Lease — Underlease — Inability of underlessee to meet rent — Underlessee insolvent — Liquidation — Liquidator disclaiming underlease — Whether disclaimer should be set aside — No evidence of male fides or perversity in decision to disclaim — New approach needed by court in dealing with onerous property in liquidation — High Court holding that no right to interfere with disclaimer — Application to set aside liquidator’s disclaimer refused
By a lease dated October 28 1968, C took a lease of 21 and 22 Hans Place, Kensington, London SW1, for a period of 32 years from December 25 1967 at an annual rent of £10,500 without rent reviews. By an underlease dated January 16 1970, D sublet those premises to the company for a period expiring shortly before the expiry of the lease at a rent of £22,000 pa subject to rent reviews. Under the terms of the lease, the company entered into a repairing covenant in respect of the premises. R and L were parties to the underlease as guarantors. By 1991 the rent payable under the underlease had been increased to £175,000 pa. That was to be increased further in 1992 to £180,000 and to £185,000 in 1993. It followed that by late 1991 C was making a substantial profit rent over the amount payable by them under the headlease. The company ran into difficulties in producing the funds to meet the rent becoming due under the underlease. It was advised that if the company went into liquidation and the liquidator disclaimed the lease, that would release the company not only from all future obligations to pay rent, but would also have the effect of releasing the guarantors from their obligations to C.
Having failed to find a subtenant or assignee for a consideration sufficient to meet the rent becoming due, the directors of the company resolved to give notice under section 98 of the Insolvency Act 1986 to the creditors of the company for the purpose of passing a resolution to place the company in creditors’ voluntary winding-up. A liquidator was subsequently appointed, who gave notice of an election under section 178(5) of the 1986 Act and entered a notice to disclaim under section 178(2). The company was insolvent and its only asset was the underlease. C applied to the High Court under section 168(5) of the 1986 Act for, among other things, an order that the disclaimer of the underlease by the liquidator be set aside.
Held The application was refused.
1. The Insolvency Act 1985 (now consolidated into the 1986 Act), by removing the requirement of leave before a liquidator could disclaim onerous property, either intentionally or unintentionally, effected a substantial alteration to the law. This required a new approach by the court when considering challenges to a liquidator’s decision to disclaim onerous property. The decision to disclaim had become one of the many instances where the liquidator exercised powers in the management of distribution of the assets of the company in liquidation, conferred on him by the Insolvency Act. Any challenge to the exercise of that power could only be made under section 168(5).
2. Such an application had to establish male fides or perversity to demonstrate that no liquidator properly advised would have taken such action in order to challenge his decision to disclaim, even where the applicant was a third party, such as a landlord, who could clearly demonstrate that he would be seriously adversely affected by the decision to disclaim: see Leon v York-O-Matic Ltd [1966] 1 WLR 1450.
3. In the present case, there was no suggestion of male fides and it was impossible to say that a decision to disclaim the underlease, which was the source of the company’s misfortunes and the substantial reason for its liquidation, could be a perverse decision.
4. Alternatively, even if the court were exercising an original discretion whether or not to permit disclaimer, there were plain advantages to the general body of creditors and to the administration of the company’s affairs arising from a disclaimer, which the competing advantage to Cavendish ought not to overrule and the disclaimer should stand. However, that matter did not arise, since there were no circumstances which justified the interference by the court in the liquidator’s decision to disclaim the underlease.
John McDonnell QC and Katherine Lampard (instructed by Wilde Sapte) appeared for the guarantors; John Davis (instructed by Elborne Mitchell) appeared for liquidator; David Neuberger QC (instructed by Brechers) appeared for C.
