Administration – Administration expenses – Payment of rent – Respondent company in administration holding premises on long leases from applicant landlord – Administrators occupying part of premises for purposes of administration – Whether full rent continuing to be payable as expense of administration – R 2.67(1) of Insolvency Rules 1986 – Application of salvage principle – Application allowed
The applicant was the landlord of premises held by the respondent company on two long leases under which rent was payable quarterly in advance. After the respondent went into administration, the administrators used part of the premises to carry out the administration and the rent continued to be paid. Other parts were held by subtenants; the right to receive rent from those tenants had been transferred to the applicant under section 6 of the Law of Distress Amendment Act 1908, and although the administrators continued to receive some rents, those rents were passed on to the applicant.
The applicant sought a court ruling that the administrators, having decided to use part of the premises for the beneficial outcome of the administration, were liable to pay the full rent as it fell due as an expense of the administration pursuant to the Insolvency Rules 1986. The administrators contended that any payments should be tailored to their actual use of the premises, the proportion of rent being payable to be assessed according to the floorspace that they occupied.
Held: The application was allowed.
(1) The “salvage” or “liquidation expenses” principle, under which liquidators were held liable to pay rent as a liquidation expense where they made use of or retained possession of leasehold premises for the benefit of the liquidation, also applied to administration: Re Lundy Granite Co, ex parte Heavan (1871) LR 6 Ch App 462 and Re Toshoku Finance UK plc (in liquidation) [2002] UKHL 6; [2002] 1 WLR 671 applied. The relevant expenditure fell within r 2.67(1) of the 1986 Rules, either, under r 2.67(1)(a), as expenses properly incurred by the administrators in performing their functions or, under r 2.67(1)(f), as necessary disbursements by the administrators in the course of the administration. The word “necessary” in the latter provision extended to a payment that ought to be made in fairness and justice and was not confined to a situation in which there had been a specific threat for redelivery; it was apt to include a case where the salvage principle applied: Re Lehman Brothers International (Europe) (in administration) [2009] EWHC 2545 applied. The court’s jurisdiction to order payment derived from the relevant rules, which, when properly construed in accordance with the salvage principle, compelled payment. Any failure on the part of the administrators to recognise that would unfairly harm the applicant landlord, and it was appropriate for the court to direct them to act in accordance with the mandatory requirements of the rules.
(2) The administrators were not entitled to tailor their payments to the use they were making of the premises. Where administrators adopted a contract for conducting the administration in a beneficial manner, all liabilities arising under that contract after the date of adoption would be entitled to priority. Administrators who elected to hold leasehold premises could do so only on the terms and conditions contained in the lease, such that any liability incurred while the lease was being enjoyed or retained for the benefit of the administration would be payable in full as an administration expense. Accordingly, the following quarter’s rent, which was payable in advance, became payable in full from the day on which it was due as one of the costs and expenses of the administration, and did not fall to be apportioned in the event that the administrators vacated the premises during that quarter: Powdrill v Watson [1995] 2 AC 394 and Re S Davis & Co Ltd [1945] Ch 402 applied; Shackell & Co v Chorlton & Sons [1895] 1 Ch 378 not followed. The court had no discretion as to whether to declare the rent a liquidation expense, although it might have a discretion as to whether to grant a remedy to obtain payment: Sunberry Properties Ltd v Innovate Logistics Ltd (in administration) [2008] EWCA Civ 1321; [2009] 1 BCLC 145 not followed; Toshoku Finance applied. The rent would continue to be payable as an administration expense quarterly in advance under the terms of the two leases for so long as the administrators retained or used any part of the premises demised under each lease for the benefit of the administration.
Stephen Jourdan QC and Blair Leahy (instructed by Olswang LLP) appeared for the applicant; William Trower QC and David Allison (instructed by Herbert Smith LLP) appeared for the respondent.
Sally Dobson, barrister
