Insolvency – Administration expenses – Payment of rent – Tenant holding retail premises on leases from appellant landlords – Tenant going into administration on day after quarter’s rent falling due – Whether appellants entitled to recover rent as expense of administration rather than proving for it as a debt – Judge holding rent not an expense of administration where falling due before administration commencing – Appeal allowed
In late March 2012, the Game retail group went into administration, leaving approximately £10m unpaid in respect of quarterly rent that had fallen due on the previous day under leases of various retail premises from which it traded. The first and second respondents were appointed as administrators. Some of the group’s stores were closed down immediately but others continued to trade and were included in a swift sale of the group’s business and assets to the third respondent. Approximately £3m of the March 2012 quarterly rent remained outstanding in respect of those stores, of which the appellants were the landlords.
In proceedings between the parties, an issue arose as to whether the appellants were entitled to recover any part of the unpaid rent from the administrators as an expense of the administration, pursuant to r 2.67 of the Insolvency Rules 1986, rather than having to prove for it as a debt. In the court below, the judge held that they were not so entitled: see [2013] EWHC 2171 (Ch). In reaching that conclusion, he followed earlier decisions of the High Court deciding that the quarter’s rent was not apportionable, with the effect that: (i) where the quarterly rent fell due while administrators were retaining the property for the purposes of the administration, the whole of the quarter’s rent was payable as an administration expense even if the administrators gave up occupation later in the same quarter (Goldacre (Offices) Ltd v Nortel Networks UK Ltd [2009] EWHC 3389 (Ch); [2010] 1 EGLR 25; [2010] 09 EG 168); and, conversely (ii) if the quarter’s rent fell due before entry into administration, none of it was payable as an administration expense, even if the administrators retained possession for the purposes of the administration (Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd [2012] EWHC 951 (Ch); [2013] 3 WLR 1132).
On appeal from that decision, the appellants contended that they were entitled to recover part of the rent pursuant to the salvage principle.
Held: The appeal was allowed.
Whether rent was recoverable as an administration expense was not a matter for the exercise of the court’s discretion; either it counted as an expense or it did not. It would count as an administration expense if it fell within the salvage principle, which applied to the interpretation of r 2.67 of the 1986 Rules. The salvage principle was founded in equity and established that, in certain circumstances, an office-holder would be deemed to have incurred a liability in the course of the winding up or administration; where the principle applied, the rent liability would be treated, on equitable grounds, as if it were an expense of the winding up or administration and would be accorded the same priority. The salvage principle and the right to prove for a debt were not mutually exclusive; accordingly, the mere fact that a debt was a provable debt did not mean that the salvage principle could not apply.
Although the principle had its origins in the landlord’s right to distrain for rent, it had outgrown its origins in the law of distress. It applied where the property was retained for the benefit of the winding up or administration or where the company remained in possession for its own purposes and with a view to realising the property to better advantage. The principle was framed not by reference to when rent fell due or accrued, but by reference to the period during which the company used the landlord’s property to its own advantage. In those circumstances, common sense and ordinary justice required the court to see that the landlord was paid. As to the amount to be paid, that again did not depend on the days when rent fell due for payment. Instead, the landlord was to receive the full value of the property, which, where the property was held under the terms of a lease, would be the rate of rent reserved by that lease. It was not appropriate to a draw a stark division between rent that fell due before the date of entry into liquidation or administration, and rent that fell due after that date. There was no reason why common sense or justice should be defeated in the event that a rent day fell immediately before the date of entry into administration, if the rent falling on that day covered a period during which the administrator retained possession of the property or the benefit of the administration. All that was necessary was to treat the rent as accruing from day to day. Equally, neither common sense nor justice required the landlord to be paid rent in full for a period after the office-holder had vacated the premises, leaving the landlord free to re-let them: Re Exhall Coal Mining Co Ltd (1864) 4 De GJ & Sm 377, Re Lundy Granite Co, ex parte Heavan (1871) 6 Ch App 462, Re Oak Pits Colliery Co (1882) 21 Ch D 322, Shackell & Co v Chorlton & Sons [1895] 1 Ch 378, Re ABC Coupler & Engineering Co (No 3) [1970] 1 WLR 702, Re HH Realisations Ltd (1975) 31 P&CR 249; [1976] 2 EGLR 51; (1975) 239 EG 807, Re Atlantic Computer Systems plc (No 2) [1990] BCC 454, Re Toshoku Finance UK plc [2002] UKHL 6; [2012] 1 WLR 671 and Re Nortel GmbH [2013] UKSC 52; [2013] 3 WLR 504 applied.
The application of the salvage principle was unaffected by the fact that rent was not apportionable in respect of time under the common law, or that rent payable in advance was not apportionable under the Apportionment Act 1870. A true apportionment either relieved the tenant of part of the liability for rent or transferred liability from one tenant to another. By contrast, in cases to which the salvage principle applied, there was no termination of the lease and no change of tenant. The whole of the instalment of rent that fell due was a provable debt and the tenant remained liable to pay it. The application of the salvage principle neither created nor transferred any liability, but simply treated part of a single liability as an insolvency expense, by requiring that it be paid in full. How the common law viewed an instalment of rent payable in advance was not determinative of how equity would treat it.
The true extent of the salvage principle was therefore that the office-holder had to make payments at the rate of the rent for the duration of any period during which he retained possession of the demised property for the benefit of the winding up or administration, with the rent to be treated as accruing day to day. The payments were payable as expenses of the winding up or administration and the duration of the period was a question of fact, not determined merely by reference to which rent days fell before, during or after that period: Goldacre (Offices) Ltd and Leisure (Norwich) II Ltd overruled.
Antony Zacaroli QC and Hannah Thornley (instructed by Berwin Leighton Paisner LLP) appeared for the appellants; Daniel Bayfield (instructed by Linklaters LLP) appeared for the first and second respondents; John McGhee QC and Catherine Addy (instructed by Macfarlanes LLP) appeared for the third respondent.
Sally Dobson, barrister
