Insolvency – Lease of commercial premises – Aviation company going into liquidation – Applicant landlord seeking payment of rent due in respect of main operating premises – Whether entitled to rent in priority to other creditors for period of earlier provisional liquidation as expense of such liquidation – Whether lease validly disclaimed by respondent liquidators – Whether right of set-off or other similar right existing in respect of rent due – Application allowed in part.
By a sale and leaseback transaction in 2007, the applicant purchased the main operating premises of its parent company for £8.3m and leased them back to it for a 15-year term at an initial rent of £520,000 pa, payable quarterly. The first £5.5m of the purchase price was financed by a bank on the security of a legal charge over the property with an assignment of the rent payable under the lease. The remaining £2.8m was left outstanding.
The parent company continued to operate its cargo airline business from the premises but fell into financial difficulties. From June to October 2010, it was in provisional liquidation; thereafter, it was ordered to be wound up and the respondents were appointed as its joint liquidators. In March 2011, the respondents purported to disclaim the lease. At that time, they were hoping to proceed with a sale, approved by the court, of the aviation assets stored on the premises; that sale later fell through and the assets remained in storage.
The applicant company went into administration. Through its administrators, it applied to the court for the payment of arrears of rent under the lease. The respondents argued that such a summary application was premature and inappropriate since they were still investigating the matters in issue. The issues were whether: (i) a binding agreement had been reached to reduce the rent under the lease; (ii) the rent payable during the provisional liquidation period was to be treated as an expense of the liquidation, under the principle in Re Lundy Granite Co, ex parte Heavan (1871) LR 6 Ch App 462, and payable in priority to most other liquidation expenses pursuant to r 4.218(3)(a)(ii) of the Insolvency Rules 1986; (iii) the disclaimer of the lease was invalidated by the lack of any intention to give vacant possession on that date, given the continued storage of aviation assets on the premises pending an approved sale; and (iii) the parent company was entitled to set off the rent against the outstanding part of the purchase price.
Held: The application was allowed in part.
(1) The general rule was that a promise to pay a lesser sum than was due was not good consideration; however, the practical benefit of such an agreement could in some circumstances provide good consideration. A formal agreement for the parent company to pay a lesser sum in rent, in order to facilitate a possible takeover and the survival of both companies, might have been such a practical benefit, but the factual position remained unclear. It was not appropriate for the court, on the evidence presently before it, to reach a conclusion on the existence of a binding agreement to reduce the rent since there was uncertainty as to whether there had been consideration for that agreement and whether the chargee bank had consented.
(2) Creditors in respect of leases or other contracts entered into before the liquidation could recover debts in full, as expenses of the liquidation, in circumstances where the contracts had been continued by the liquidators for the benefit of the liquidation: Re Lundy Granite Co and Re Toshoku Finance UK plc [2002] 1 WLR 671 applied. The test was whether the liquidators had retained possession for the convenience of the winding-up and this depended on their motivation: Re ABC Coupler & Engineering Co Ltd (No 3) [1970] 1 WLR 702 applied. The Lundy Granite principle was equally applicable to a provisional liquidation just as it did to an administration. It would be anomalous if the position differed between administration and liquidation on the one hand, and provisional liquidation on the other. In all three cases, it might be in the interests of the company and its creditors to continue the company’s business, with a view to its eventual sale, and for that reason to use the company’s premises. There was no reason why the position of the company’s landlord should be worse where that decision was taken by a provisional liquidator. Provisional liquidators were not mere caretakers, incapable of taking decisions for the benefit of the company.
The landlord would not always be entitled to priority. Priority would be accorded only where the administrator, provisional liquidator or liquidator had either retained the property for the purpose of advantageously disposing of it or had continued to use it. Doing nothing would not suffice. In the instant case, the provisional liquidators had taken a decision that the company’s assets would be realised more advantageously if the premises were retained for the time being. From that point, their purpose in retaining the lease, rather than seeking to disclaim it, had been to benefit the provisional liquidation. On that basis, the rent due in September 2010 was an expense of the provisional liquidation. However, the rent for the previous quarter, falling due on June 2010, was not. Prior to the provisional liquidators’ decision, their retention of the premises was not for the benefit of the provisional liquidation. They had not continued the parent company’s business at the premises but had merely decided to secure its aircraft assets that were stored there. That was not sufficient to amount to “continued use” so as to engage the principle: Re Oak Pits Colliery Co (1882) 21 Ch D 322 applied.
(3) Once a formally valid notice was given in accordance with section 178 of the Insolvency Act 1986, then the lease was terminated. The notice was not invalidated by the lack of an intention to vacate the premises immediately. If the company failed to give up possession, then it was liable for damages for trespass, calculated by reference to the letting value, whether higher or lower than the rent, in the same way as an ordinary tenant that failed to give up possession on the termination of a tenancy. Although the court had a power to reverse the decision to disclaim if it was a decision that no reasonable liquidator could have made, it was not appropriate to exercise that power in the instant case. The respondents’ decision to disclaim made good financial sense, since it had seemed to them at the time that the parent company’s liability for trespass was unlikely to be as great as its liability for rent, in circumstances where they then hoped to sell the aircraft assets and clear the premises within a few weeks. They owed no duty to the applicant not to act to the detriment of its financial interests in that respect, but were entitled to choose whichever form of civil liability was more beneficial to the parent company. Accordingly, the disclaimer was valid and should not be set aside. Further questions fell to be decided as to the extent of the parent company’s liability for trespass.
(4) Although £2.8m of the purchase price on the 2007 sale remained unpaid, and would ordinarily have given rise to a straightforward legal set-off of one liquidated claim against another, any such right of set-off was excluded by the clear terms of the lease. The same applied to any requirement, under the principle in Cherry v Boultbee (1839) 4 My & Cr 442, that the applicant satisfy its claims for rent out of the amount due for the unpaid purchase price. The applicant was entitled to rely on the terms of the lease for that purpose notwithstanding the disclaimer. The purpose of section 178 was to enable the liquidators to disclaim onerous property for the future, so as to avoid any future burden; it was not intended to relieve the company of existing burdens. The position immediately prior to disclaimer, namely that the terms of the lease excluded any right of set-off or any other similar right in relation to the rent that had fallen due, was unaffected by the disclaimer. It would not be fair to deprive the applicant of its right to payment of the rent in full; nor was this legally necessary: Hindcastle Ltd v Barbara Attenborough Ltd [1997] AC 70; [1996] 1 EGLR 94; [1996] 15 EG 103 and Capital Prime Properties plc v Worthgate Ltd (in liquidation) [2000] BCC 525; [1999] PLSCS 200 considered. The outstanding rent therefore remained payable in full.
Hermann Boeddinghaus (instructed by Eversheds LLP) appeared for the applicant; Andrew Clutterbuck (instructed by Rosenblatt Solicitors appeared for the respondents.
Sally Dobson, barrister
