Mackay and others (joint administrators of UK Housing Alliance (North West) Ltd) v Kaupthing Singer & Friedlander Ltd (in administration)

Neutral Citation Number: 2013 EWHC 2553 (Ch) IN THE HIGH COURT OF JUSTICE CHANCERY DIVISION COMPANIES COURT No. 4662 of2010 Date 15th August 2013 Before: MR MARTIN MANN QC (Sitting as a deputy high court judge of the Chancery Division) IN THE MATTER OF UK HOUSING ALLIANCE (NORTH WEST) LIMITED (IN ADMINISTRATION) AND IN THE MATTER OF THE INSOLVENCY ACT 1986 BETWEEN BRUCE MACKAY, RUSSELL CASH, MATTHEW HAW AND JOHN ARIEL (Joint Administrators of UK Housing Alliance (North West) Limited) Applicants – and KAUPTHING SINGER & FRIEDLANDER LIMITED (in administration) Heard: 13th and 14th June 2013 Respondent (Mr Stephen Robins appeared for the Applicants instructed by Pannone LLP; Mr. Tom Smith appeared for the Respondent instructed by Freshfields Bruckhaus Deringer LLP) Judgment I direct that pursuant to CPR PD 39A paragraph 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic Introduction 1. There are two applications before the Court. One, albeit not the first in time, though nothing turns on this, is an application of the Joint Administrators (the UKHA Administrators) of UK Housing Alliance (North West) Limited (“UKHA”). The other is an application by the joint administrators of Kaupthing Singer & Friedlander Limited (KSF) which had been placed in administration on 8th October 2008 by order of the Court. UKHA seeks directions under paragraph 63 of Schedule BI (Schedule B1) to the Insolvency Act 1986 (IA). KSF seeks, among other things, permission under paragraph 43(2)(b) of Schedule B1 to the IA to enforce its security over the assets of UKHA which in the circumstances explained below include a large number of properties (Secured Properties). 2. UKHA was incorporated on 29th September 2006. It had carried on the business of a property company engaged in the sale and lease-back of residential properties principally in Yorkshire, the North West and the North East, although a small number of properties were located elsewhere in England and Wales. 3. The sale and lease-back business involved the purchase by UKHA of residential properties (both freehold and leasehold) from homeowners and the leasing of those properties back to the vendors on assured shorthold tenancies (ASTs) for a term of 10 years. Typically, although with some exceptions, UKHA paid 70% of the purchase price on completion, when legal title to the property was transferred to UKHA and the previous owners waived any proprietary rights to the property. The terms of the sale contract (the Sale Contract) provided for the remaining 30% (known as ‘final payments’) to be payable to the vendor at the end of the term of an AST (provided that the vendor had paid the rent and complied with the other covenants in the AST throughout the term) or sooner in the event of the vendor’s death. Special Conditions provided that the contract should remain in force with regard to anything remaining to be done, performed or reserved under it and crucially that the vendor was not to have any lien in respect of any money payable to the vendor under the Sale Contract. 4. The funding to enable UKHA to purchase each property was provided to UKHA by KSF under a loan agreement dated 17 May 2007. This provided UKHA with a 30 million on-demand revolving credit facility which was subsequently increased to 40 million by a deed of amendment and restatement dated 13 March 2008. The monies advanced under the loan agreement were repayable on demand. The Court has not been provided with an up to date figure for the amount outstanding but as of 14th February 2013 the amount due and owing from UKHA to KSF was 30.1 million. 5. A debenture (“the Debenture”) made the same day as the loan agreement between (inter alia) UKHA and KSF secured the facility by providing KSF with security as follows: (I) a legal mortgage of each property owned by UKHA at the time of the execution of the Debenture; (2) an equitable mortgage of each property to be acquired by UKHA in the future; (3) a supplemental mortgage of each property acquired after the execution of the Debenture; (4) a fixed charge over UKHA’s rights and interests in contracts; and (5) a floating charge over the remainder of UKHA’s property and undertaking. 6. Under the supplemental mortgages, KSF was granted first legal mortgages over property as and when it was acquired by UKHA. As a result, KSF presently has the benefit of first legal mortgages over such property and is therefore a fixed charge secured creditor of UKHA in respect of the sums owing by UKHA to KSF which sums are secured by the legal mortgages over the Secured Properties. 7. In the course of its business, UKHA purchased a total of 465 properties. The portfolio when the UKHA Administrators were appointed consisted of 401 properties. 8. During the course of the UKHA Administration, a number of properties were vacated or repossessed and subsequently sold. At the time of the hearing UKHA owned 256 properties of which, the Court has been informed, 235 are currently let. It has been calculated that there is a maximum contingent liability for future final payments of approximately 8,749,722. The UKHA Administration 9. As a result of the fall in property prices caused by the recession and a reducing number of tenants, UKHA became loss making and fell into arrears in its interest payments to KSF. Having reviewed UKHA’s operations, KSF concluded that UKHA’s business plan was no longer viable and resolved to place it into administration. 10. KSF appointed the UKHA Administrators in respect of UKHA on 3rd June 2010 in exercise of its powers under the floating charge contained in the Debenture. The UKHA Administration has been extended by the Court from time to time since then. 11. In accordance with their proposal for the conduct of the UKHA Administration dated 21st July 2010 the UKHA Administrators have continued to trade UKHAs business and to explore the possibility of selling it and/or its assets upon terms that they consider beneficial to UKHAs creditors. To this end, they retained a property management company named Sterling Property Company Limited (“Sterling”) to act as managing agents, and since then Sterling has collected rent from the AST tenants on behalf of the UKHA Administrators. UKHA has continued to comply with its obligations to repair, maintain and insure the properties and from time to time has entered into variations of ASTs with tenants. 12. By the beginning of June 2012 Sterling had collected rents totalling 4,547,000 which the UKHA Administrators concluded were floating charge realisations in the sense of the IA. It is common ground that in this they were correct because although clause 2.1.3.6 of the Debenture purports to provide KSF with a “fixed charge” over UKHAs rights and interests in contracts, clause 5.2 of the Debenture gives UKHA contractual freedom to use the rent money in the course of its day-to-day business, which is, of course, the hallmark of a floating charge. The KSF Administration 13. KSF was the English banking subsidiary of the Icelandic Bank, Kaupthing. Alan Robert Bloom, Patrick Joseph Brazzill, Benjamin Thom Cairns and Margaret Elizabeth Mills are the joint administrators of KSF (the KSF Administrators”). 14. The KSF Administrators are in the process of realising KSF’s assets and distributing the proceeds to unsecured creditors, who include depositors and the Financial Services Compensation Scheme. The Court has been informed that as at 14th February 2013 assets totalling 3,780 million had been realised and 76p in the paid to unsecured creditors. The Court has also been informed that as part of this process, in cases where principal and interest are not being repaid by a borrower to whom KSF lent monies, it may be necessary for KSF to enforce any security which it holds. The Applications Preliminary matters 15. As already alluded to, the first in time of the applications before the Court is that of the KSF Administrators. This was issued on 18th January 2013 with a return date of 19th February 2013. Subsequently, on 29th January 2013, the UKHA Administrators issued the UKHA Administrators application with a return date of 13th June 2013. 16. On 19th February 2013 Sales J ordered that they be heard together and that pending the determination of the applications the UKHA Administrators were to retain the AST rents received in a segregated account (the Segregated Account) net of payments in respect of prescribed matters which were not to include any costs and expenses (including legal expenses) in relation to either application. The UKHA Administrators were to give notice of the applications to the AST tenants by letter giving an account of the issues to be decided at the hearing. Costs were reserved. 17. The purpose of the Segregated Account was to ensure that KSF would not be prejudiced by not being granted permission to enforce its security over the Secured Properties at the hearing on 19th February 2013 and the hearing of its application being deferred. 18. The Court has been informed that each AST Tenant has been given notice in accordance with the order of Sales J. 19. It is convenient to digress at this point to set out a little additional background on account of an intervening complication which arose when a number of AST tenants caused unilateral notices to be entered against the freehold titles subject to their respective ASTs. Although most of these notices have been cancelled following adjudication in three test cases, and three remain for a variety of reasons, the position in law is that a purchaser of any Secured Property so subject would take free from any claim for a final payment that any of these AST tenants might have against the UKHA Administrators. 20. KSF’s position is that final payments do not fall to be treated as administration expenses under any of the heads of Rule 2.67(1) of the 1986 Rules (IR) and the same applies to any which may fall due in the future. They all rank as unsecured claims which are provable in the administration in the usual way. In any event, whether or not some or all of these payments rank as administration expenses, KSF should be permitted forthwith to enforce its security. 21. A core contention that KSF makes is that this is not a case in which it would advantage the UKHA Administration to retain the Secured Properties even though the rents, in UKHA’s hands, are floating charge realisations prospectively available to meet any claims for final payments should these be held to rank as administration expenses. Coupled with this is a further contention which in substance is that were the Court minded to withhold permission to enforce KSFs security it should do so on terms commensurately compensating KSF; in another words, that UKHA should make a “Usage Payment”. The UKHA Administrators application 22. A short explanation is necessary for the incorporation in the UKHA Administrators application (see below) of a reference to the estate of Susan Myers (Ms Myers). Ms Myers had prior to her death (she probably died between July 2012 and July 2013 although enquires have not revealed the precise date of her death) been an AST tenant of one of the Secured Properties in respect of which she was entitled to a final payment. Her case has therefore crystallised the need for the UKHA Administrators to obtain the Courts directions whether final payments which fall due to be paid are to be dealt with on the footing they are or are not administration expenses. 23. The UKHA Administrators application, as subsequently amended, and with some words of mine substituted and others interposed, seeks directions under paragraph 63 of Schedule B1 as follows: 1(1) Whether Ms Myerss final payment in the sum of 25,500 (“the Final Payment”) payable to her estate must be paid as an expense of UKHAs Administration under Rule 2.67(1) of the Insolvency Rules 1986 (“IR”); (2) Whether other final payments which in future become payable by UKHA to other tenants (“Future Final Payments”) will be payable by the Administrators as expenses under Rule 2.67(1) IR, and (3) In the event that Future Final Payments are held to be expenses, how the UKHA Administrators should deal with them in view of (i) the fact that the available assets will be insufficient to pay them in full and (ii) the fact that UKHAs administration will expire before the Future Final Payments become payable. 2. In the event that the Court holds that the Final Payment and/or Future Final Payments must be paid as expenses of the Company’s administration, an order under Rule 2.67(3) IR re-ordering the order of priority set out in Rule 2.67(1) IR by providing for the Final Payment and/or Future Final Payments to rank for payment after any other expenses falling within paragraphs (a) to G) of Rule 2.67(1) IR, so that the Final Payment and Future Final Payments become payable only when any other expenses falling within paragraphs (a) to G) of Rule 2.67(1) IR have been paid in full. 3. Such further or other relief at the Court thinks fit. 4. An order that the costs of and incidental to this application be paid as an expense of UKHAs administration. Discussion 24. The UKHA Administrators are anxious to obtain by means of their application that certainty which a judicial determination will afford them. This is because they are concerned that it could or might be said against them that by collecting the rents payable by AST tenants under the sale and leaseback arrangements and by performing UKHAs obligations under the AST they have adopted those arrangements and accordingly must suffer all of the consequential burdens of those arrangements including making final payments in accordance with the Sale Contract as and when such fall due. 25. The core issue is therefore whether by collecting the rents paid by the AST tenants, and repairing, maintaining and insuring the Secured Properties the UKHA Administrators have adopted the liability for the Final Payment and all Future Final Payments. 26. The contextual basis for this, in so far as material, is that the schedule to the Sale Contract contained the terms on which UKHA agreed to make the Final Payment at the end of the term of the AST (provided always that the AST tenant had paid the rent and complied with the covenants in the AST in the meantime). 27. The material terms of the Sale Contract and its schedule are: “You/Your: Susan Myers of 76 Chapel Street. Wath-upon-Dearne, Rotherham S637RQ We/Our/Us: UK Housing Alliance (North West) Limited … Property: 76 Chapel Street. Wath-upon-Dearne. Rotherham S63 7RQ Tenure: Leasehold Title No: SYK513887 Completion Date: 12 July 2007 . 24, 000. 00 NB Percentage of Purchase Price to be left outstanding. Deposit: None Purchase Price: 85,000.00 of which 59,000.00 will be paid on the Completion Date and the Final Payment will be payable in accordance with the Schedule hereto. Assured Shorthold Tenancy Agreement: the tenancy agreement of the Property between You and Us in the form attached. You will sell and We will buy the Property for the Purchase Price. SPECIAL CONDITIONS [6.2] You hereby agree that You shall not have any lien in respect of any money payable to You under this contract … .. [11.2] On completion … We and You will enter into the Assured Shorthold Tenancv Agreement. .. SCHEDULE [1] Save as provided in paragraph 5 below, we agree to pay You the Final Payment on the day on which You give Us vacant possession of the Property provided that You have occupied the Property under the terms of the Assured Shorthold Tenancy Agreement (AST’) for an unbroken period of at least 10 years from today’s date. [2] lf We terminate the AST for any reason other than pursuant to Our right to do so as set out in the AST then We will pay to You the Final Payment upon termination of the AST. [3.1] If You (not being a joint tenant under the AST) die whilst the AST is continuing then We will pay to Your estate the Final Payment upon vacant possession of the Property being given to us. [3.2] If You (being the last survivor of two or more joint tenants under the AST) die whilst the AST is continuing then We will pay to Your estate the Final Payment upon vacant possession of the Property being given to Us. [4] If the AST is terminated by Us pursuant to Our right so to do as set out in the AST then You will cease to have any right to receive the Final Payment. [5] If You terminate the AST in accordance with your right to do so at any time after the expiration of the sixth year of the Term of the AST we agree to pay to You: 80% of the Final Payment if You give Us vacant possession [of] the Property in the 7th year of the term: 84% of the Final Payment if You give Us vacant possession [of] the Property in the 8th year of the term, 88% of the Final Payment if You give US” vacant possession [of] the Property in the 9th year of the term: 92% of the Final Payment if You give Us vacant possession [of] the Property in the 10th of the term … [6] If the Tenant exercises the Tenant’s option to renew in accordance with clause 10 of the AST then the Final Payment will not be paid to the Tenant until vacant possession of the Property is given either at the end of the term of the renewed AST or if the Tenant determines the renewed AST in accordance ‘with the determination provisions of the same.” 28. The AST, after identifying the property and specifying the rent, then provides (in so far as material): (1) for uninterrupted occupation conditional upon compliance with the tenants obligations under the AST (clause 3.1). (2) that UKHA will maintain, make certain payments in respect of and insure the Secured Property (clauses 3.2 to 3.4). (3) for the payment of the rent (clause 4.1). (4) that UKAs may terminate the AST in the event of non-payment of rent (clause 5.1.1.1). (5) that Mrs Myerss may terminate the AST after the 6th year on giving 6 calendar months prior notice (clause 5.2). (6) an option for the tenant to renew for a term of 8 years as provided in the sale contract (clause 10). 29. Although early on in the UKHA Administration the rents collected by Sterling were assumed by both UKHA and KSF to be fixed charge realisations it has been common ground for some time between them that those rents are properly to be characterised as floating charge realisations. 30. Administration expenses are payable from floating charge realisations ahead of secured creditors. This is the effect of paragraph 99(3) of Schedule 1B when read with paragraph 70 (see below). 31. If therefore the Court concludes that the Final Payment is an expense of the UKHA Administration, the UKHA Administrators will have to use the net rents which Sterling has collected (amounting to approximately 4 million at the date of the hearing) to discharge the Final Payment. If not, then the KSF Administrators if permitted to enforce their security (by the appointment of a Law of Property Act LPA – receiver) will be entitled to have these distributed to them. 32. The UKHA Administrators also assert that it should follow if the former view is correct that any and all Future Final Payments whenever crystallising will fall to be treated in exactly the same way. 33. The consequences of such an outcome would be serious because many of the ASTs will not expire until 2017 or 2018 and were any AST tenant to exercise the option to renew the renewed term would not expire for a great many years, perhaps necessitating repeated extensions of the UKHA Administration. 34. An additional question would then arise whether, under the circumstances, the UKHA Administrators should be allowed to sell the Secured Properties and if so whether they should retain the proceeds until the last Future Final Payment had become due before making a distribution. 35. Other consequences might in this case also follow though it is in my judgment premature to set these out at this juncture (if at all). 36. The question whether the UKHA Administrators adopted the Sale Contract arises on account of paragraph 99(3) of Schedule B1 which provides: The former administrators remuneration and expenses shall be- (a) charged on and payable out of property of which he had custody or control immediately before the cessation, and (b) payable in priority to any security to which paragraph 70 applies. I should point out, however, that putting it that the question is whether the UKHA Administrators adopted the Sale Contract is a trifle misleading in as much as the IA actually only employs this expression in relation to contracts of employment which in the special circumstances spelled out in paragraph 99 (5) of Schedule IB an employer is deemed to have adopted. There is no question of deeming in relation to other contracts or arrangements where such have been or are to be treated as, for want of a more apposite description, adopted for this, by contrast, is an evidence-based determination. I shall refer briefly to this statutory deeming provision later in this judgment. 37. Paragraph 70(1) provides: The administrator of a company may dispose of or take any action relating to property which is subject to a floating charge as if it were not subject to the charge. 38. The meaning of remuneration and expenses is defined by Rule 2.67(4) IR by reference to Rule 2.67(1) which prescribes the order in which the expenses of the administration are payable. Rule 2.67(1) also applies whenever an administrator proposes making a distribution to any class of creditors. 39. It is common ground that this is a complete statement of administration expenses just as Rule 4.218 (1) IR is a complete statement in relation to liquidation expenses (per Lord Hoffmann at paragraph 15 In re Toshoku Finance UK Plc [2002] 1 WLR 671, a liquidation case). 40. I should point out that the IR were amended with effect from 15th September 2003 through the introduction pursuant to the Enterprise Act 2002 of Rule 2.67 IR in relation to administrations. Rule 2.67 as amended closely follows the existing rule 4.218 dealing with liquidation expenses, a change which enabled Richards J in In Re Trident Fashions Plc., Exeter City Council v. Bairstow [2007] 4 All ER 437 to conclude (at paragraph 79): “The reasonable inference is that, by adopting for rule 2.67 the same terms as rule 4.218, the intention was that it should carry the same meaning.” See also In re Portsmouth City Football Club Ltd, Neumans LLP v. Andronikou [2013] Bus LR 374 at paragraph 86. 41. It is contended that the Final Payment is an expense of the administration on account of the so-called Lundy Granite principle (In re Lundy Granite Company, Ex party Heaven (1871) LR 6 Ch. App 462). 42. In Lundy Granite a landlord had wished to levy distress for rent against the goods of a company which had gone into liquidation after taking an assignment of the lease from the lessee. The liquidator had continued to pay the rent to the landlord and taken no steps to remove the goods. The court held that the landlord was so entitled because he had not forfeited his right to the security for the rent, that is to say, any goods on his land. The legislature had made provision for creditors to prove for their debts but had said nothing at all about distress, in effect leaving it to the Court as a matter of discretion whether or not to permit it. The development of the principle, as it has become known down the years, is on account, in addition to other dicta, of a short passage in the judgment of Sir W.M. James LJ at page 466: But in some cases between the landlord and the company, if the company for its own purposes and with a view to the realization of the property to better advantage, remains in possession of the estate, which the lessor is therefore not able to obtain possession of, common sense and ordinary justice require the Court to see that the landlord receives the full value of the property. He must have the same rights as any other creditor, and if the company choose to keep the estates for their own purposes, they ought to pay the full value to the landlord, as they ought to pay any other person for anything else, and the Court ought to take care that he receives it. And per Sir G. Mellish LJ at page 467: If the Official Liquidator, for the convenience of the winding up, does not surrender the lease, but continues to keep possession for the purpose of obtaining a better price for the goods, the landlord should not be deprived of his right to recover his rent. 43. The effect of these and similar words in other cases such as In re Oak Pits Colliery Company (1882) 21 CH D 322 at pages 330 and 331(per Kay J) has been examined exhaustively time and again but so far there are no cases that the Court has had its attention drawn to quite like this one. 44. It is worth noting that when in the passage cited Sir W. James LJ spoke of common sense and ordinary justice he clearly had in mind Equitys understanding of fairness, in other words the very concept which the Court strives to achieve whenever the equitable jurisdiction is prayed in aid. However, in a case like the present, there is in light of more recent authority little if any room for the intervention of Equity. 45. Nevertheless, it can do no harm to question whether when taking into account the interests of the general body of unsecured creditors as a whole it would seem fair to promote the interests of AST tenants in respect of their unsecured contractual rights to final payments over those whose claims are likewise unsecured; when, after all, the Sale Contract in each case has long since been completed, neither that contract nor the AST impose any obligation on UKHA to apply the rents collected in satisfaction of the Final Payment or Future Final Payments and, crucially, the UKHA Administrators would not be using any third partys property to the advantage or convenience of the UKHA Administration. Tested in this way, purely as a matter of fairness it would seem inequitable were the application of Lundy Granite to result in the promotion of the interests of the AST tenants. 46. Indeed, the perspective one is left with on analysis is that far from UKHA gaining an unfair benefit for which it must give value, it is solely the AST tenants occupation rights which are capable of constituting relevant benefits for which value must be given and they, of course, give value by means of the rents which Sterling continues to collect, rather than the other way around. 47. In summary, the UKHA Administrators have been using (turning to account) UKHAs own property (in the form of the rents) rather than the property of others. I acknowledge, of course, that the case might be different had the AST tenants reserved interests in a fund represented by the rents collected over time but they did not. The Sale Contract, as I have mentioned, even denies them liens. 48. It is seen on analysis, therefore, that were the Court to apply the Lundy Granite principle in this case it would not only be contrary to principle but would also result in great unfairness and, by a side wind, so to speak, heretically re-write the parties arrangements. Though it is perhaps unnecessary for me to say so, I will for good measure add that had it been the intention that the rents should not fall into and form part of the assets employed in UKHAs business but rather that they should be preserved in the form of a fund out of which to meet Future Final Payments then one would have expected to see this spelled out in either the Sale Contract or the AST or even both. 49. Among the authorities drawn to my attention were authorities for the proposition that the Lundy Granite principle is applicable to commercial contracts generally besides the paradigm contexts out of which the principle evolved. These authorities included Re Japan Leasing (Europe) Plc [1999] BPIR 911, Re Lehman Brothers International (Europe) (in administration) [2009] EWHC 2545 and Neumans (see above, approved on appeal under neutral reference [2013] EWCA Civ 916). 50. In Japan Leasing, the Deputy Judge, Mr. Nicholas Warren QC as he then was, had to consider whether on the sale of an aircraft monies received in instalments into four separate bank accounts in the name of a representative vendor which had been placed in administration were held as part of the representative vendors general assets or upon trust even though a participation agreement expressly excluded a fiduciary relationship, and also whether, if there was no trust, the other participating vendors should receive their respective shares as expenses of the administration. While holding that there was neither an express nor an implied trust, the Deputy Judge nevertheless concluded on the facts that they were held on constructive trusts for the participating vendors respectively because it would be unconscionable were the administrators under the circumstances in which the insolvent representative vendor received the monies to retain them. In the alternative, however, prior to the payment of an instalment, the chose in action representing each participating vendors right as against the purchaser to its share of the purchase price belonged to that vendor. When, therefore, the representative vendor received an instalment, it did so on the hypothetical basis there was a valid agency agreement and in receiving an instalment the joint administrators were making beneficial use of the property of the other participating vendors, that is to say, their respective shares of the purchase price. If, therefore, they chose to take the benefit of the continuing agency relationship, and thereby make use of the other vendors property, they must meet the obligations of the representative vendor under the agency agreement by allowing the other vendors to recover to the extent of the benefit they had received. 51. Although the alternative holding in Japan Leasing was strictly obiter, it follows, if it was correct in law, which in my judgment it was, that had Ms Myers and the AST tenants reserved interests in the rents they would have had a strong argument that the Final Payments and Future Final Payments would have been payable as expenses of the UKHA Administration, but unfortunately for them they did not do so. 52. Briggs J (as he then was) was invited to consider Japan Leasing in Lehman and did so without demur as an example of cases where administrators have, as he put it, adopted contracts, in that case the agency contract, entered into before an administration. 53. In Neumans, Morgan J had to consider whether fees charged by solicitors in connection with a companys opposition to a petition for the winding up of the company prior to the appointment of administrators out of court were chargeable as administration expenses. He concluded in a seminal judgment tracing the evolution of the Lundy Granite principle, as explained by Lord Hoffmann in Toshoku, during which Lord Hoffmann rejected Sir Donald Nicholls V-Cs earlier conclusion in Re Atlantic Computer Systems Plc [1992] Ch 505 that the Court had a discretion in the matter, that they were not so chargeable because the administrators did not do anything to elect to retain the benefit of the contract of retainer for the purposes of the administration. It had had no continuing effect after the company had entered into administration. 54. The present case is clearly not on all fours with any of these authorities for in this case the UKHA Administrators have not taken the benefit of AST tenants property and equally clearly the obligation under the Sale Contract to pay the Final Payment and Future Final Payments does not correlate with any right under the AST. The obligation which does correlate with the right to the rents under the AST is UKHAs liability to perform its covenants under the AST and not otherwise. 55. Counsel for the UKHA Administrators also cited a number of other authorities illustrating the operation of the Lundy Granite principle in property related cases. Among these were Re Oak Pits Colliery Co. (1882) 21 Ch D 322 (which I have already referred to), Re Levi & Company Limited [1919] 1 Ch 416, Re Anchor Lines (Henderson Bros) Ltd [1937] Ch 1, Re S Davis and Co Ltd [1945] Ch 402 and Re ABC Coupler & Engineering Co. Ltd (No.3) [1970] 1 WLR 702. 56. All of these cases demonstrate in one way or another that the present case is completely different. For example, in Levi (in which Lundy Granite and Oak Pits Colliery were applied) liquidators elected to continue in possession under a lease which enabled them to receive a large profit rental from under- lessees. The liquidators were required to pay for dilapidations pursuant to the covenants in the lease. 57. In Anchor Lines a liquidator was required to pay the final instalment due under a contract entered into three years before the liquidation for the purchase of a crane under which the property had not yet passed because he had purported to include it in a sale of the assets to a new company. This, therefore, was another clear case of use of the property of another. 58. Davis was a case in which an owner had stored furniture with a company which in due course went into voluntary liquidation. The liquidator had sold the latters business and subsequently the purchaser had sold it on. The furniture remained in storage, however, the owner having had no notice in the meantime of these events, possibly because it was wartime. In 1943 the owner had removed the furniture from storage only to find that some of it was missing and some of it damaged. Having signed judgment for damages against the first purchaser, he discontinued a second action against the other and then applied for an order that the liquidator pay him the amount of the judgment and the taxed costs as an expense of the liquidation. Cohen J held that the liquidator had carried on the business, including the business of holding the owners goods in bailment for reward. The contract had been adopted by the liquidator and he in breach of contract, when the time for delivery up had arrived, had failed to deliver all of the property up and some that he did was damaged. The liquidator would therefore have to pay up out of the companys assets. This too, therefore, was a case in which a liquidator had used anothers property for the advantage of the liquidation or as Mellish LJ said in Lundy Granite and Plowman J said in yet another case, In re ABC Coupler & Engineering Co. Ltd [1970] 1 WLR 702 at page 709, for the convenience of the process. 59. I should add that Counsel for the UKHA Administrators in the course of his succinct and helpful submissions has argued that the correct approach is to construe the Sale Contract and AST together as though a single contract under which the benefit of the AST incurs a corresponding liability for the Final Payment and Future Final Payments. He found support for this in the Court of Appeals decision in Mortgage Business Plc v OShaughnessy [2012] 1 WLR 1521, a case in which there had been contemporaneous separate sales and leasebacks, neither referring to the other. It was for decision whether the vendors had acquired equities by virtue of the purchasers assurances with regard to the vendors rights of occupation against the claimant as the mortgagee who had lent the purchase money, the purchaser having defaulted. The vendors contention was rejected for reasons it is not necessary to go into except to note that the vendors had submitted that the two contracts should be read together so as to facilitate an argument that there was not even a scintilla temporis during which the mortgagees prior interest could have arisen. The submission failed because the sale contract did not furnish details sufficient to constitute notice of the vendors occupation rights. It would not have failed had the sale contract given details of the entire contractual deal between the vendors and the purchasers. Had that been the case, the mortgagees solicitors would have been bound to report those contractual arrangements to the mortgagee at the pre-exchange stage. 60. The basis for Counsels argument in the present case is the fact that the Sale Contract expressly refers to the AST. The case for a holding that the Final Payment and Future Final Payments are prospectively expenses of the UKHA Administrators is that construing the two contracts together as though a single contract permits the application of a dictum of Astbury J in Levi at page 421 over to page 422 where he said, .. and if the company or the liquidator choose to remain in possession of the demised premises or mortgaged premises, they must do so upon the terms and conditions of the instrument; just as any other person must observe those terms The principle on which that case was decided [Lundy Granite] applies equally to other outgoings connected with the property the possession of which is retained for the purpose of more advantageously winding up the affairs of the company [my emphasis] 61. It must follow, it is argued, that if the two contracts were in substance one that the benefit of the AST (the rents) cannot be taken by the joint administrators without suffering the extant burden of the Sale Contract (the liability for the Final Payment and Future Final Payments). 62. In Powdrill and Others v Watson [1995] 2 AC 394 the House of Lords was called upon to decide the meaning of adoption in the context of an administration in which the administrators informed all employees of a charter airline that they were not adopting or assuming personal liability for the employees contracts of employment. In point was the true construction of section 19(5) IA (as it relates to contracts of employment) in light of the mischief which it had been enacted to dispel as a result of the decision in Nicoll v. Cutts [1985] BCLC 322 CA. Despite its narrow ambit, counsel for the UKHA Administrators drew from a passage in Lord Browne-Wilkinsons speech at pages 448G to 449A the proposition that all of the liabilities of this single contract fell to be treated as expenses. The passage is as follows: Therefore the concept of adoption of is inconsistent with the ability to pick and choose between different liabilities under the contract. The contract as a whole is either adopted or not: the consequences of adoption are then spelled out by the Act. And then in a later passage further down the page 499 at letter G, after referring to Oak Pits Colliery and Levi: The salvage principle in liquidation indicates that if a liquidator adopts a contract for the purpose of the more beneficial conduct of a liquidation all such liabilities under such contract after the date of adoption are entitled to priority. This principle is therefore of no assistance in seeking to limit the administrators liability in this case. 63. The result was that employees were held entitled under the section to payment in lieu of notice including pension contributions in respect of a notice period. 64. Although this was a decision confined to contracts of employment it is nonetheless important in the sense that it pointed out that adoption for the purpose of the Lundy Granite principle is not a term of art but rather an expression which takes its colour from the context in which it is used. Nothing therefore turns on the use of that word in some of the judgments any more than that in certain of them that the so-called salvage principle is associated with it (see page 448 letters B to D). 65. What cannot be drawn from the decision is that it is permissible to rewrite the terms which the parties have agreed, which would be the effect were Lord Browne-Wilkinsons words to be applied literally in the present case. 66. In my judgment the argument cannot be run in this case for the reasons which I have already given and even if there were in substance just one contract it would plainly be a divisible contract and even if not a divisible contract the outgoings connected with possession under the AST, in the sense employed by Astbury J, plainly cannot, on any reasonable construction, include those payments, not least because capital payments cannot without indulging an absurdity be characterised as outgoings Decision 67. I hold therefore that the Final Payment and the Future Final Payments are pre-administration debts which are provable in the ordinary way in the administration. The KSF Administrators application 68. The KSF Administrators application (as amended and with words of my own incorporated as before) is for the following orders (so far as material): 1. that pursuant to paragraph 43(2)(b) of Schedule B1 IA KSF may enforce first legal mortgages over the Secured Properties (as set out in the Schedule to the draft order); 1A. that, further or alternatively, the UKHA Administrators do pay as an expense of the administration of UKHA such sum as the Court considers appropriate to compensate the applicant for the retention of the Secured Properties; 1B. that the monies standing to the credit of the Segregated Account be paid to KSF. 2. that the costs of and occasioned by the application be paid as an expense of the administration of UKHA; 3. for such further or other relief as the Court thinks fit. Discussion 69. It was said by Briggs J (as he then was) at paragraph 100 in Lehman, referring to the now largely discredited proposition of Sir Donald Nicholls in Re Atlantic Computer Systems Plc [1992] Ch 505, that: The court habitually deals flexibly with applications for permission by, for example, secured creditors of a company in administration to enforce their security, or by landlords to forfeit a lease of property to a company. In such circumstances it is commonplace for the creditor to be restrained, for the better functioning of the administration, provided that the administrator discharges what would otherwise be unsecured liabilities, as they arise. 70. This would seem ex facie to imply that the Court is normally unsympathetic to applications of this kind where it would not be for the better functioning of the administration to grant permission. In the present case, however, no serious attempt has been made by the UKHA Administrators to persuade the Court that not permitting the KSF Administrators to enforce KSFs security would advantage the administration. 71. KSF submits that it is entitled to permission irrespective of the Courts answer to the UKHA Administrators application. Subject to permission being given, its intention is to appoint a LPA receiver who will then sell the Secured Properties. 72. The structure of its submission is that the Secured Properties are not required for the purpose of the UKHA administration. This is not a case where the properties are required because UKHA is continuing to trade in administration. Given that the Secured Properties are not required for the purpose of the administration, KSF should for this reason be permitted to enforce its security. It has assets worth in the region of 19 million which it cannot realise and turn to account. 73. The Secured Properties are in the nature of investments made by UKHA, and the purpose of the UKHA administration is to realise those assets for the benefit of the person entitled to them. I understand that UKHA accepts that KSF is the only person with an interest in the Secured Properties and that should there be sales there will be a shortfall, leaving no surplus for the unsecured creditors. 74. KSF adds to this that were the Court to refuse permission to enforce the security, this would have to be on condition that the UKHA Administrators make payments to KSF in order to compensate it. 75. The Court is required when considering whether or not to exercise its jurisdiction to grant permission to enforce securities under paragraph 43 of Schedule B1 to balance the interests of the secured and unsecured creditors only if the relevant property is required for the purposes of the administration. In this instance, however, no such case is advanced. And in any event normally permission will be given if significant loss would be caused by a refusal. 76. I am satisfied on the evidence that this would be the case even though as a result of my decision there will be no depletions on account of the UKHA Administrators having to provide for the Final Payment or any Future Final Payments on the basis they are expenses of its administration, which I have held they are not. This is because according to KSFs Administrators it will be prevented from realising assets valued at 19.2 million and receiving cash proceeds to that value or thereabouts which can then be distributed to its own creditors. It is obviously right in these circumstances to assimilate KSFs position with those of its creditors. Decision 77. In all the circumstances it is in my judgment just and expedient that the Court grant permission to KSF to enforce its securities as prayed in paragraph 1 of its amended application. There will also be an order in the terms of paragraph 1B. Paragraph 1A would appear now to fall away though I shall hear further submissions in that regard should the parties think it appropriate that I do so in light of my decisions. Costs 78. The costs of and incidental to both applications shall be paid as an expense of UKHAs administration.