Re Games Station Ltd and others [2013] ChD (Game) was the latest of several recent cases to consider the entitlement of landlords to recover rents after a company has entered into administration.
In Game, the High Court was bound by Goldacre (Offices) Ltd v Nortel Networks UK Ltd (in administration) [2009] EWHC 3389 (Ch); [2010] 1 EGLR 25 and Leisure (Norwich) II Ltd and others v Luminar Lava Ignite Ltd (in Administration) and others [2012] EWHC 951 (Ch) but gave permission to fast-track the appeal – a decision that was met with curiosity and anticipation.
The principles that were established in Goldacre and Luminar are under attack again and landlords will watch the case with interest.
Game
The Game group of companies went into administration on 26 March 2012, immediately after the March quarter day. A new company, Game Retail Ltd, took over the business and kept more than ?half of the stores open, occupying under licence from the administrators.
It is understood that rent for the March 2012 quarter has not been paid but subsequent rents have, as an administration expense. In Game, the Court of Appeal will be asked by four landlords to overturn the decisions in Goldacre and Luminar and order that certain rents, which fell due before the companies went into administration, be paid as an administration expense.
Goldacre and Luminar
The history leading to Goldacre and Luminar and the development of insolvency expenses since the decision in Re Lundy Granite (1870-71) LR 6 Ch App 462 was dealt with in In Administration, Out of Pocket (EG 9 March, pp138-140). In Goldacre, the court held that an administrator who retained premises for the benefit of the administration must (where rents are payable quarterly in advance) pay the full quarter’s rent, even where the administrator only retains part, or vacates the premises before the end of the quarter.
This decision was initially welcomed by landlords for providing certainty as to what rents were payable as an administration expense, but met with dire warnings from certain insolvency practitioners, that the financial burden of paying rents when they fell due would stifle their ability to rescue companies.
A solution for administrators was, however, quickly discovered and came from the long-established case of Ellis v Rowbotham [1900] 1 QB 740, where it was held that the Apportionment Act 1870 does not apply to rents payable in advance: the decision in Goldacre was clear that, if the premises were occupied for the benefit of the administration, the full rents for the entire rental period were payable on the date on which they fell due even if the premises were vacated during that period.
It followed that rents that fell due prior to the administration would also not be apportioned and so, for the period between the company entering administration and the next rent payment date, rents would not be payable as an administration expense. This was confirmed in Luminar. It has, as a result, become common for administrators to be appointed immediately after a quarter day to benefit from this “free” occupation until the next rent payment date. The landlord will have the right to submit a proof in the administration for unpaid rents, but this claim will rank equally with other unsecured creditors and, once secured creditors and other expenses have been paid, there may be little or no dividend.
The current regime has been the subject of much criticism and suits neither landlords nor administrators (although either may, on occasion, benefit from a windfall). The question remains as to whether the Court of Appeal in Game will resolve the issue. Many commentators have argued that the logical position is that the administrator ought to be obliged to pay, as an administration expense, an apportioned rental sum for the period during which the company occupies premises for the purposes of the administration.
However, to achieve this goal, the standard apportionment position would need to be circumvented, and the court may need to reconsider the early liquidation cases that have been followed in the recent administration cases.
In Lundy Granite, the court exercised its discretion, holding that, since the company had remained in possession of property for the benefit of the liquidation “common sense and ordinary justice require the court to see that the landlord receives the full value of the property”. This was confirmed by Lindley LJ in In Re Oak Pit Colliery Co (1882) 21 Ch D 322 and, more recently, in Re Toshoku Finance UK plc [2002] UKHL 6. However, by elevating what would otherwise be an unsecured claim to insolvency expense status, the court in Lundy Granite adopted a common sense approach: the liability to pay rents arose when the lease was entered into, before the insolvency event, but the court held that rents that fell due after the insolvency event should be treated as if they were an expense of the administration.
Given that the obligation to pay rents as an expense was based on the court’s view of “common sense and ordinary justice”, it could be said that it would not require a significant further leap to hold that (notwithstanding Ellis), that in an insolvency context, the sums payable for premises as an expense should be apportioned to be equivalent only to the rents due for the days on which the premises are retained or used for the purposes of the insolvency.
However, if the Court of Appeal does hold this, as with any judgment, there could be unintended consequences. For example, if the court reaches a decision based on equitable principles, could it also find that the rent payable by the administrator or liquidator ought to be based on an open market rental valuation at the commencement of the insolvency, rather than the then passing rent? What if an administrator retained only part of the premises for storage purposes, and there was clear evidence that it would be possible for the landlord to re-let the remainder? Would it be equitable to require the administrator to pay rents for the whole?
Nortel
The Game appeal will follow closely on the heels of the landmark decision of the Supreme Court in Re Nortel Companies and others [2013] UKSC 52. Here, the Supreme Court considered whether a statutory liability under a Financial Support Direction (FSD) or Contribution Notice (CN) issued by the Pensions Regulator against companies within the Nortel group after the onset of insolvency would rank as an administration or liquidation expense, a provable debt or neither. It is important to note that there are key differences in the facts. Nortel involved statutory liabilities imposed by the Pensions Regulator and not contractual liabilities due under a lease. Nortel did not consider the apportionment point that is key to the decision on the payment of rent. Finally, one of the arguments in Nortel was that liability under a FSD or CN would not be a provable debt at all, an issue that does not arise in Game.
The Supreme Court’s judgment, primarily given by Lord Neuberger, reviewed the law on insolvency expenses going back to the 19th century. In holding that any liability under an FSD or CN will not rank as an expense, the court found an outcome that the majority of commentators consider sensible and fair.
However, in reaching its decision, it should be noted that the Supreme Court held that there is no “residual discretion” for the court to change statutory rankings. As noted by Lord Neuberger, none of the early insolvency cases justifies a contention that an administrator “can be ordered to change the ranking of a particular debt simply because the statutory ranking appears unattractive”. With this in mind, if Goldacre and Luminar are to be overturned, it will not simply be on the basis that the law as it currently stands appears unfair.
Although on its facts the decision in Nortel may be of limited direct effect, the case makes an interesting backdrop for the Game appeal. In Game, the Court of Appeal has an opportunity to resolve the anomaly, which has arisen as a result of Goldacre and Luminar, that the landlord’s position and recovery of the sums owed depends on the timing of the start of the administration.
Frances Edwards is a senior associate in the real estate dispute resolution group and Gawain Moore is a senior associate in the restructuring and insolvency group at Herbert Smith Freehills
