Insolvency Act 1986, section 11 — Position when an administration order under the Act is in force — No steps to be taken to enforce any security over the company’s property — Meaning of ‘security’ — Whether it covers a proviso in the lease for re-entry for non-payment of rent — Peaceable re-entry and change of locks by landlord — Landlord’s action a breach of section 11
administration order under Part II of the Insolvency Act 1986 had been made in
respect of Exchange Travel Agency Ltd, which was the owner of a number of
freehold properties and leasehold shops — One of the leasehold shops was the
subject of the present motion — The administrators were proposing to sell this
shop and were conducting negotiations for that purpose with prospective
assignees when they discovered that the landlord, Triton Property Trust plc,
had peaceably re-entered the premises and changed the locks — The landlord
complained that the tenant had failed to pay the last quarterly gale of rent;
and the landlord had proceeded to relet the premises — The administrators, in
reply, issued a writ against the landlord and sought relief in the form of an
order restraining the landlord and the prospective tenant from occupying the
premises — Hence the present motion, of which the judge had given leave to
serve short notice
was as to the effect in these circumstances of section 11 of the Insolvency Act
1986, which provided that, on the making of an administration order under the
Act, no steps may be taken to, inter alia, enforce any security over the
company’s property, and no proceedings, execution or other legal process may be
commenced, except with the consent of an administrator or the leave of the
court — The administration procedure was introduced to remedy a deficiency in the
previous law — One of the objects was to ensure a better realisation of assets
than would be achieved on a winding-up — It was essential that during the
usually short period of administration restrictions were imposed on the normal
rights of creditors and others — The particular point at issue on this motion
was whether the exercise by the landlord of the rights given by a proviso for
re-entry came within the restriction imposed by section 11 on ‘steps taken to
enforce any security’
administrators argued that the proviso for re-entry for non-payment of rent has
been traditionally regarded by the law as in the nature of a security for the
rent and was therefore clearly covered by the restriction in section 11 — The
contrary submission by the landlord was that the proviso was not a security in
the sense intended by the Act, which contemplated something in the nature of a
mortgage, charge or lien — Harman J accepted the administrators’ interpretation
— He also held that, if the exercise of the right of re-entry was not the
enforcement of a security, it was the commencement of ‘other legal process’
within the meaning of section 11(3)(d) — Harman J summed the matter up by
saying:
It would be astonishing, in my mind, if
Parliament has plainly prevented a landlord from issuing a writ for forfeiture
or taking steps in the courts to effect a forfeiture or re-entry, but has left
entirely open and untouched the right to effect a peaceable re-entry
landlord were in breach of section 11, should never have been taken, and should
be remedied and set aside by appropriate orders
The following cases are referred to in
this report.
Clarke (Richard) & Co Ltd v Widnall [1976] 1 WLR
845; [1976] 3 All ER 301, CA
Howard v Fanshawe [1895] 2 Ch 581
Paramount Airways Ltd, Re (1990) BCC 130
Shiloh Spinners Ltd v Harding [1973] AC
691; [1973] 2 WLR 28; [1973] 1 All ER 90; (1973) 25 P & CR 48, HL
Wadman v Calcraft (1804) 10 Ves Junior
768
This was a motion by the administrators
in an action by Exchange Travel Agency Ltd (in administration) against Triton
Property Trust plc, seeking to restrain the latter as landlord from occupying
the premises of which the former company was leaseholder. Triton Property Trust
plc claimed to have re-entered the premises peaceably in pursuance of a proviso
for re-entry for non-payment of rent in the lease of the premises; it also
claimed to have relet the premises.
Richard Snowden (instructed by Wragge
& Co, of Birmingham) appeared on behalf of the applicants, for the
plaintiff in the action, Exchange Travel Agency Ltd; David Marks (instructed by
Frere Cholmeley) represented the respondent, defendant in the action, Triton
Property Trust plc.
Giving judgment, HARMAN J said: I
have before me a motion in an action by Exchange Travel Agency Ltd in
administration against Triton Property Trust plc and another company. Notice of
motion was issued on Monday of this week [October 29 1990], and I gave leave to
serve short notice of the motion so as to bring the matter on today.
The matter turns upon a bare point of law
and no substantial question on the facts really arises. Very briefly
summarised, they are that an administration order was made in respect of
Exchange Travel Agency Ltd in the vacation court on September 18 1990. Mr
Lovett, together with two partners, a Mr Katz and a Mr Talbot, who are all
partners in Arthur Andersen & Co, were appointed joint administrators by
that order. The purpose to be achieved as specified in the administration order
was the better realisation of the assets than would be achieved in a
winding-up.
At the commencement of the administration
Exchange Travel, as I shall call it, owned five freehold properties, 64
leasehold properties which were shops occupied by franchisees and 64 leasehold
shops which the travel agency used direct.
One of the leasehold shops used by
Exchange Travel for the purpose of its business was situated at 3 Queen’s Road,
Clifton, Bristol, which I shall call ‘the shop’. That shop was held pursuant to
a lease granted on October 29 1976 between the Royal National Pension Fund for Nurses,
as landlord, and Exchange Travel Holdings Ltd, as tenant. A term of 15 years
from December 21 1976 was thereby demised. Rent was payable quarterly in
advance and, pursuant to a rent review, the rent from December 21 1986 was
£8,800 a year, payable quarterly.
Following the making of the
administration order against Exchange Travel, the administrators were
conducting negotiations with prospective purchasers of the assets of Exchange
Travel, and in particular they were conducting negotiations for the assignment
of the leasehold interest in the shop to four prospective joint-assignees who
had made an offer of £25,000 by way of premium for the assignment of the lease.
The prospective sale had proceeded down to the extent of draft contracts being
submitted on October 10 1990 by the administrators’ solicitors to the
prospective assignees’ solicitors, and all obviously was proceeding in a normal
and apparently regular manner.
However, on October 16 1990, the
administrators received a letter from agents instructed by the landlord
informing them that the landlord had re-entered the premises on October 15 and
had changed the locks. The reason given was that Exchange Travel had failed to
pay the quarterly gale of rent due, I think, on Michaelmas Day or thereabouts —
the precise date does not matter. Further, the letter said that the landlord,
Triton Property Trust plc, which holds the
Nurses, had relet the premises. Not surprisingly, Exchange Travel, as tenant,
by its solicitors inquired the name of the new tenant, but for some reason
which entirely escapes me the solicitors acting for Triton Property Trust
refused to give the name. In the circumstances the administrators issued the
writ and sought ex parte relief on Monday October 29, this week, by way
of an order that the landlord be restrained from occupying the premises and
that the prospective tenant also be restrained. At the same time counsel for
the administrators sought leave to give short notice of this motion.
The ground was principally section 11 of
the Insolvency Act 1986. That section, as is becoming notorious, provides that
on the making of the administration order, a whole series of consequences
follows. By subsection (3), during the period for which an administration order
is in force — and the present time in respect of Exchange Travel is such a
period:
(a) no resolution may be passed or order made for
winding up of the company;
(b) no administrative receiver of the company may
be appointed;
(c) no other steps may be taken to enforce any
security over the company’s property, or to repossess goods in the company’s
possession under any hire-purchase agreement, except with the consent of the
administrator or the leave of the court . . . and
(d) no other proceedings and no execution or
other legal process may be commenced or continued, and no distress may be
levied, against the company or its property except with the consent of the
administrator or the leave of the court . . .
This section has been the subject of a
decision of the Court of Appeal, Re Paramount Airways Ltd [1990] BCC
130, where my judgment at first instance begins, continuing at p 142, where the
Vice-Chancellor delivers the leading judgment in the Court of Appeal which was
almost entirely assented to by his two brothers, who delivered short judgments
but who adopted the Vice-Chancellor’s reasoning upon the main points.
The Vice-Chancellor held in that case
that the administration procedure, which was introduced into the law following
the Cork Committee’s report, was intended to remedy what had been seen as a
deficiency in the law by conferring on the court a power analogous to the power
created by agreement with a debenture holder enabling the holder to appoint a
receiver, now called an administrative receiver, of the whole of the company’s
undertaking and assets. Such a power did not exist in the case of any company
if there were no person holding a fixed and floating charge which covered all
the assets of the company. The purpose for which administration orders are to
be made is described by the Vice-Chancellor at p 147 at G to be:
. . . the statutory purpose is to install
an administrator, as an officer of the court, to carry on the business of the
company as a going concern with a view to achieving one or other of the
statutory objectives mentioned.
–here the better realisation of the
assets than would be achieved in a winding-up.
The Vice-Chancellor goes on:
It is of the essence of administration .
. . that the business will continue to be carried on by the administrator . . .
[and] requires that there should be available to him the right to use the
property of the company, free from interference by creditors and others
— I stress the words ‘and others’ —
during the, usually short, period during
which such administration continues. Hence the restrictions on the rights of
creditors and others introduced by ss 10 and 11 of the Act.
The Vice-Chancellor holds that it is
desirable to construe the Act to carry out and effectuate that purpose if
possible. He goes on to hold that in that case, Paramount Airways, the
rights thereby asserted, which were rights raised by statute, section 88 of the
Civil Aviation Act 1949, were rights which did not amount to a security within
the terms of section 11(3)(c) of the Act of 1986, reading that word in the
definition contained in section 248 of the Act of 1986. He says at p 149,
between D and E:
[The submissions] do not persuade me that
the words ‘other security’ in the Act of 1986 ought to be given other than
their natural meaning.
And he says that the statutory rights are
not unique.
In this case Mr Snowden, for the
plaintiff, argues that the rights created by a proviso for re-entry in a lease
are and have for some centuries been described as giving security to the
landlord for the observance by the tenant of his obligations under the lease.
He cites, in support of that, a whole string of textbooks and cases: first, Halsbury’s
Laws of England, 4th ed, vol 27, at p 346 where para 442 starts: ‘The
proviso for re-entry on non-payment of rent is regarded in equity as merely a
security for the rent.’ He cites
further, in support of that, Hill and Redman’s, a very well-known
textbook on the law of landlord and tenant, which states the matter perhaps
even more firmly, at p 1001, para 2297:
The proviso for re-entry on non-payment
of rent is regarded in equity as merely a security for the rent and
accordingly, provided that the lessor and other persons interested can be put
in the same position as before, the lessee is entitled to be relieved against
the forfeiture on payment of the rent and any expenses.
I should observe here that the
administrators have sworn that the omission to pay the gale of rent due on
Michaelmas Day last was an oversight which they regret, and they are ready,
able and willing to pay that amount to the landlord if that be required.
The authorities cited in support of the
propositions in the textbooks go back to Wadman v Calcraft (1804)
10 Ves 67, where the Master of the Rolls, Sir William Grant, in 1803 held that
the purpose of a clause of re-entry is only to secure the payment of rent. Mr
Snowden also cited, to similar effect, Howard v Fanshawe [1895] 2
Ch 581, where Stirling J said at p 586: ‘The purpose of a clause of re-entry
can be only to secure the payment of rent and when the rent is paid the end is
obtained.’ He also cited the decision of
the House of Lords in Shiloh Spinners Ltd v Harding [1973] AC
691, where Lord Wilberforce’s speech observes at p 723G that:
The primary object of the bargain is to
secure a stated result which can be effectively attained when the matter comes
before the court, and where the forfeiture provision is added by way of
security for the production of that result.
He also cited Richard Clarke & Co
Ltd v Widnall [1976] 1 WLR 845, where the Court of Appeal headnote
is summarised: ‘That the immediate right of re-entry . . . was to be regarded
as merely security for the payment of rent.’
Mr Marks, for the defendant, did not
doubt that the word ‘security’ has been applied to the proviso for re-entry in
a lease for generations by distinguished property lawyers and is undoubtedly so
regarded. He said, however, it was not a security within the definition in
section 248 of the Insolvency Act 1986. That provides, in para (b):
‘Security’ means –(i) in relation to
England and Wales, any mortgage, charge, lien or other security.
The Vice-Chancellor has said that the
word ‘security’ should be construed in its ordinary and natural sense. Mr Marks
asserted that a proviso for re-entry was not a security in the ordinary sense
of that word. The taking of possession was not similar to enforcing a security
over the property of the debtor, since it was merely the retaking by the
landlord of his own property. Mr Marks also argued that enforcing a proviso for
re-entry was not analogous to the enforcement of a mortgage, a charge or a
lien, because the landlord was asserting a paramount right. He asserted that a
lease was not a relationship of the same nature as a relationship created by a
mortgage, or charge or lien, and that on the ejusdem generis principle
of construction introduced by the word ‘other’ before ‘security’, one could see
a genus in the phrases ‘mortgage, charge or lien’ and any other form of
security must be within that genus to be within the section.
The result seems to me surprising, if
that is a correct reading of the definition in section 248(b). Mr Marks
entirely agreed that if there were a winding-up order made by this court, or if
a company went into voluntary liquidation, section 130(3) of the Insolvency
Act, which reads:
(3)
When an order has been made for winding up a company . . . no action or
proceeding shall be commenced or proceeded with against the company or its
property . . . in respect of any debt of the company, except by leave of the
court
covers the peaceable effecting of a right
of re-entry pursuant to a proviso in a lease. Those comparatively short and
general phrases, said Mr Marks, are to be contrasted with the more elaborate
provisions of section 11 and that the result was that when one read the words
‘enforce any security’ in section 11(3)(c) in the light of section 248,
one could see that although a right of re-entry could not be effected against a
company in liquidation yet it could be effected against a company in
administration.
Such a result seems to me to fly in the
face of the purpose of the Act asserted by the Vice-Chancellor. It also seems
to me to be quite unlike the probabilities that Parliament, which must have
known that a proviso for re-entry has been referred to by generations of
property
under a lease, did not intend it to be covered by this term.
In my view, although I follow Mr Marks’
argument that the word ‘security’ in section 248 must be read ejusdem
generis with the other terms, yet, as it seems to me, the words ‘other
security’ are wide enough to cover a proviso for re-entry. In my judgment, the
relationships between a landlord and a tenant do have sufficient analogies with
the relationship between a mortgagee and a mortgagor, where legal estates may
vest in both, or certainly a chargee and chargor. In all such relationships
each has rights which entitle them to different aspects of control over the
physical property represented by the land, but in respect of which each has a
legal estate and each can enforce against the other certain obligations.
Under a lease the tenant is bound to pay
his landlord rent. He is not bound so to do by contract in this case, and in
many cases, because the contract was not between this landlord, now present in
court, and this tenant. The right arises by reason of privity of estate. That
is a legal relationship which gives rights to the landlord which the landlord
can enforce by action against the tenant. If these be landlord’s covenants, a
tenant, although the sixth assignee of the term, can enforce those covenants
against his landlord.
The right to re-enter has always been
regarded as a security, and that word has always been used to describe that
right. It is a way of securing the observance of the tenant’s obligations. So,
also, when a mortgagor charges his premises to a mortgagee, the mortgagee is
entitled to sue for his money under the covenant in the mortgage and is also
entitled under the right given by the mortgage to enter upon the premises for
the better security of his debt. The analogies are, of course, not perfect, but
they seem to me sufficiently close to allow the reading of the words ‘other
security’ in section 248 to extend to cover the right to re-enter peaceably
conferred by a proviso for re-entry in a normal lease.
Mr Snowden’s other proposition was that,
in any event, the exercise of a right of re-entry would be, pursuant to section
11(3)(d), the ‘commencement’ of ‘other legal process’. Those three words appear
in that subsection a little after the words ‘no other proceedings’ with which
the subsection begins. The Vice-Chancellor in Paramount Airways held
that ‘proceedings’ in that phrase meant proceedings of a judicial or
quasi-judicial nature, that is an action in the courts or an arbitration or
similar matter. Mr Snowden observed that the later part of the phrase was not
concerned with ‘proceedings’ but something different. The words are ‘and no
execution or other legal process may be commenced or continued’. In my view,
‘other legal process’ is plainly something different from ‘proceedings’ of a
judicial or quasi-judicial nature.
It is clear that the section 130
provision, to which I have already referred as providing for ‘proceedings . . .
against the company or its property’, covers the exercise of a peaceable right
of re-entry pursuant to a proviso for re-entry of the lease, and it seems to me
astonishing if ‘other legal process’ here would not also cover that step. It
seems to me that ‘legal process’ is exactly how one would describe the exercise
of a right by a person not in a contractual relationship with his tenant but
holding a relationship by privity of estate between them. In my judgment, it is
a correct use of words to describe a landlord who has legal rights arising out
of the privity of estate which he exercises by the process of peaceable
re-entry as exercising ‘legal process’. It seems to me, therefore, that if this
exercise of the right of re-entry be not a security, it is quite certainly the
‘commencement of another legal process’, and as I see it that must have been
one of the purposes for which Parliament plainly intended the Act to operate.
It would be astonishing, in my mind, if
Parliament has plainly prevented a landlord from issuing a writ for forfeiture
or taking steps in the courts to effect a forfeiture and a re-entry, but has
left entirely open and untouched the right to effect a peaceable re-entry. It
must be obvious to all that the better realisation of the company’s assets than
in a winding-up cannot be achieved if in a winding-up peaceable re-entry is
barred but in an administration peaceable re-entry is not barred.
I conclude that Mr Snowden is right and
that in this case the steps taken by the landlord were in breach of section 11
and should never have been taken and should be remedied and set aside by
appropriate orders.
The judge granted leave to appeal, if
necessary.
