Administration provides struggling companies with a breathing space. The legislation that underpins the regime was designed to help administrators to rescue companies that are in financial difficulties or, if that proves impossible, to achieve a better result for a company’s creditors than would be likely were the company to be wound up.
Consequently, the Insolvency Act 1986 prohibits on the commencement or continuation of claims against companies in administration. The prohibition is extremely wide. No legal process can be brought or continued except with the consent of the administrator or the permission of the court.
Administration provides struggling companies with a breathing space. The legislation that underpins the regime was designed to help administrators to rescue companies that are in financial difficulties or, if that proves impossible, to achieve a better result for a company’s creditors than would be likely were the company to be wound up.
Consequently, the Insolvency Act 1986 prohibits on the commencement or continuation of claims against companies in administration. The prohibition is extremely wide. No legal process can be brought or continued except with the consent of the administrator or the permission of the court.
The statutory moratorium is commonly used to block financial claims against a company. However, Somerfield Stores Ltd v Spring (Sutton Coldfield) Ltd [2009] EWHC 2384 (Ch); [2009] PLSCS 282 concerned an innovative attempt to use the prohibition to suspend proceedings for the renewal of a business lease.
The landowner had opposed the tenant’s claim for a new lease on the ground that it intended to redevelop the property but was not in a position to proceed because of its financial problems. None the less, redevelopment remained a possibility (if planning permission could be obtained, a number of prelets could be secured and a developer could be found or a joint venture arranged).
The administrator asked for time to formulate a viable scheme. There was no doubt that this would have resulted in a dramatic uplift in value, which might have improved the creditors’ position. However, the likelihood was that the only real beneficiary would be the bank, which had a fixed charge securing indebtedness in excess of the value of the property. Consequently, the administrator’s request was denied.
The judge accepted that administrators are entitled to realise property to make distributions to secured or preferential creditors. However, the legislation had not been enacted to improve the position of such creditors as against tenants seeking new business leases, or to put them in a better position than they would have been in had there been no administration, and the rights of third parties, whether or not creditors, ought not to be prejudiced unless this was necessary to achieve the administration’s objective.
The landowner’s position was uncertain and it would be wrong to allow that uncertainty to continue indefinitely. The tenant had a right to have its proceedings heard without undue delay. The maximum new term that the court can order, in the absence of agreement between the parties, is 15 years. However, section 33 of the Landlord and Tenant Act 1954 empowers the court to order the grant of a new lease for such term as it considers reasonable in all the circumstances.
Consequently, when the tenant’s application for a new lease was heard, the court could allow the potential redevelopment by ordering the landowner to grant a lease for a relatively short term or a lease containing a break clause.
Allyson Colby is a property law consultant
