entitled to if there had been no
disclaimer (which I shall call the ‘no disclaimer amount’). Credit against that
amount is then given for the value of what is left to the landlord after the
disclaimer (which I shall call the ‘residual amount’). In addition, under some
bases further amounts are said to be included in the loss and damage by reason
of (i) the existing dilapidations to the property at the date of disclaimer; (ii)
the loss of the benefit of the tenant’s covenant to repair during the whole of
the 25 year term; and (iii) the loss of the benefit of the tenant’s covenant to
pay rates and the cost of insurance throughout the term.
I find it convenient to define at this
stage one further expression which will aid the description of a number of the
suggested bases of calculation. I shall
a term or terms equivalent to the residue of the term granted by the disclaimed
lease as at the date of disclaimer. Such lease or leases are to be assumed to
have been granted at the date of the disclaimer (or in the case of the second
or subsequent lease in a series at the expiration of the preceding lease) on
the same terms as the disclaimed lease except as to rent (which is to be taken
as the market rent obtainable at the date of the assumed lease) and, in the
case of a series of leases, except as to duration and commencement.
The judge dealt separately with four
bases (A to D), propounded by the landlord in descending order of preference
from its point of view, and three bases (E to G ), propounded by the
liquidators in descending order of preference from their point of view.
For detailed reasons, which it is
unnecessary to repeat, the judge rejected all bases of valuation, except basis
F, which he considered adopted the correct approach. Basis F is described by
him in p560b-e as taking:
… as the no disclaimer amount the value,
at the date of disclaimer, of the rent, insurance rent, rates and other sums
payable by the tenant during the residue of the term, with a ‘market risk rate’
being applied in order to ascertain the current worth of payments due in the
future.
Basis F also required, correctly in the
judge’s view, the residual value to be ascertained by a similar process in
relation to the assumed tenancy.
Finally, the judge had to determine the
figures applicable to the present case and the amount achieved on basis F. It
is unnecessary to examine the valuation evidence because, by the time the
matter returned back for further argument on interest and costs, the parties
had agreed that, on basis F, the amount payable to the landlord under section
178(6) was £1,053,000, and that is reflected in the order dated February 9
1996.
Appeal
The landlord’s case on the appeal has
been simplified by Mr Terence Etherton QC (who did not appear in the court
below) by an amendment to the notice of appeal, for which leave was granted on
March 10 1997 without opposition from Mr Richard Adkins QC, who appears for the
liquidators.
The main order which the landlord seeks
is that:
1. It be declared that the loss or damage
sustained in consequence of the operation of the disclaimer (‘the disclaimer’)
on 9th December 1994 of the lease (‘the lease’) dated 9 January 1990 between
the landlord and the tenant, then called United Guarantee Plc, of 48 Grays Inn
Road, London WC1 (‘the premises’) for which the landlord may prove in the
winding up of the tenant is to be calculated on the following basis, namely,
the difference between:
(i) The aggregate of the rent, insurance
rent, rates and other sums payable by tenant until the expiration of the term
of the lease by effluxion of time (‘the no disclaimer amount’);
(ii) The aggregate of the rent, insurance
rent, rates and other sums payable by new tenants on relettings of the premises
during the same period (‘the residual amount’) without any discount for early
payment together with the costs of repairs caused by the breach by the tenant
of its repairing covenants, if such repair needed to be effected so as to
secure a re-letting of the premises.
An alternative declaration is sought in
similar form save that, instead of there being no discount for early payment,
there be a discount for early payment for the no disclaimer amount and the
residual amount, applying a discount assuming a yield of 5% pa or, (if
different) a yield equal to the interest on medium term deposits or such other
yield as compensates sufficiently only for accelerated receipt of an assured
future income stream.
The landlord claims a declaration that it
is deemed to be a creditor in a sum calculated on either basis and is entitled
to prove for such sum in the winding up of the company; that it is entitled to
interest at 8% on the balance outstanding from time to time in respect of the
period from December 9 1994 to payment in full; that the joint liquidators pay
the balance outstanding together with interest to the landlord within 28 days;
and that the liquidators pay the landlord’s costs of the application and the
appeal.
General principles
The evidence filed and the arguments
deployed before the judge were detailed and complex. The attractive force of
the submissions made by Mr Etherton QC, on behalf of the landlord, is their
simplicity and their foundation on first principles. We start with the
statutory question: what is the extent of the loss or damage sustained by the
landlord in consequence of the operation of the disclaimer of the 1990 lease on
December 10 1994?
In principle the loss sustained by the
landlord would appear to be the difference between:
(a) the aggregate of the rent and other
payments which the landlord was entitled to be paid by the tenant for the
residue of the term of the lease; and
(b) the amount of the rent and other
payments which it is estimated, at the date of disclaimer, the landlord could
obtain from another tenant entering into the same lease (save as to rent) for a
term equivalent to the residue of the term granted by the disclaimed lease.
That difference would produce a figure
for which the landlord is entitled to prove in the winding up of the company.
Is there anything in the 1986 Act, in the 1986 Rules or in the authorities
which refutes or refines that approach ? We have reached the conclusion that
there is not, that this appeal should be allowed and that an order should be
made in the terms of the first declaration sought by the landlord.
Liquidation principles
The position of the landlord must be
viewed in its proper context, namely proof of debt in the winding up of the
tenant company; it is not to be approached simply as a claim for damages for
breach or repudiation of an ordinary commercial contract in respect of which
the plaintiff is seeking compensation for lost future income. The landlord’s position
on the winding up of the tenant company is that of a secured creditor, ie one
who has a proprietary or possessory interest over the property of the tenant as
security for payment of a debt. A landlord has a right to re-enter for
non-payment of rent, to recover possession of the leased premises and to
distrain for unpaid rent.
As explained in Gore-Browne on
Companies 44th ed, when a company goes into liquidation,
a secured creditor has various courses
open to him:
(1) He may value the security and prove
for the balance.
(2) He may realise his security and prove
for the balance.
(3) He may surrender his security and
prove for the whole debt.
(4) He may rely entirely upon the
security and not prove at all.
These principles are seen in operation in
the decisions on the landlord’s right (in bankruptcy and in winding up) to
prove for unpaid rent (A) in those cases where there has been no disclaimer and
(B) in those cases where there has been disclaimer.
(A) Position of landlord in no
disclaimer cases
We consider first the position of the
landlord in those cases where there has been no disclaimer of the lease by the
liquidator (or trustee in bankruptcy).
(1) Continuation of tenancy
(a) If the tenancy continues because the
tenant company remains in possession of the premises ‘for the convenience of
the winding up’, the landlord is entitled to recover his rent in full as an
expense of the liquidation: he does not prove for a dividend in the
liquidation.
(b) In any other case where the tenancy
continues, the landlord is entitled: (i) to prove for all the arrears of rent;
(ii) to enter a claim for all future rent; and (iii) as rent accrues due, to
submit proofs in the liquidation from time to time: Re New Oriental Bank
Corporation [1895] 1 Ch 753 at p757. The decision in that case was at a
time when, unlike a trustee in bankruptcy, a liquidator in the winding up of a
company had no power to disclaim.
Consistently with, and in aid of, the
right of the landlord to enter a claim for and prove for future rent, it was
held in Gooch v London Banking Association (1886) 32 ChD 41 that,
on the application of a
company in voluntary liquidation from distributing assets of the company among
its shareholders, without setting aside sufficient assets to provide for the
payment of all future rent and liabilities under the lease. Pearson J stated at
p48:
I am satisfied here that the intention of
the Legislature as shewn by all the terms of the Act, was to provide once and
for all for the winding-up of the company, for the discharge of its
liabilities, the distribution of its assets, if there were any to distribute,
and then for the dissolution of the company; and being of that opinion I have
come to the conclusion that the liquidators would be guilty of a dereliction of
duty if they were to distribute the assets without providing for this
liability, and that the landlord therefore in the present case, who has a claim,
as it is admitted, against the company for the future rent which may become
due, is interested in seeing that the liquidators discharge their duty
properly, and is entitled to come to this Court and ask to restrain them, when
… it appears … that they claim as a matter of right … to distribute these
assets without providing for this liability.
(The case went to the Court of Appeal,
but the parties compromised the dispute after the court had reserved judgment.)
(2) Surrender of the lease
Alternatively, although under no
obligation to do so, the landlord could agree to accept a surrender of the
lease on terms entitling him to prove immediately in the liquidation for the
rent payable for the remainder of the term. If that course were adopted, the
landlord would be bound to give credit for the fact that, and to the extent
that, following the surrender, he would be entitled to repossess and relet the
premises: see New Oriental Bank Corporation (supra) at p755 where
it was said (arguendo):
The proof should be admitted only for
future rent, less the benefit which the landlord obtains by getting his
property back again; that is to say, he is in the position of a secured
creditor.
see the intervention of Vaughan Williams
J at p756; see also Re Panther Lead Co [1896] 1 Ch 978 at p983 and Re
London & Colonial Co (1868) LR 5 Eq 561 at p566.
(3) Determination of lease
In cases where there has been no
surrender, the lease may be regarded as determined, for example, in the case of
the acceptance by the landlord of a repudiation of the lease by the tenant
company. In those cases the landlord is entitled to prove for the rent for the
remainder of the term on the basis that the lease has been determined and that
he is regarded as an unsecured creditor. In such cases, as in (2) above, the
landlord must, in submitting his proof, give credit for the benefit of the
lease since, like other secured creditors, he cannot both maintain the security
conferred by the lease and prove for the full amount of the debt secured. In Re
Panther Lead Co (supra) there was no surrender of a lease to the
landlord and the liquidator did not have the power to disclaim the lease. In
the voluntary winding up of an insolvent company the landlord sought to prove
for the liabilities of the company under the lease down to the end of the term.
The lease was an onerous one: Romer J accepted that the terms of the lease were
beneficial to the landlord and, if the lease were put an end to without due
compensation to the landlord, he would suffer damage. The landlord was willing
for the lease to be determined on terms of being allowed to prove for the loss
thereby sustained. The judge gave liberty to the liquidator to carry out that
arrangement, which would enable the landlord to prove ‘at once for his loss on
the footing of the lease being determined or treated as determined’ (p985). The
proof was allowed and the question of the amount was to be determined in
chambers. This arrangement meant that the landlord would be able to prove for
his loss and the liquidator would be able to complete the winding up. The basis
on which the loss was in fact calculated is not apparent.
(B) Position of landlord in
disclaimer cases
The right of a landlord to prove for loss
and damage where there is a statutory disclaimer (ie one which he is
statutorily obliged to accept) is governed by principles laid down as long ago
as 1871 In re Hide, ex parte Llynvi Coal and Iron Company (1871) 7 Ch
App 28, a bankruptcy case in which the trustee in bankruptcy disclaimed an
agreement for a lease under section 23 of the Bankruptcy Act 1869. The landlord
claimed to prove as creditor under the section which provided:
Any person injured by the operation of
this section, shall be deemed a creditor of the bankrupt to the extent of such
injury, and may, accordingly, prove the same as a debt under the bankruptcy.
The question for decision was how the
amount of the landlord’s injury was to be estimated. It was argued on behalf of
the trustee in bankruptcy that:
… assuming that the lessors have received
some injury, in assessing the loss regard must be had to the insolvency of the
lessee [p30]
and that:
… the utmost loss [the lessors] have
sustained through the disclaimer of the trustee is the dividend which they
would have got from the estate if they had proved for the future rent under the
31st Section [p31].
That argument was rejected by the Court
of Appeal. It was decided that the lessors were entitled to prove and the
measure of the injury sustained by them was the difference between the rent to
be paid under the agreement for the lease and what the lessors would now obtain
for the property. As James LJ said at p32:
I am satisfied that the injury referred
to in the section means the legal wrong that is done him. He is deprived of a
certain contract, under which he was to recover a certain sum of money, and he
is to prove against the estate for that which he would have had a right to
recover or to sue for if he had not been deprived of that right by the
bankruptcy.
He went on to explain at p33 that:
… a landlord who has made a contract for
£500 a year, to be paid to him for the use of the land, is entitled to claim
£500 a year, minus what he can get for the land from another tenant.
Mellish LJ agreed and said at p33:
It is quite plain that the object of
these sections is that the bankrupt shall be absolutely relieved from any
liability under any contract he has ever entered into. And the bankrupt being
so relieved, it is plainly also the intention of the Legislature that the
person deprived of the right of action against the bankrupt, and of the benefit
of the contract which he made with the bankrupt, should be turned into a
creditor in respect of what the Act describes as the injury he has received.
That, I think, must mean in respect of what he would have been entitled to
recover against the bankrupt if the bankrupt had remained solvent. It would be
contrary to every principle that in assessing the damages which could have been
recovered against the bankrupt if he had not been made bankrupt, and for which
proof is made, you are to take into consideration the fact of the bankrupt
being insolvent, so that the amount of the proof is to depend upon the extent
of his insolvency.
On p35 Mellish LJ added that:
… in estimating the amount of damages,
you are to take into consideration that the landlord regains possession of the
property, and if he can get as much rent for the property afterwards as before,
then the damages would be nil: if he gets less, it will be the
difference.
Conclusion on the authorities
In our judgment, the effect of the
authorities is that, if a lease is determined or treated as determined in a
winding up or in a bankruptcy, the landlord is entitled to prove in principle
for all the rent and other payments which he would have been entitled to
recover from the tenant for the residue of the term, had the lease not been
determined. The reason for determination of the lease — whether it be
surrender, acceptance of repudiation, operation of disclaimer or treating the
lease as determined for the purposes of proof — is irrelevant to the landlord’s
right to prove for future rent. In estimating the amount of the debt for which
he proves, the landlord must give credit for the fact that, on the
determination of the lease, he recovers
original term at a lower rent, then he is entitled to claim for the difference
between what he would have recovered from the tenant, if the lease had
continued, and the amount which he will in fact recover from a new tenant of
the premises. The extent of the tenant’s insolvency is irrelevant to the
estimation of the size of the debt due to the landlord though, of course, the
extent of the insolvency will affect the amount that the landlord in fact receives
by way of dividend in respect of his proof.
We agree with Mr Etherton QC that the
wrong approach was adopted in this case. In effect, a capital value, as at the
date of proof, was placed on the landlord’s right to receive the income stream
lost as a result of the operation of the disclaimer and a discount for early
payment was applied. The capitalised value was ascertained by applying a market
yield, which assumed that there would have been some risk of default in the
payment of the income stream lost in consequence of the disclaimer. This
‘property investment’ approach to valuation in the market of the income stream
lost by the landlord in consequence of the disclaimer is incorrect. It does not
give effect to the statutory right of the landlord to prove in the liquidation,
as illustrated by the authorities on bankruptcy and liquidation. The landlord
is entitled to prove in the liquidation on the basis that, but for the
disclaimer, he would have had a continuing contractual right to receive that
income stream from the tenant company for the residue of the term of the lease,
subject only to the landlord’s duty to mitigate the loss suffered during the
residue of the term by reletting the property after the disclaimer. The terms
of and the evident purpose of the disclaimer provisions (early closure of
liquidation) do not require that there should be a diminution of those rights
in the event of a statutory disclaimer by a liquidator.
R 11.13 and rent payable at future time
The 1986 Rules contain express provision
for proof of, and for payment of dividend in respect of, future debts. ‘Debt’
is defined in r 13.12 (1) as:
(a) any debt or liability to which
the company is subject at the date on which it goes into liquidation;
(b) any debt or liability to which
the company may become subject after that date by reason of any obligation
incurred before that date …
In section B (Quantification of claim) of
chapter 9 (Proof of debts in a liquidation) of the rules it is provided in r
4.94 (Debt payable at future time) that:
A creditor may prove for a debt of which
payment was not yet due on the date when the company went into liquidation, but
subject to Rule 11.13 in Part 11 of the Rules (adjustment of dividend where
payment made before time).
R 11.13 (3), which had no equivalent in
the earlier winding up rules, is in contention on this appeal, as the judge
accepted the submission of Mr Adkins QC for the liquidators that it did not
apply to a proof for the loss or damage payable to the landlord under section
178(6). The judge said at p554e:
A person claiming under that section is
deemed a creditor to the extent of the loss or damage sustained in consequence
of the disclaimer. The notional debt which is thus regarded as due to him must,
in my view, be a debt which becomes due at the moment of disclaimer. In the
ordinary case this will be before any dividend is declared and will thus be
outside r 11.13 (1).
The effect of this construction is that,
in a solvent liquidation, the landlord is unable to take the benefit of r 11.13
(3):
Other creditors are not entitled to
interest out of surplus funds under section 189(2) or (as the case may be)
328(4) until any creditor to whom paragraphs (1) and (2) apply has been paid
the full amount of his debt
Paras (1) and (2) of r 11.13 apply to
proof by a creditor for a debt ‘of which payment is not due at the date of the
declaration of dividend’ and apply a formula for the reduction of the amount of
the creditor’s admitted proof. The landlord is, in respect of future rent, a
creditor to whom paras (1) and (2) would apply, subject to para (3). We do not
agree with the judge that the landlord’s claim was for a notional debt due at
the date of disclaimer and before any dividend is declared, and therefore
outside r 11.13. The future rent covenanted under the lease consisted of a
series of debts, of which payment was not yet due at the date when the company
went into liquidation. R 4.94 confers a right to prove for a debt or debts
payable at a future time, but subject to adjustment of dividend for payment
before time in accordance under r 11.13. The effect of para (3) of r 11.13 is
that the landlord is entitled to be paid, out of the surplus funds available in
this liquidation, the full amount of the future rent reserved by the lease,
less the credit which must be given for the amount of rent obtainable by the
landlord on reletting in the open market after disclaimer. The judge wrongly
held that r 11.13 (3) does not apply to the landlord’s claim for loss and
damage under section 178(6). It applies, because the loss and damage for which
the landlord is entitled to prove in the winding up includes the future rent ie
a future debt to which r 11.13, including para (3) of the rule, applies. The
result is that no statutory discount for early payment is applicable to the
landlord’s proof for future rent.
For these reasons we allow the appeal and
make the declaration sought by the landlord, subject to any further submissions
on the wording of the order, on interest and on costs.
Appeal allowed.