Insolvency — Disclaimer of lease — Determination of loss and damage to landlord under section 178(6) of Insolvency Act 1986 — Loss of right to future rent — Whether discount for early payment
By a lease dated 9 January 1990 the respondent
landlord granted a 25-year term of office premises to a company at a rent
rising to £160,000 pa in the fourth year of the term and subject to review
after the fifth year. By 1994 the rent payable was more than four times the
rental value of the property. On 9 December 1994 the company entered into
members’ voluntary winding-up and the appellants were appointed the liquidators.
The liquidators gave notice disclaiming the lease. The landlord submitted a
claim for a sum of £5.3m as representing its loss and damage, under section
178(6) of the Insolvency Act 1986, on the disclaimer of the lease; the sum
represented the difference between the amounts that would have been received in
respect of rent, insurance rent and other sums under the lease if there had
been no disclaimer, and amounts the landlord would be likely to receive after
the disclaimer. The liquidators rejected the claim on the ground that each of
the relevant payments ought to have been discounted for accelerated receipt.
Ferris J decided that the sum must be discounted to reflect the immediate
payment of sums payable in the future ([1996] 2 EGLR 49). The Court of Appeal,
allowing an appeal by the landlord, decided that no discount for early payment
was applicable ([1997] 2 EGLR 36). The liquidators appealed.
allowed.
When a lease was disclaimed it was determined and the reversion accelerated
(see Hindcastle Ltd v Barbara Attenborough Associates Ltd [1996]
1 EGLR 94. The assessment of compensation under section 178(6) of the
Insolvency Act 1986 required ascertainment of the loss or damage suffered by
the landlord; this was the same exercise as was undertaken when assessing the
damages for breach of contract where one party repudiated a contract. An award
of damages involved arriving at a single monetary figure. Where the loss would
be suffered over a period, the computation would have to allow for any
advancement that has occurred. The loss was the aggregate of the difference
between the contractual rent and market rent over the period of the remainder
of the lease, discounted to allow for advancement. On the evidence, an 8.5%
discount was appropriate.
The landlord’s loss was the loss of the right to future rent, not the loss of
the rent. There was no justification for employing a different approach in the
assessment of compensation for such damage than would be employed if the
claimant were claiming damages for breach of a contract that had been
wrongfully terminated. The landlord was not a secured creditor. Rent was not a
simple debt; rent payable in future under a subsisting lease could not be
treated as a series of future debts making up a pure income stream. R 11.13 of
the Insolvency Rules 1986 has no application. The future losses to the landlord
were to be discounted.
The following cases are
referred to in this report.
Hardy v Fothergill
(1888) 13 App Cas 351; 58 LJQB 44; 59 LT 273; 37 WR 177
Hide, In re, ex parte Llynvi Coal & Iron
Co, (1871) 7 Ch App 28
Hindcastle Ltd v Barbara
Attenborough Associates Ltd [1997] AC 70; [1996] 2 WLR 262; [1996] 1 All ER
737; [1996] 1 EGLR 94; [1996] 15 EG 103, HL
London & Colonial Co, Re (1868) LR 5 Eq 561
Metropolis Estates Co Ltd v Wilde [1940] 2 KB 536; [1940] 3 All ER 522, CA
New Oriental Bank Corporation (No 2), Re [1895] 1 Ch 753
Oppenheimer v British
Exchange Bank (1877) 6 ChD 744
Overstone Ltd v Shipway
[1962] 1 WLR 117; [1962] 1 All ER 52, CA
Park Air Services plc, In re, sub nom
Christopher Moran Holdings Ltd v Bairstow
[1997] 1 WLR 1376; [1997] 3 All ER 193; (1998) 75 P&CR 161; [1997] 2 EGLR
36; [1997] 30 EG 127, CA
Park Air Services plc, In re, sub nom Christopher
Moran Holdings Ltd v Bairstow [1996] 1 WLR
649; (1996) 72 P&CR 174; [1996] 2 EGLR 49; [1996] 40 EG 136, Ch
Photo Production Ltd v Securicor Transport Ltd [1980] AC 827; [1980] 2 WLR 283;
[1980] 1 All ER 556; [1980] 1 Lloyd’s Rep 545, HL
This was an appeal by the
liquidators, Vivien Murray Bairstow and Nigel Ruddock, from a decision of the
Court of Appeal that had allowed an appeal by the landlord, Christopher Moran
Holdings Ltd, from a decision of Ferris J in proceedings by the landlord
claiming compensation under section 178(6) of the Insolvency Act 1986.
Jonathan Sumption QC and Richard Adkins QC
(instructed by Lawrence Graham) appeared for the appellants; Terence Etherton
QC and Peter Griffiths (instructed by Memery Crystal) represented the
respondent.
Lord Slynn of Hadley, Lord Lloyd of Berwick and
Lord Hope of Craighead all referred to the draft speech of Lord Millett and
concurred with his reasoning.
Giving his judgment, Lord Hobhouse of Woodborough said: I have had the
advantage of reading in draft the speech of Lord Millett and agree with him
that this appeal should be allowed for the reasons that he gives.
Your lordships are disagreeing with a unanimous
judgment of the Court of Appeal delivered by Mummery LJ (reported at [1997] 1
WLR 1376) and I therefore consider it appropriate that I should briefly, in my
own words, state why it is that I would allow this appeal.
Section 178 of the Insolvency Act 1986 gives a
liquidator the option to disclaim onerous property, that is to say, any
unprofitable contract or any other property of the company which is such that
it may give rise to a liability to pay money or perform any other onerous act.
On 10 December 1994 the liquidator chose to exercise that power and disclaimed
the 25-year lease dated 9 January 1990 of 48 Gray’s Inn Road, London WC1. The
disclaimer operated so as to determine from
in respect of the property. The consequence of this was well summarised in the
speech of Lord Nicholls of Birkenhead in Hindcastle Ltd v Barbara
Attenborough Associates Ltd [1997] AC 70* at p87E:
In order to determine these rights and obligations
it is necessary, in the nature of things, that the landlord’s obligations and
rights, which are the reverse side of the tenant’s rights and obligations, must
also be determined. If the tenant’s liabilities to the landlord are to be
extinguished, of necessity so also must be the landlord’s rights against the
tenant. The one cannot be achieved without the other.
Disclaimer also operates to determine the
tenant’s interests in the property, namely the lease. Determination of a
leasehold estate has the effect of accelerating the reversion expectant upon
the determination of that estate. The leasehold estate ceases to exist.
*Editor’s note: Also reported at [1996] 1 EGLR 94
The act of disclaimer brings into existence the
right of the lessor to claim for the loss or damage that he has sustained in
consequence of the operation of the disclaimer. This right is given by section
178(6) of the Act. A lessor is deemed to be a creditor of the company to the
extent of the loss or damage and he is accordingly given the right to prove for
the loss or damage in the winding-up.
This is a statutory right to compensation directly
analogous to a right to claim damages for a statutory fault. Its character is
compensatory. It is a right that comes into existence without more at the
moment of the disclaimer. It is not a right to the performance of the contract
disclaimed; it is not a right to the payment of future debts.
Two things follow from this. The first is that the
assessment of the compensation involves, as the statute says, an ascertainment
of the loss or damage sustained by the lessor as a result of the disclaimer. It
is necessary to quantify the relevant sum in money terms. This is precisely the
same exercise as has to be undertaken when assessing the damages for a breach
of contract, as, for example, where one party has repudiated a contract and the
other party has accepted that repudiation as terminating the contract and he
then exercises his secondary right to claim damages: see Lord Diplock in Photo
Production Ltd v Securicor Transport Ltd [1980] AC 827 at p849. It
is interesting to note that this is the way in which the lord justices chose to
express themselves in In re Hide, ex parte Llynvi Coal & Iron Co
(1871) 7 Ch App 28. Thus, Sir George Mellish LJ said at p34: ‘Surely he is to
prove for the damage which could be recovered for the breach of the contract.’
Any award of damages involves arriving at a single
monetary figure that, in present terms, quantifies that loss. Where the loss
will be suffered over a period in the future, the computation will have to make
allowance for any advancement that has occurred: eg Overstone Ltd v Shipway
[1962] 1 WLR 117. To fail to take into account the element of advancement leads
to an over-compensation of the claimant.
I consider that the Court of Appeal fell into
error at pp1383-1384 in the present case when, under the heading ‘General
Principles’, they gave their first reason for deciding in favour of the lessor.
They failed to take into account that ordinary principles require that the
element of advancement should be allowed for and that the sum awarded should be
appropriately scaled down.
The second consequence of the character of a
disclaimer of a lease and the requirement to pay compensation is that the right
to prove for loss and damage is not a right to prove in respect of any debt due
in the future. Such considerations cease to be relevant. For example, r 11.13
of the Insolvency Rules 1986 cannot have any application. The creditor is not
proving for a debt ‘of which payment is not due at the date of the declaration
of dividend’. He is claiming in respect of a present right to compensation that
came into existence at the date of disclaimer, that is to say, in the present
case, on 10 December 1994. The argument of the lessor and the third ground of
decision of the Court of Appeal (at pp1388-1389) are therefore misconceived.
The rule has no application.
Further (as the lessor has expressly conceded
before us) the position under a lease has particular characteristics that it
may share with other types of synallagmatic relationship. While the lease is
subsisting, the lessor is not entitled to prove for any instalment of rent
until the date upon which that payment becomes due. Similarly, if the lease is
determined, the right to rent is also determined. This is an additional reason
why the attempt of the lessor to introduce r 11.13 into the assessment of the
compensation to which he is entitled under section 178(6) is mistaken.
Subsequent to the commencement of the winding-up but before the disclaimer, he
had no right to receive future payments of rent; he would have to wait until
they fell due. The provisions of r
the time that a dividend was declared, would there have been a future debt in
respect of which a dividend could be paid.
After the disclaimer the right to rent is lost.
There is only a right to compensation. That involves a comparison between the
pre-disclaimer and post-disclaimer positions. For material purposes this
difference is the aggregate of the differences between the contractual rent and
the market rent over the period of the remainder of the lease discounted to
allow for advancement. The second ground on which the Court of Appeal decided
in favour of the lessor (at pp1384-1388) is accordingly, in my judgment,
mistaken. It does not take into account the inability of the lessor to make an
advanced proof of rent and the fact that section 178(6) gives him an immediate
right to compensation without having to wait.
Further, for the reasons stated by Lord Millett,
the references to security are mistaken. The right of re-entry does not secure
the payment of rent. The approach in the 19th-century cases, for example Re
New Oriental Bank Corporation (No 2) [1895] 1 Ch 753, do not derive from
any assertion that the lessor is a secured creditor. They arise from the
practical problems resulting from the then inability of a liquidator to
disclaim a lease and the need to protect the lessor, who (as stated previously)
has to wait before he can prove for instalments of rent, from being defeated by
a premature distribution of the assets of the company.
The Court of Appeal was obviously impressed, as
were your lordships, by the detailed historical review undertaken by Mr Terence
Etherton QC. But the Court of Appeal was mistaken to be persuaded that the
right to compensation now given by section 178(6) was simply to be equated with
a preservation of the right to be paid rent from time to time during the
remainder of the lease. The right to compensation is a different kind of right
to the primary right of performance. Just as an acceptance of a repudiatory
breach means that the injured party can sue at once for damages without waiting
for the time of performance, so also the exercise of the right of disclaimer
and the provision in section 178(6) give the lessor an immediate right to
compensation. Making an adjustment for the element of advancement is an
essential ingredient in the quantification of the compensation.
On the remaining questions argued before us I do
not need to add anything to what has been said by Lord Millett. I agree that,
on the findings of fact made in this case by the judge, the 8.5% discount rate
is the appropriate rate. It is a matter of evidence. There is no remaining
dispute on the question of statutory interest. It runs from the date of the
disclaimer.
On the question of costs, I agree with what Lord
Millett has said.
I agree with the order proposed.
Giving his judgment, Lord Millett said: A solvent company is a tenant of
property under an onerous lease. It goes into members’ voluntary liquidation,
and the liquidator disclaims the lease. The landlord comes in to prove for his
loss. Must the landlord submit to an appropriate discount to reflect the
present value of the rents and other payments that would have accrued in the
future but for the disclaimer? The judge (Ferris J) held that he must: see
[1996] 1 WLR 649*; the Court of Appeal that he need not: see [1997] 1 WLR
1376†.
*Editor’s note: Also reported at [1996] 2 EGLR 49
†Editor’s note: Also reported at [1997] 2 EGLR 36
The respondent is the owner of a freehold property
at 48 Gray’s Inn Road, London WC1. In 1990 it granted a lease of the property
to a company now known as Park Air Services plc (the company) for a term
of 25 years from 29 September 1989. Rent was payable quarterly in advance with
provision for periodic upwards-only rent reviews. By the date of the first rent
review in September 1994 the state of the property market had declined to such
an extent that the passing rent was more than four times the then rental value
of the property.
On 9 December 1994 the company entered into
members’ voluntary winding-up and the appellants were appointed liquidators.
The company has been fully solvent throughout. On the following day the
appellants gave notice to the respondent under section 178(2) of the Insolvency
Act 1986 disclaiming the lease. This entitled the respondent under section
178(6) to prove in the winding-up for any loss or damage that it had sustained
in consequence of the operation of the disclaimer.
The respondent duly submitted a proof of debt for
a sum in excess of £5.3m. This sum represented the difference between: (i) the
amounts that would have been receivable by the respondent in respect of rent,
insurance rent and other sums payable under the lease for the residue of the
term if there had been no disclaimer; and (ii) the amounts that the respondent
would be likely to receive in respect of rent, insurance rent and other sums on
a notional reletting or series of relettings for a similar term after the
disclaimer. Each of these amounts was calculated without any discount for
accelerated receipt.
The appellants rejected the proof on the ground
that each of the relevant amounts ought to have been discounted for accelerated
receipt. The respondent appealed against the rejection of its proof. The appeal
was heard by Ferris J. He upheld the appellants’ contention and assessed the
respondent’s loss at £1,053,000 with interest. The appellants duly paid this
amount. The Court of Appeal allowed the respondent’s appeal. The effect of the
judgment of the Court of Appeal was to increase the amount for which the
respondent was entitled to prove to £2,548,899, together with interest thereon
pursuant to section 189 of the Insolvency Act 1986. That sum, together with
interest, has been paid. The appellants now appeal to your lordships.
The main question: should a discount be
applied?
The office-holder’s right to disclaim onerous
property has been part of our bankruptcy law since the Bankruptcy Act 1869. It
was introduced into corporate insolvency by section 267 of the Companies Act
1929. It is currently contained in section 178 of the Insolvency Act 1986.
Subsection (4) states the effect of a disclaimer as follows:
(4) A disclaimer under this section —
(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.
It has long been recognised that the effect of the
disclaimer of a lease is to extinguish the lease as between the landlord and
the tenant. Where (as in the present case) these are the only parties involved,
the disclaimer operates to determine the lease altogether with the result that
the landlord’s reversion is accelerated: see Hindcastle Ltd v Barbara
Attenborough Associates Ltd [1997] AC 70 at p87 per Lord Nicholls of
Birkenhead. This is because the subsection expressly provides that the tenant’s
rights and liabilities in respect of the leasehold property are determined.
These include its right to possession and its liability to pay rent. Once these
are determined, the landlord is entitled to immediate possession and has no
right to any further payment of rent. In Hindcastle Ltd v Barbara
Attenborough Associates Ltd your lordships explained that the disclaimer
has the same effect even where third parties such as sureties are involved.
When the lease is disclaimed it is determined and the reversion accelerated,
but the effect of subsection (4)(b) is to preserve the rights and
liabilities of others, such as guarantors and original tenants, as though the
lease continued: see ibid at p88.
Since the disclaimer operates to bring to an end
both the tenant’s liability to pay rent and the landlord’s right to receive it,
the landlord cannot prove for future rent. The tenant’s obligation to pay it
has gone. Since this is the consequence of an act that is authorised by
statute, the landlord has no right to claim damages at common law for his loss.
Instead, section 178(6) gives him a statutory right to compensation. This
provides as follows:
(6) 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.
This gives the landlord an immediate right to
prove for the loss or damage that he has sustained in consequence of the
operation of the disclaimer, that is to say in consequence of the determination
of the lease and the acceleration of the reversion. This is normally measured
by reference to the difference between the rents and other payments that the
landlord would have received in future but for the disclaimer and the rents and
other sums that the disclaimer will enable him to receive by reletting. But the
subject-matter of the landlord’s proof is compensation for loss of his right (inter
alia) to future rent, not the rent itself, to which he no longer has any
claim. The amount of this loss has to be assessed. This involves giving credit
for the receipts that the disclaimer will enable him to obtain by reletting.
Thus, even the undiscounted amount of the landlord’s proof does not represent
the aggregate amount of the rents and other sums that he would actually have
received but for the operation of the disclaimer. The appellants contend that,
in order accurately to reflect the value of receipts that would have accrued at
a future time, but in respect of which the landlord is given an immediate right
of proof, the amount of such receipts must be discounted to an amount that
reflects their present value.
It has always been recognised that the right
conferred by section 178(4) or its predecessors is a statutory right to compensation
for the loss caused by the operation of the disclaimer, and that this must be
assessed in the same way as damages. There was a bold attempt in In re Hide,
ex parte Llynvi Coal & Iron Co (1871) 7 Ch App 28 to argue that the
landlord was entitled to compensation for the loss of his dividend in the
liquidation, thus compounding the effect of the insolvency; but this was firmly
rejected. What is determined by the disclaimer is the landlord’s right to the
rent, not merely his right to prove for it. As Sir George Mellish LJ asked:
‘Surely he is to prove for the damage which could be recovered for the breach
of contract?’
There is no justification for employing a
different approach in the assessment of compensation for such damage than would
be employed if the claimant were claiming damages for breach of a contract that
had been wrongfully terminated. In assessing damages in such a case, however,
allowance would have to be made for accelerated receipt of any sums that had
not fallen due at the date of breach (and which the contract did not make
immediately due and payable in the event of breach). An award of compensation
that failed to take this into account would overcompensate the claimant.
It follows that I cannot accept the premise on
which the judgment of the Court of Appeal was based viz: that in
principle the compensation should be calculated without any discount for early
receipt; and that a discount should not be imposed unless there was something
in the Insolvency Act 1986, the Insolvency Rules 1986 or the authorities that
required it. The opposite is the truth. Nor do I accept the proposition that
the purpose of the disclaimer provisions, which the Court of Appeal described
as the early closure of the liquidation, does not require the application of
any discount for early payment. It is true that the reason the liquidator is
given the right to disclaim onerous property is in order to enable him to
achieve an early closure of the liquidation. But the reason the landlord is
given a statutory right to compensation by section 178(6) is different. It is
to ensure that he is fairly compensated for his loss, and this requires a
discount for early receipt.
The Court of Appeal conducted an examination of
the authorities in order to explain the position that obtained before 1929,
but, in my view, they failed to draw the right conclusion from them. In those
days, the absence of any right on the part of a liquidator of an insolvent
company to disclaim an onerous lease left both parties in an unenviable
position. The landlord could forfeit the lease if it contained a proviso for
entry in the event of liquidation, as any well-drawn lease did. This would
enable
lease, for he could not have both rent and possession, and he could not obtain
compensation for the consequences of his own action in forfeiting the lease. In
practice, therefore, where the passing rent was greater than the current market
rent he would normally treat the lease as still on foot. But if he did so he
would be likely to be met by the argument that he could only prove for rent
already accrued due: see Re London & Colonial Co (1868) LR 5 Eq 561;
Re New Oriental Bank Corporation (No 2) [1895] 1 Ch 753; Metropolis
Estates Co Ltd v Wilde [1940] 3 All ER 522 (CA). These decisions are
not easy to reconcile with Hardy v Fothergill (1888) 13 App Cas
351, as that case might have been considered to decide that he could prove for
future rent in the event of the lessee’s bankruptcy. But on the existing state
of the authorities, a claim for future rent was likely to encounter difficulty.
I shall return to the reason for this later. In respect of such rent, his only
course in practice was to leave the property empty and submit proofs quarter by
quarter as the rent fell due.
The liquidator’s position was equally
unsatisfactory. He could not safely distribute the estate once he had notice of
the landlord’s interest. If he did so, he would be personally liable for the
rents as they fell due. He could retain an amount by way of indemnity, but,
without an order of the court, he would still be personally liable if the
amount he retained proved insufficient. The court would give him leave to
distribute, thus protecting him from any risk of personal liability, but only
if he retained a sum sufficient when invested at compound interest to fund the
future liabilities: see Oppenheimer v British Exchange Bank
(1877) 6 ChD 744. In other words, he was required to retain an amount equal to
their present or discounted value.
Even this was not wholly satisfactory to either
party. The landlord could not relet the property, and the liquidator was bound
to retain a sum that gave no credit for its current rental value. In practice
the parties were well advised to negotiate a surrender of the lease, and the
court encouraged this course while recognising that it could not compel it: see
Re New Oriental Bank Corporation (No 2) [1895] 1 Ch 753. The amount of
the compensation payable by the liquidator to the landlord on a surrender was a
matter for negotiation, but it would be surprising if it did not normally
include a discount to reflect the present value of the future liabilities as
well as credit for the current rental value of the property. The liquidator
would be unlikely to agree to pay more than he would be compelled by the court
to retain.
The Court of Appeal rejected the appellants’
argument that the question should be approached simply as a claim for damages
for breach of an ordinary commercial contract, in which the claimant is seeking
compensation for the loss of future income; although that is what the language
of section 178(6) indicates. Instead, the Court of Appeal regarded the landlord
as a secured creditor, his security taking the form of a right to re-enter and
recover possession for non-payment of rent and to distrain for unpaid rent.
This enabled the Court of Appeal to treat the respondent as a secured creditor
who had voluntarily surrendered his security and was proving for the whole debt
as if it was unsecured: see r 4.88(2) of the Insolvency Rules 1986.
The short answer to this is that a landlord is not
a secured creditor within the meaning of section 248 of the Insolvency Act
1986. Section 248 defines ‘secured creditor’ as a creditor of the company who
holds a security over the property of the company. A secured creditor who does
not realise or voluntarily surrender his security must put a value on his
security and prove only for the balance as an unsecured creditor. None of these
provisions is capable of applying to the landlord’s right of re-entry. This is
not a security interest subsisting in the tenant’s property, nor is it capable
of being realised by the landlord. It does not secure the performance of the
tenant’s liability to pay rent, which remains unsatisfied as well after
re-entry as before. It cannot be valued or surrendered. If the lease is
disclaimed, it is not voluntarily surrendered by the landlord but brought to an
end by the liquidator without his consent. Once it is disclaimed, the right to
re-enter is gone, together with the right to future rents, payment of which it
is supposed to have secured. It is a very curious security that is liable to
evaporate just when it is needed.
Having thus circumnavigated section 178(6), the
Court of Appeal applied r 11.13(3) to the respondent’s proof of debt. R 11.13
is concerned with the proof of debts payable at a future time. It provides as
follows:
(1) Where a creditor has proved for a debt of
which payment is not due at the date of the declaration of dividend, he is
entitled to dividend equally with other creditors, but subject as follows:
(2) For the purpose of dividend (and for no other
purpose), the amount of the creditor’s admitted proof (or, if a distribution
has previously been made to him, the amount remaining outstanding in respect of
his admitted proof) shall be reduced by [a percentage] calculated as follows: I
x M/12, where I is 5% and M is the number of months (expressed, if need be, as,
or as including, fractions of months) between the declaration of dividend and
the date when payment of the creditor’s debt would otherwise be due.
(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.
By r 4.94 a creditor whose debt is not due at the
date when the company went into liquidation is entitled to prove for the
nominal, ie undiscounted, amount of the debt; but this is subject to adjustment
of the dividend when payment is made before the time it would have become due.
R 11.13(2) adjusts the dividend payable in respect of the proof by requiring it
to be discounted at the rate of 5% pa over the period of acceleration. R
11.13(3) is a very curious provision, newly introduced in 1986, when interest
during the winding-up was for the first time made payable on debts proved in
the winding-up. Its effect seems to be that there is no discount for
accelerated receipt of a future debt in a solvent winding-up.
The judge was plainly right to hold that this rule
has no application to a proof submitted by a landlord pursuant to section
178(4). Such a proof is not a proof for a debt of which payment was not due at
the date when the company went into liquidation within the meaning of r 4.94.
At that date the landlord was not a creditor in respect of any loss or damage
arising in consequence of the disclaimer, for the lease had not then been
disclaimed. That is why section 178(6) only deems him to be a creditor. Nor
does he afterwards prove for a debt of which payment is not due at the date of
the declaration of a dividend. He proves for the statutory compensation to
which he is entitled by virtue of the section. That is not a right to a future
payment. The claim remains to be quantified; but subject thereto it is a
present right to immediate payment.
The respondent’s argument attached great
importance to the alleged anomaly of applying a discount to the landlord’s
claim in respect of future rents and not to the proofs of other creditors in
respect of future debts. Both, the respondent submitted, suffered the loss of a
future stream of income. Why, it was asked, should the landlord be singled out
in this way?
But there is no anomaly. The Court of Appeal
evidently considered that the landlord could, but for the disclaimer, have
proved for the future rent and recovered it without discount. But, as I have
already pointed out, in practice he could not have proved for the future rent.
He would have had to wait until the rent fell due and then prove quarter by
quarter. This is because rent is not a simple debt. It is the consideration for
the right to remain in possession. The tenant’s liability to pay future rent is
not debitum in praesenti solvendum in futuro. Its existence depends upon
future events. Rent in respect of a future rental period may never become
payable at all. Rent payable in future under a subsisting lease cannot be
treated as a series of future debts making up a pure income stream.
There is a critical distinction between contracts
that have been fully performed by the creditor and contracts that remain executory
on his part. The creditor who has lent money that has not been repaid or
supplied goods or services that have not been paid for sues or proves in
respect of a debt. If the debt is not yet due at the date on which a dividend
is declared, the dividend is subject to adjustment under r
creditor who has contracted for payment for goods or services still to be
supplied by him, however, is not and may never become entitled to payment. He
cannot sue or prove in respect of a debt.
in full. But if the creditor is entitled to treat the contract as discharged by
breach or the office-holder disclaims the contract, the creditor is entitled to
compensation. He may quantify his loss and prove for it, giving credit for the
cost of the goods or services that he is no longer bound to supply. R 11.13 has
no application to such a proof.
It would be wrong for me to leave r 11.13 without
drawing attention to the respects in which its drafting appears to be seriously
defective. For more than 100 years provision has been made for future debts to
be discounted at the rate of 5% pa in order to arrive at their present value.
The process of discounting involves applying the discount to the reducing
amount of the debt, thus arriving at a sum that, invested at compound interest,
would equal the nominal value of the debt at the date when it fell due. R
11.13(2), however, applies the discounting formula to the full (ie unreducing)
amount of the admitted proof. Such a process would reduce the proof to zero
after 20 years, and at no stage yields an amount that, invested at 5% compound
interest, would equal the nominal value of the debt at the date fixed for
payment.
The second respect in which the drafting appears
defective is in relation to the amount and priority of the discount to be added
back where the company is solvent. Obviously the first priority is to satisfy
the principal amount of the debts, including the discounted value of any future
debt. Once these have been satisfied in full, one would expect the amount of
the discount from the date of the liquidation to the date of final distribution
to be paid pari passu with the interest payable during the winding-up to
other creditors. Instead, however, the creditor whose proof has been discounted
recovers the full amount of the discount, not to the date of final
distribution, but to the date, possibly still far into the future, when his
debt would have fallen due for payment; and he recovers this, not pari passu
with the interest payable to other creditors during the winding-up, but in
priority to such interest. It is difficult to believe that this was the
intention of the Rules Committee.
Two subsidiary issues
The first issue concerns the rate of discount. The
best evidence of the appropriate discount rate is the yield on gilt-edged
securities for an equivalent term. The judge found that this was 8.5% pa. But
he applied different rates to the passing rents (10%) and to the current market
rents for which credit must be given (12%) to reflect the fact that the
property was over-rented and the risk that the company might default. The
appellants do not seek to support the judge’s use of higher rates to reflect
the risk of default, and are content for a rate of 8.5%. The respondent
contends for 5% to reflect the discount rate provided for by r 11.13. I would
reject the latter approach as without merit. The 5% rate is a purely nominal
rate, which has remained constant for more than 100 years during periods of high
and low interest rates alike, and its application would not yield a correct
assessment of the amount of the respondent’s loss.
There was a second issue that concerned the date
from which interest should run under section 189 of the Insolvency Act 1986. It
is now common ground that if the value of the respondent’s loss is to be
assessed at the date of disclaimer, then the discounted amount can properly be
treated as outstanding at that date and carry interest for the whole period
thereafter until payment.
Costs
The respondent lodged a proof for £5.3m. The
appellants rejected the proof, as they were entitled to do, in toto without
admitting it in part. At the hearing, and on the basis of its own expert
evidence, the respondent reduced the amount of its claim to £3.5m. The
appellants contended for a sum of £200,000. The respondent recovered £1.053m.
This was far less than it claimed, and far more than the smallest sum for which
the appellants contended. The judge recognised that this was hostile litigation,
and that, accordingly, it would not be right to order the costs of both parties
to be paid out of the assets of the company. At the same time he did not
consider it appropriate to award the respondent its costs on the footing that
costs should follow the event. Indeed, he said that he could not tell what the
event really was. The truth was that the issue had to be determined by the
court; and that he had accepted the arguments and evidence of one party on some
aspects and those of the other on others. In those circumstances, he made no
order for costs.
The respondent accepts the judge’s ruling that
this was hostile litigation, but submits that the ordinary rule should follow.
The judge was wrong to say that he could not tell what the event was. The respondent
was the successful party, in that it obtained an award higher than it could
have obtained without coming to court.
I do not think that this is right, even at the
most technical level. The respondent submitted an excessive proof. The
appellants were entitled to reject it. The respondent appealed from their
rejection of its proof. It was unsuccessful. It did not obtain an order that
its proof be admitted. On this footing, the respondent was the unsuccessful
party. But the judge’s order reflected the realities of the situation. Neither
party was wholly successful or wholly unsuccessful. In my view, the judge’s
order for costs was well within the exercise of his discretion and should be
affirmed.
Conclusion
I would allow the appeal and restore the order of
the judge but varied so as to reflect a discount rate of 8.5% pa.
Appeal allowed.
