Landlord and tenant — Assignment — Liability of original tenants — Whether liability released or discharged by insolvency voluntary arrangement made by insolvent assignee of term
The defendants are the original tenants
under a lease for a 25-year term granted in February 1977. In August 1989 the
plaintiff landlords acquired the reversion. In 1990 the defendants assigned the
term to E, who later became insolvent and fell into arrears with the rent. In
1995, following the service of notices on the plaintiffs and defendants, a
company voluntary arrangement was made under the Insolvency Act 1986 in respect
of E. In the present proceedings the landlords claimed the arrears of rent from
the defendants. The defendants contended that the arrangement, which froze all
creditors’ claims, operated as a variation of the lease or as an accord and
satisfaction discharging E from liability as assignee and that by virtue of the
fact that the arrangement bound the parties to the action the liability of the
defendant original tenants to the landlords has been discharged or released.
plaintiffs. It was clear from the terms of the arrangement that: (1) there is
no intention to vary the lease and, even if there was such an intention, it
would be ineffective. (2) While the arrangement was intended to bind the
landlords and the original tenants and did bind them, it only bound them in
respect of their rights as creditors of E and did not affect their rights inter
se. (3) There was no accord and satisfaction or release of the rights of the
landlords against E such as to extinguish the liability of the original tenants
to the landlords or release the original tenants from liability, but merely a
statutorily imposed moratorium on the enforcement by the landlords and the
original tenants of their rights against E, a moratorium which in no wise
affected the rights of the landlords against the original tenants in respect of
the unpaid rent.
The following cases are referred to in
this report.
Bradley-Hole, Re [1995] 1 WLR 1097; [1995] 4 All
ER 865
Burford Midland Properties Ltd v Marley Extrusions Ltd
[1995] 2 EGLR 15; [1995] 30 EG 89; [1994] BCC 604
Cancol Ltd, In Re [1996] 1 All ER 37; [1995]
BCC 1133
Doorbar v Alltime Securities Ltd (No 2)
[1995] BCC 728
Ezekiel v Orakpo [1977] QB 260; [1976] 3
WLR 693; [1976] 3 All ER 659; [1976] 2 EGLR 47; (1976) 239 EG 501, CA
Hindcastle Ltd v Barbara Attenborough
Associates Ltd [1996] 2 WLR 262; [1996] 1 EGLR 94; [1996] 15 EG 103
House Property & Investment Co Ltd,
In re [1954]
Ch 576; [1953] 3 WLR 1037; [1953] 2 All ER 1525
Mytre Investments Ltd v Reynolds [1995] 3 All
ER 588; [1995] 2 EGLR 40; [1995] 43 EG 131
Naeem (a bankrupt), In re [1990] 1 WLR 48
RA Securities Ltd v Mercantile Credit Co Ltd
[1994] BCC 598; [1994] 2 EGLR 70; [1994] 44 EG 242
This was an application for summary
judgment by the plaintiffs, March Estates plc, against the defendants, Gunmark
Ltd, for rent arrears.
Helen Gulley (instructed by Helder
Roberts & Co, of Epsom) appeared for the plaintiffs; Thomas Grant
(instructed by Churchers, of Gosport) represented the defendants.
Giving judgment, Lightman J said: These proceedings
raise important questions as to the effect of a company voluntary arrangement
in respect of the assignee of a lease on the rights of the lessor.
Facts
On February 25 1977 London &
Manchester Assurance Co Ltd (‘LMA’) granted a lease (‘the lease’) to the
defendants Gunmark Ltd (‘Gunmark’) for a term of 25 years from February 14
1977. The lease contained no provision for the release of the liability of Gunmark
under the covenants of the lease on assignment and the provisions of section 5
of the Landlord and Tenant (Covenants) Act 1995 to this effect only apply to
leases granted on or after January 1 1996. On December 2 1988 LMA assigned the
reversion upon the lease to Brief Perfect Ltd who, on August 2 1989, assigned
the reversion to the plaintiffs March Estates plc (‘March’). On January 3 1990
March gave their licence to the assignment of the lease to Eldair Engineering
Ltd (‘Eldair’) and this assignment took place during 1990. Eldair became
insolvent and fell into arrears in the payment of rent. On June 29 1995 March
made demand for these arrears. Meanwhile, on June 27 1995 Eldair presented a
petition for an administration order, the principal purpose of the
administration being to prepare and present to creditors a proposal for a
company voluntary arrangement, and such order was made. In July 1995 the
administrator convened a meeting of creditors pursuant to sections 3 and 23 of
the Insolvency Act 1986 (‘the Act’) to consider his proposal for a voluntary
arrangement. Notice of this meeting was duly served on March and Gunmark. March
did not attend: Gunmark did and voted. The meeting duly approved the proposal
with two amendments. Certain other amendments were rejected or withdrawn. I
shall refer to the approved proposal as ‘the arrangement’.
The relevant terms of the arrangement
were as follows:
1.1. The Administrator proposes that the
company shall enter into a Voluntary Arrangement with its creditors under the
provisions of [Part I of the Insolvency Act 1986].
1.2. The Administrator considers that
such an arrangement will enable the survival of the business, and enable a
dividend to be paid to unsecured creditors …
4.6. The company’s bankers have indicated
that they would be prepared to continue support, provided a formal arrangement
is made with the creditors …
6.1. It is proposed that:
6.1.1. All creditor’s claims at the date
of the voluntary arrangement be frozen
6.1.2. The company be permitted to
continue trading under the control of its present directors
6.1.3. The Supervisors be entitled to
receive all monies due to the company from debtors and continued trading
6.1.4. In the period following the
commencement of the voluntary arrangement the administrator shall extract from
the company’s cash flow sufficient funds to pay the dividends set out in 6.1.8
and 6.1.9.
6.1.5 The Voluntary Arrangement will last
to 31 August 2000 and 50% of all profits in the accounts of the company from
the date of the Voluntary Arrangement to 31 August 2000 shall be paid annually
to the supervisors as additional contributions on I January following the
accounting date. The supervisors will continue to act so long as it is
necessary for him [sic] to collect all sums due under this arrangement, and for
him to distribute the funds in hand
6.1.8. The supervisors will agree the
claims both of the preferential and unsecured creditors and pay dividends to
creditors as funds are available and the claims are agreed.
6.1.9. The initial payment to unsecured
creditors will be a minimum of 20p in the £, and will be paid by the end of
1995, or so soon afterwards as claims are agreed, and a second dividend of 10p
in the £ will be paid within 12 months of approval, if sufficient funds are
generated …
6.2. The directors consider the Voluntary
Arrangement proposal has the following advantages: …
(vi) The prospect of future dividends
based on profits
7.12. Distributions will be made from
time to time at the absolute discretion of the Supervisors when they are of the
opinion sufficient funds are available.
The one proposed amendment which was
withdrawn read as follows:
8. The provisions of clauses 6.1.8,
6.1.9, and 7.12 shall have effect in full and final settlement of all claims
against Eldair Engineering Limited by creditors relating to liabilities in
existence as at 27th June 1995 (whether those
otherwise) and shall represent an accord and satisfaction.
It is to be noted that no reference was
made to the lease (or leases generally) in the arrangement.
On September 25 1995 March issued these
proceedings against Gunmark claiming in a specially endorsed writ arrears of
rent of £19,316.91 due on June 24 1995, and on October 9 1995 issued the
summons for summary judgment now before me. There is an issue between the
parties as to the exact amount of rent paid by Eldair and counsel have agreed
that, if I am minded to give summary judgment, I shall direct an account rather
than specify the exact sum due. That is the only fact in issue. The issue
between the parties is one of law, namely the effect of the arrangement upon
the liability of Gunmark as original lessee for arrears of rent accrued due as
at the date of the arrangement.
Law
Mr Thomas Grant, counsel for Gunmark,
submits that the arrangement operates as a variation of the lease or as an
accord and satisfaction discharging Eldair from liability as assignee of the
lease or otherwise as a release from such liability and that by virtue of the
fact that the arrangement bound March and Gunmark, the liability of Gunmark to
March has been likewise discharged or released.
This submission calls for a careful
analysis of the operation of a voluntary arrangement in relation to the
assignee of a lease on the rights of the lessor. The law in this regard is far
from clear, in particular because the legislation governing voluntary
arrangements makes no specific provision for liabilities under leases and
because leases do have peculiar legal incidents of their own. It is I think
appropriate to consider the general principles which can be deduced from the
legislation and the authorities.
1. Composition or scheme
Section 1 of the Act provides that
(unless the company is in administration) the directors, the administrator or
the liquidator may make a proposal to the company and its creditors ‘for a
composition in satisfaction of its debts or a scheme of arrangement of its
affairs’, each of which the section refers to as a voluntary arrangement. In
this context a scheme of arrangement (‘a scheme’) is plainly something
different from a composition and involves something less than the ‘release or
discharge of creditors’ debts, eg a moratorium. Mr Grant submits that all
voluntary arrangements involve a composition or release and for this purpose
cites the dictum of Rimer J in Re Bradley-Hole [1995] 4 All ER
865 at p886 e-f:
The essence of a voluntary arrangement is
that under it each creditor compromises or releases his rights against the
debtor in respect of his pre-existing debt and receives in exchange and full
satisfaction whatever payment terms are being offered by the debtor.
It is however clear from the context that
Rimer J had under consideration the former category of voluntary arrangements,
ie a composition, and not the latter, ie a scheme. A scheme does not, or does
not necessarily, involve any compromise or release. Certainly there is no such
compromise or release in the case of a scheme providing merely for a
moratorium.
The arrangement in this case is a scheme
providing for a moratorium on all existing debts until August 31 2000 and
repayment to creditors by way of dividends out of available funds and a
half-share of future profits over the period. If and so far as the debts are
not fully discharged when the moratorium expires, by implication the full
balance becomes immediately payable. The existence and quantum of the debts
is unaffected by the moratorium: repayment is however postponed in the interest
of all creditors thereby achieving the prospect of a higher return than would
be available on a liquidation and a possibility of a complete return out of the
profits of the continued trading of Eldair. I do not think that I can properly
take into account in construing the arrangement and determining its character
the fact that a proposed amendment to the effect that it should take effect as
a composition was withdrawn. But this fact does afford me some comfort showing
that a composition was not in fact intended.
2. Effect on voluntary
arrangement on rights of creditors against third parties
Legislation has created a number of
procedures designed to protect a corporate debtor from its creditors or limit
its exposure to claims, eg administration and disclaimer. It cannot be assumed
that the legislation intended these procedures by a side wind to affect the
rights of the creditors against third parties who are liable to the creditors
for the same debt: see eg Hindcastle Ltd v Barbara Attenborough
Associates Ltd [1996] 2 WLR 262*. The like approach is appropriate in case
of voluntary arrangements. As Jacob J said in RA Securities Ltd v Mercantile
Credit [1994] BCC 598 at p600†:
*Editor’s note: Also reported at [1996] 1
EGLR 94
†Editor’s note: Also reported at [1994] 2
EGLR 70
The whole scheme [for voluntary
arrangements] is not for the benefit of solvent parties who happen to owe debts
also owed by the debtor. It would in my judgment be unfair if a solvent debtor
escaped liability by a side wind of the voluntary arrangement system.
The fact that Eldair has fallen on hard
times and needs the protection of a voluntary arrangement is no reason why
March should not be entitled to enforce their rights to payment of any
outstanding rent from anyone else liable for the rent, whether such person is
the original lessee or a guarantor. Eldair’s protection does not require the
protection of Gunmark from liability for the arrears of rent: Eldair requires
protection from any claim by Gunmark under their right to indemnity in case
Gunmark is compelled to pay, but Eldair can obtain protection in respect of
this right to indemnity by giving notice of the meeting to Gunmark and
including Gunmark’s claim in the arrangement. This is what was done in this
case.
A voluntary arrangement may expressly or
by necessary implication regulate the rights inter se of a creditor of
the company and of third parties liable for the same debt: consider Burford
Midland Properties Ltd v Marley Extrusions Ltd [1994] BCC 604*.
Exceptional circumstances may justify this course. But if this is to be the
case, the intention to regulate such rights must be made plain on the face of
the proposal. Of course notice of the meeting must also be given to those
affected. In this way, those affected will know what is at stake, can make
representations and vote at the meeting accordingly, and if necessary can
within the statutory 28-day period apply to the court under section 6 of the
Act (as to which see below) to revoke or suspend the approval of the meeting if
this provision in the proposal unfairly prejudices their interests. But in the
absence of either of these statutory safeguards to the interests of those
affected being complied with, any arrangement can only affect the company
alone, leaving unaffected the rights of the creditor against third parties. The
voluntary arrangement may statutorily absolve the company from liability
without absolving or releasing from liability any other party and will
ordinarily be construed as reserving all rights of creditors against other
parties: see RA Securities (supra) and Mytre Investments Ltd v Reynolds
[1995] 3 All ER 588†.
*Editor’s note: Also reported at [1995] 2
EGLR 15
†Editor’s note: Also reported at [1995] 2
EGLR 40
3. Statutory limitations on
terms of voluntary arrangements
Section 5(2) of the Act provides a
voluntary arrangement approved at a meeting of creditors takes effect as if
made by the company at the creditors meeting and binds every person who in
accordance with the rules had notice of, and was entitled to vote at, that
meeting (whether or not he was present or represented at the meeting) as if he
were a party to the voluntary arrangement. Section 3(3) provides that the
persons to be summoned to the creditors meeting are every creditor of the
company of whose name and address the person summoning the meeting is aware. The
binding effect of the arrangement is subject to two qualifications:
(a) under section 6 of the Act a person
entitled in accordance with the rules to vote at the meeting is (among others)
entitled within 28 days to apply to the court to revoke or suspend the approval
on two grounds, one of which is that the voluntary arrangement approved at the
meeting unfairly prejudices his interests; and
(b) under section 4(3) the meeting shall
not approve any proposal or modification which affects the rights of a secured
creditor of the company to enforce his security, except with the concurrence of
the creditor concerned. To alter the amount secured or the circumstances in
which the security may be enforced must be to affect the rights of the secured
creditor to enforce his security: his rights to enforce the security are as set
out in the deed, agreement or statute creating the security, and the rights
include the right to enforce when, and in respect of the amount, there
provided.
4. Voluntary arrangements and
leases
Though the lessor’s right of re-entry is
not security in a legal sense (see In re House Property & Investment Co
Ltd [1954] Ch 576 at p614 and Ezekiel v Orakpo [1977] QB 260*
at p269) since the enactment of the Insolvency Act 1986 there has been a
consistent line of authority to the effect that for the purposes of section
4(3), in respect of his right under a lease to re-enter and forfeit the lease
for breach of covenant, the lessor is a secured creditor (in particular see the
cases cited). His right of re-entry is security for the performance by the
lessee of the covenants on his part contained in the lease and in particular
for payment of the rent reserved. The lessor’s right to enforce his security
would be affected, and possibly seriously prejudicially affected, by a term of
a voluntary arrangement which varied the terms of the lease relating to the
exercise of the right of re-entry or the tenant’s covenants in the lease, eg
limiting the right to forfeit or reducing the rent payable. The lessor could in
such circumstances no longer enforce his secured right to enforce compliance
with the covenants in the lease as they existed prior to the voluntary
arrangement. Section 4(3) accordingly is, as it seems to me, designed and apt
to preserve sacrosanct from any variation without the lessor’s consent the
tenant’s covenants in the lease so long as they are secured by the lessor’s
right of re-entry.
*Editor’s note: Also reported at [1976] 2
EGLR 47
A voluntary arrangement may postpone,
modify or extinguish the lessor’s right as a creditor of the company to the
reserved rent whether past or future (see In re Cancol Ltd [1995] BCC
1133) and excuse the company (whether original lessee or assignee) personally
from performance. The voluntary arrangement in such a case by operation of law
absolves the lessee from, or limits or postpones, his personal liability. None
the less, (a) the voluntary arrangement cannot prejudice the lessor’s right to
forfeit the lease if the full rent reserved by the lease is not paid. This is
implicit in the judgments of Knox J and (in the Court of Appeal) of Peter
Gibson LJ in Doorbar v Alltime Securities Ltd (No 2) [1995] BCC
728 at p739 A-B, and p1149 at pp1158 F-H and 1159 G-H; and (b) the covenants of
the lease remain unchanged and the right of the lessor to enforce those
covenants against third parties (including any assignee of the lease) are fully
preserved.
If the lessor’s right to enforce his
security is not to be affected by a voluntary arrangement save with the
lessor’s consent, upon forfeiture by the lessor the grant of relief should be
on the same terms as those on which it would be granted if there was no
voluntary arrangement, and therefore (in accordance with well established
principles) relief should only be granted on terms that all arrears of rent are
paid. This is clearly the assumption upon which Doorbar v Alltime
Securities (supra) was decided. With all respect, the suggestion by
Hoffmann J to the contrary in In re Naeem (a bankrupt) [1990] 1 WLR 48
at p50 F-H cannot be correct.
5. Decision
Turning to the facts of this case,
contrary to the submissions of Mr Grant, it is quite clear from the terms of the
arrangement that: (a) there is no intention to vary the terms of the lease and,
even if there were such an intention, it would be ineffective; (b) while the
arrangement was intended to bind March and Gunmark and did bind them, it only
bound them in respect of their rights as creditors of Eldair (in particular by
imposing a moratorium) and did not affect their rights inter se; and (c)
there was no accord and satisfaction or release of the rights of March against
Eldair such as to extinguish the liability of Gunmark to March or release
Gunmark from liability, but merely a statutorily imposed moratorium on the
enforcement by March and Gunmark of their rights against Eldair, a moratorium
which in no wise affected the rights of March against Gunmark in respect of the
unpaid rent.
In my judgment, accordingly, March are
entitled to summary judgment for any unpaid rent and since the quantum
is in issue, are entitled to summary judgment for an account.
Judgment for the plaintiffs.
