Landlord and tenant — Whether original tenant liable for rent following voluntary arrangement made by assignee binding on landlord
The defendant
was an original tenant under a lease. The lease was first assigned to T2 and
then to T3. T3 subsequently entered into a voluntary arrangement pursuant to
Part I of the Insolvency Act 1986. The plaintiff landlord claimed arrears of
rent and service charges arising before and after the voluntary arrangement
from the defendant. The landlord had been summoned to the creditors’ meeting called
under section 3 of the 1986 Act, but did not attend. By section 5(2) the
landlord was deemed to be a party to the arrangement and bound by it. By the
arrangement each of T3’s lessors were to accept a surrender of the respective
leases and take immediate steps to mitigate damages. The defendant contended
that by that arrangement the landlord had accepted a surrender of the lease and
the defendant’s liability for post-arrangement rents was discharged. In respect
of the pre-arrangement rents, the defendant denied liability on the basis that
the arrangement was a settlement by T3 amounting to accord and satisfaction
which enured for its benefit.
RSC. The effect of the voluntary arrangement was to bind only those parties to
it. An outsider, such as the defendant, can get no assistance from the terms of
the arrangement as such. The defendant could have relied only on actual
surrender of the lease, which did not take place. Although the landlord was
bound by the voluntary arrangement, it did not voluntarily accept some other
performance. There was no ‘accord’, just a statutory binding.
The following
cases are referred to in this report.
Deanplan
Ltd v Mahmoud [1993] Ch 151; [1992] 3 WLR
467; [1992] 3 All ER 945; (1992) 64 P&CR 409; [1992] 1 EGLR 79; [1992] 16
EG 100
Hill v East & West India Dock Co (1884) 9 App Cas 448
Jacobs,
Re (1875) 10 Ch App 211
Levy, ex
parte Walton, Re (1881) 17 ChD 746
Saigol
v Goldstein unreported, May 13 1994
This was the
hearing of a summons under Ords 14 and 14A of the RSC in a claim by the
plaintiff, R A Securities Ltd, for rent and service charges against the
defendant, Mercantile Credit Co Ltd.
Stephen
Jourdan (instructed by P J W Sidwell) appeared for the plaintiff; Paul Emerson
(instructed by Fladgate Fielder) represented the defendant.
Giving
judgment, JACOB J said: The plaintiff landlord claims rent and service
charges due under a lease granted to the defendant (‘T1’). The lease had been
assigned first to Barclays Bank (‘T2’) and by them to a company called HLM
Design (‘T3’). Later T3 entered into a voluntary arrangement pursuant to Part I
of the Insolvency Act 1986. At the time of that arrangement rent and service
charges were due and unpaid (‘the pre-arrangement rent’). The claims of
preferential creditors are so great that the landlord will not receive any
pre-arrangement rent from T3. Nor will it receive from that source any of the
post-arrangement rent and service charges (‘the post-arrangement rent’). So the
landlord claims both the pre-arrangement and post-arrangement rent from the
original lessees,
detail.
The landlord
says its claim is so plain that it is entitled to summary judgment under Ord 14
RSC. Determination of this may involve the decision of a point of law arising
from the effect of the voluntary arrangement. In any event the landlord invites
me to decide this point one way or the other under Ord 14A RSC. It would like
to know if it is wrong as soon as possible.
Despite a
suggestion otherwise there is no real dispute as to the sums involved. No
conflict of fact arises. I am told there is no authority on the points which
arise for the first time under the Insolvency Act 1986. That is no reason not
to determine them under Ord 14A. I am clearly of the view that this is the sort
of case to which this comparatively new rule applies — the parties can get a
speedy determination of a point of law which lies at the heart of their dispute.
Matters might
have been different if I had thought the points involved a prior determination
of seriously disputed factual questions. But, as I have said, that is not the
case here. The nearest approach to such a conflict was a suggestion that the
landlord had actually accepted a surrender of the lease from T3 following the
voluntary arrangement. Although T3 wrote a letter unilaterally purporting to
terminate the lease with effect from the date of the voluntary arrangement it
is plain that the landlord never accepted such termination. There is no triable
issue as to a factual termination. That leaves the effect of the voluntary
arrangement as such to be determined.
The original
lease provided that the ‘lessees’ (as defined) were to pay rent and service
charges for the demised term. There were review provisions which have operated
in the usual way. ‘Lessees’ by definition include T1’s successors in title and
assigns. T1 covenanted to pay the rent and service charges. So, in the usual
way, notwithstanding assignment of the lease, T1 retains its own primary
liability to pay. T1 is a primary debtor, not mere surety. Whether it is
rational for the law to permit such a liability to remain in force when the
original tenant has long parted with the lease is debatable. Certainly the rule
can often produce harsh results. But so far as this case is concerned the
primary liability of T1 exists and remains unless in some way or other it has
been extinguished.
T1 suggests
such extinguishment by virtue of the voluntary arrangement. The landlord was
duly summoned to the creditors’ meeting called under section 3 of the Act, but
did not attend. T2, but not T1, was also summoned and was party to the
arrangement. The meeting approved the voluntary arrangement. Section 5(2) of the
Act provides:
The approved
voluntary arrangement —
(a) . . .
(b) 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.
So the
landlord is deemed to be a party to the arrangement and bound by it. The terms
of the arrangement (so far as material) are:
At present
the company leases business premises . . . [and equipment]. These leases are
onerous to the company’s business and in a Receivership the Receiver would
probably repudiate the leases and in a Liquidation they would probably be
surrendered or disclaimed. This would leave the lessors with unsecured claims
in respect of their damages but with very little prospect of a dividend from
the company . . . It is therefore proposed that each lessor . . . accepts a
surrender of the respective lease and take (sic) immediate steps to
mitigate its claim for damages.
It is said
that thereby the landlord accepted a surrender of the lease and that
accordingly T1’s liability to pay post-arrangement rent fell with the lease.
This is said to be so even though in fact no surrender was accepted and there
was no compliance with the statutory requirements for an effective surrender
set out in section 2 of the Law of Property (Miscellaneous Provisions Act)
1989.
As to the
pre-arrangement rent, T1 accepts it was liable for it (so far as unpaid by T3)
until the voluntary arrangement. But, it says, the arrangement amounted to a
settlement with T3 by way of accord and satisfaction for the sums due because
the landlord accepted a surrender of the lease. Since there was no reservation
of any claim against T1 that accord and satisfaction enures for its benefit.
I prefer to
consider the matter as a question of principle first. The purpose of voluntary
arrangements is to enable a company (or individual, for which case provision is
made in Part VIII) to come to a composition with creditors so that the more
drastic step of liquidation or bankruptcy can be avoided, if possible. It is
better to keep the show on the road than close it down even if creditors have
to accept less than their nominal (but not achievable) entitlement. The whole
scheme 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 as a side-wind of the voluntary arrangement system.
In so saying I
am doing no more than echoing what other, more distinguished, judges said, in
trenchant Victorian terms, in relation to earlier insolvency legislation. Thus,
in Hill v East & West India Dock Co (1884) 9 App Cas 448 Earl
Cairns recoiled from a construction of section 23 of the Bankruptcy Act 1869 to
the effect:
. . . that a
solvent man who has entered, with his eyes open, into a covenant with the
owners of property to pay rent to them and to be liable to them for that rent
and for other covenants, and who upon an assignment has recognised that
liability and has stipulated that it should continue, shall nevertheless be
delivered of that liability, not by reason of anything which has passed between
him and the lessors, but from a misfortune which has happened to the lessors,
namely that the person to whom the lease has been assigned has become a
bankrupt.
James LJ in ex
parte Walton, Re Levy (1881) 17 ChD 746 at p757 described the proposition
that a solvent original tenant was released by reason of the assignee’s
insolvency as leading to a ‘. . . most grievous injustice, and the most,
revolting absurdity’. These considerations led to a narrow construction of
section 23 of the Bankruptcy Act 1869, which provided that a disclaimed lease
was ‘deemed to have been surrendered’. It was not so deemed as between the
landlord and solvent original lessee.
Turning back
to section 5, does ‘binds every person’ have any effect outside the voluntary
arrangement? I think not. The effect of
the binding is solely as between the parties bound — those entitled to vote,
whether they did or not. An outsider, such as T1, can get no assistance from
the terms of the voluntary arrangement as such. Of course if something is
actually done as a result of the arrangement (eg property transferred or, as
might have but did not happen here, surrender of a lease) then an outsider can
rely upon that. But his right to rely upon it must result from an actual act
done, not the arrangement.
That, to my
mind, ends the case, both for pre-arrangement and post-arrangement rent. T1
cannot take advantage of the arrangement to which it was not a party. However,
I must go on to deal more fully with the points made by Mr Paul Emerson.
First, he said
that the 1986 Act was a new code and that earlier authorities were irrelevant.
He is right. But that does not mean that it was intended to create a ‘most
revolting absurdity’. Nor is it likely that a voluntary arrangement can
extinguish a landlord’s rights against a solvent non-party, when the more
drastic effect of a liquidation or bankruptcy does not do so.
Second, he
said that things were different under this Act as compared with the position,
for instance, in Hill because under this Act the landlord could have
protected itself. This would be by turning up to the creditors’ meeting and
seeking an express preservation of its right to claim rent from an original
tenant. Thus, instead of agreeing to a surrender it could instead have come to
some accommodation about the rent due (past and future) from T3 Mr Emerson says
that is what the landlord should have done, even though its prospects of
actually getting any money pursuant to the arrangement were minimal. His
argument applied even if no rent were due at all and only the future
liability for rent was under consideration. I find that bizarre and all the
more so when Mr Emerson contended that, if there had been such an attendance,
the landlord would very probably get protection for its claim against T1,
either from the meeting or, were it not granted there, on appeal to the court
pursuant to section 6 of the Act. If Mr Emerson were right, whether or not an
outsider could escape his own primary liability would depend on how well
advised was the landlord. It is by no means self evident that a creditor should
have to attend a meeting dealing with the debts of X when he has a claim against
Y. Moreover, even well-advised creditors would have to incur the expense and
trouble of attendance even where they had, in their own mind, written off any
chance of significant recovery from the debtor concerned.
Further, even
if the landlord did attend to oppose an agreement to surrender, things might
not go as smoothly as Mr Emerson suggests. Consider the simple case where the
company seeking an arrangement is the first assignee of the original tenant.
His assignor is a contingent creditor, for if his assignor pays the rent he has
a right of indemnity from his assignee pursuant to the usual implied covenant:
see section 77 of the Law of Property Act 1925. Suppose the landlord simply
agrees to forgo his claim for rent against the assignee, retaining his right to
claim against the assignor. Then the assignor will be able to turn on the
assignee. So, if the assignor is not a party to the voluntary arrangement
nothing will have been achieved by the landlord giving up his financial claim
against the assignee. The assignor will make the claim instead. The other
parties to the arrangement would not want this and would therefore not readily
allow the landlord to retain his claim against the assignor. Things would be
different if both the landlord and original lessee (as a contingent creditor)
were parties to the voluntary arrangement. Thus, it may well be that for a
voluntary arrangement effectively to deal with a lease held by assignment, the
assignor should be summoned too.
Here the
position is more complicated. T3’s assignor is T2, who is a party to and bound
by the arrangement. T2 has, as it seems to me, accepted (as between it and T3)
that there will be no post-arrangement rent due. So it could not bring a claim
against T3 in respect of any unrecovered rent (supposing, that is, that T1
claims indemnity from him).
Mr Emerson’s
third point relied upon Deanplan Ltd v Mahmoud [1992] 3 WLR 467*.
The plaintiff landlord had accepted goods and a surrender of the lease ‘in full
and final settlement’ in respect of rent due from an ultimate assignee of the
lease. He then turned on an earlier assignor for the unpaid rent less the value
of the goods (which turned out to be minimal). It was held that by the
settlement the landlord had accepted accord and satisfaction for the rent. So
none was due. Judge Paul Baker QC’s exhaustive analysis of the law was
summarised by him as follows [at p483F]:
. . . where
the obligations are non-cumulative, ie the obligation of each is to perform in
so far as it has not been performed by any other party, the acceptance of some
other performance in lieu of the promised performance relieves the others. The
covenantee cannot have both the promised performance and some other performance
which he agrees to accept.
*Editor’s
note: Also reported at [1992] 1 EGLR 79.
Here it is
said there was an equivalent to accord and satisfaction. I do not think so.
True it is that the landlord is bound by the voluntary arrangement. But it did
not in fact voluntarily accept some other performance. There was no ‘accord’ in
truth — just a statutory binding. I do not regard failure to exercise the
option to turn up at the creditors’ meeting and argue for some other
arrangement as amounting to an ‘accord’ — a true ‘acceptance’.
In my
judgment, the release of the debtor is, as Bailey, Groves and Smith say in Corporate
Insolvency — Law and Practice at 25.15, an act of law. The same
result was achieved under earlier legislation, namely the Bankruptcy Act 1869:
see eg Re Jacobs (1875) 10 Ch App 211. I mention this case only because
Mr Emerson relied upon a passage in vol 2 of the current edition of Chitty
on Contract [at p5048]:
The position
therefore appears to be that voluntary arrangements made under the 1986 Act are
in the same position as were compositions under the 1869 Act: they are
‘voluntary acts’ which discharge the surety, in the same way as do compositions
and arrangements made at common law.
Mr Emerson
said that accordingly the landlord had, by a ‘voluntary act’, agreed to accept
a different performance than payment of the rent due, namely gained at least a
right to accept surrender of the lease. Whether that was valuable or not was
irrelevant — it was a different performance. Chitty relies upon Jacobs,
but assumes that it held that a ‘composition’ under section 126 of the 1869 Act
was equated with a voluntary act. This is simply not so. The judgment of
Mellish LJ (read by James LJ) could not be clearer [at p214]:
We think that
a discharge of a debtor under a liquidation or a composition is really a
discharge in bankruptcy by operation of law.
Another work
relied upon by Mr Emerson was Andrews and Millett’s Law of Guarantees.
This does not adopt the Chitty view, suggesting as a better analysis the
notion that a voluntary arrangement is in effect a statutory variation of
pre-existing contractual rights. It follows, the authors argue, that the common
law effect of discharge of a surety by a consensual discharge of the debtor
(without reservation of a right against the surety) will apply in a voluntary
arrangement. This analysis, to my mind, turns a statutory binding into a
consent and is in error.
So the third
point fails.
My remaining
concern was, what is to happen for the future?
Can the landlord simply stand by and collect the rent as and when due
from T1, even though the lease continues to exist and is assigned to T3? There is no provision for a vesting order
such as, for instance, can be made to vest a lease back in an original tenant
after a liquidator of its assignee disclaims a lease under section 178: see
section 181. It was made plain that this is a theoretical concern in this case
because the landlord is willing to let T1 back into possession or to allow it
to find new tenants. No doubt that would be the practical answer in most cases.
However, the
theoretical problem must be addressed. I do not have complete confidence in the
answer which I have reached and which did not arise directly on the points in
dispute. The problem arises from the fact that the statutory scheme of
voluntary arrangements has not dealt with what happens to things like leases.
Indeed, it is possible that the whole scheme relates only to creditors as such
and can bind only parties qua their position as creditors. But assuming
a landlord can be bound qua landlord, the solution is, I think, as
follows. The original tenant will remain liable for the rent and have an
indemnity claim against its assignee. If that assignee enters into a voluntary
arrangement it will either summon the assignor or not. If it does summon both
then they will be bound and the assignor will get the benefit of any surrender
called for by the arrangement. If the assignor is not summoned, then its right
of indemnity will be enforceable. If the assignee cannot pay, then it can be
wound up and liquidated. Then the liquidator would disclaim and the assignor
could invoke the vesting order machinery. In practice a vesting would be achieved
by agreement by reason of the threat of this machinery.
Since I wrote
the foregoing paragraph my attention has been drawn to a very recent decision
of Ferris J, Saigol v Goldstein May 13 1994. This was not
available when the matter was argued before me. Ferris J held that a creditor
for an unliquidated claim whose amount is not agreed at the meeting of
creditors ought not to be bound by any figure put on the claim at the meeting.
That may well have an impact on what I wrote. This is because the claim of an
assignor may well be uncertain in amount: although there is a fixed amount due,
how much it will be owed depends upon how much is paid by the debtor or, when
there have been several assignments, by intermediate assignees and the debtor.
If that is right then even if the assignor is summoned to the meeting, unless
all is agreed, it may not be bound and my solution will not work. This might
result in a failure of the voluntary arrangement altogether, for in some cases
there would be no point in so far as other
stands.
Here the
theoretical point does not arise so far as T1 is concerned. His indemnity is
against T2. The fact that T2 cannot enforce its indemnity against T3 is a consequence
of T2 being party to the arrangement.
In the result
the claim succeeds.
Judgment for
the plaintiff.
