Lease of commercial premises – Administration – Permission to bring proceedings –Paragraph 43(6) of Schedule B1 to the Insolvency Act 1986 – Appellant tenant going into administration – Tenant’s business sold as going concern – Terms granting purchaser licence to occupy premises – Grant of licence breaching covenant in lease – Permission given to respondent landlord to bring proceedings for order terminating licence – Whether order impeding purpose of administration – Whether court required to balance interests of landlord against those of tenant’s creditors – Appeal allowed
The respondent was the landlord and the appellant company was the tenant under a lease of commercial cold-store premises for a term of 30 years from 1998. The lease contained a covenant against assignment or parting with possession of occupation. In 2008, the appellant went into administration; at that point, it lacked the funds to meet its quarterly rental payments. In June 2008, the appellant entered, to avoid going into liquidation, into an agreement to sell its frozen food warehousing and distribution business as a going concern. It hoped to obtain a better price for its assets and ensure that outstanding contracts could be fulfilled and existing book debts recovered from customers at full value, thereby providing a surplus for its own unsecured creditors. The purchaser undertook to perform the customer contracts but did not want to take an assignment of the lease. The appellant instead granted it a six-month occupational licence of the premises.
The respondent requested the administrator to terminate the licence. When it refused, the respondent applied to the court for permission, under para 43(6) of Schedule B1 to the Insolvency Act 1986, to bring proceedings for a mandatory order to that effect on the ground that the licence had been granted in breach of the covenants in the lease. Granting permission at first instance, the judge held that the purpose of the administration had been achieved immediately upon the sale, and that the administrator had acted in a reprehensible and illegal manner by granting a licence without informing the respondent or the court, resulting in a flagrant breach of covenant; it had been entitled to sell the business only if it sold to a person willing to take an assignment of the lease. The judge held that, in those circumstances, he was not required to conduct the balancing exercise between the interests of the landlord and other creditors referred to in Re Atlantic Computer Systems plc [1992] Ch 505. The appellant appealed and permission was given to admit new evidence. Meanwhile, the purchaser gave notice to the administrator to terminate the licence in October 2008.
Held: The appeal was allowed.
The purpose of an administration was to introduce a statutory moratorium postponing the enforcement of substantive rights so as to achieve a better result for the company’s creditors as a whole than would be likely if the company were to be wound up. The burden lay upon the respondent, as the party wishing to bring proceedings, to make out its case and to satisfy the court that it would be inequitable to prevent it from commencing the intended proceedings. Leave to bring proceedings would normally be given to a lessor to exercise its proprietary rights if this was unlikely to impede the statutory purpose of the administration. The court, in seeking to give effect to that purpose, had to balance the legitimate interests of the lessor against those of the company’s other creditors: Re Atlantic Computer Systems plc applied.
The judge had relied upon a range of inadequate reasons for not carrying out the necessary balancing exercise. He had made criticisms of the administrator’s conduct that he would not have made had he been alerted to the relevant evidence regarding the circumstances of the administration and sale. He had wrongly concluded that the purpose of the administration had been achieved on the sale of the business and that the purpose of the administration would not be impeded by the commencement of proceedings. One of the main purposes of the administration was a continuation of the collection of the book debts owed to the appellant for the benefit of its creditors. In order to achieve that, it was essential for the purchaser to occupy the property and thereby take over and perform the appellant’s contracts by storing and distributing the goods of the customers, many of whom owed money to the appellant. The mandatory injunction sought by the respondent would, if granted, terminate the ability of the purchaser to do that and would mean that it was not possible to use the premises for the purposes of the administration. Moreover, both the appellant and the respondent would benefit from a continuation of the purchaser’s occupation of the property since the appellant did not have the funds to pay the rent, whereas the purchaser would pay a sum equal to the passing rent for its occupation. The administrator was ordered to pay those sums to the respondent together with any interest that the appellant had earned on them.
Simon Mortimore QC, Janet Bignell and Blair Leahy (instructed by Jones Day) appeared for the appellant; Gabriel Moss and Katherine Holland (instructed by Pinsent Masons LLP) appeared for the respondent.
Sally Dobson, barrister
