Winding up of company — Disclaimer of lease by liquidator — Release of guarantors — Whether disclaimer should be set aside
dated October 28 1968 Viscount Chelsea and Cadogan Estates Ltd, as lessors,
granted Cavendish Offices & Houses Investments Ltd (‘Cavendish’) a lease of
21-22 Hans Place, London (‘the premises’) for a period of 32 years at an annual
rent of £10,500, without review — By an underlease dated January 16 1970
Cavendish sublet the premises to Hans Place Ltd (‘the company’) for a period
expiring shortly before the expiry of the lease at a rent of £22,000 pa,
subject to reviews — The second and third respondents, David Rogers and David
Lewthwaite, were parties to the underlease as guarantors — By 1991 the rent
under the underlease had been reviewed to £175,000 pa — On November 26 1991 it
was resolved to place the company in creditors voluntary winding up and the
first respondent, Christopher Guy Adams, was appointed liquidator — On the same
day the liquidator gave notice to disclaim the underlease under section 178 of
the Insolvency Act 1986 — On behalf of the applicants, Cavendish, it was
conceded that the court was bound by the decision of the Court of Appeal in
Stacey v Hill, whereby upon a disclaimer the guarantors of a lease are
released, but the point was reserved should the matter go further — The
applicants applied under section 168 of the Insolvency Act 1986 for an order
setting aside the liquidator’s decision to disclaim on the ground, inter alia,
that the liquidator should have balanced the advantages and disadvantages of a
disclaimer to be gained by the liquidator and by persons affected by the
disclaimer, such as Cavendish
consolidated with the Insolvency Act 1986, worked a substantive change in the
law which requires a new approach by the court when considering challenges to a
liquidator’s decision to disclaim onerous property — The removal of any
requirement of leave of the court means that the decision to disclaim becomes
simply one of the many instances where a liquidator exercises powers of
management and distribution of the assets of a company in liquidation,
conferred on him by the 1986 Act — There being no challenge to the bona
fides of the liquidator nor suggestion that his decision could be
categorised as perverse, the court could not interfere with his decision to
disclaim — If the court were exercising the original discretion of the
liquidator, which it should not save in cases of mala fides or
perversity, there were advantages to the general body of creditors and to the
administration of the company which the competing advantage of Cavendish ought
not to overrule — The disclaimer should stand
The following
cases are referred to in this report
Debtor,
ex parte the v Dodwell [1949] Ch 236
Distributors
& Warehousing Ltd, Re [1986] 1 EGLR 90; (1985)
278 EG 1363; [1986] BCLC 129
East and
West India Dock Co, Re (1881) 17 Ch 759
Katherine
et Cie Ltd, Re [1932] 1 Ch 70
Leon v York-O-Matic Ltd [1966] 1 WLR 1450; [1966] 3 All ER 277
Maurice
Tempany v Royal Liver Trustees Ltd [1984]
BCLC 568 No 1 London Ltd, Re [1991] BCLC 501
Peters,
ex parte Lloyd, Re (1882) 47 LT 64
Stacey v Hill [1901] 1 QB 660
Warnford
Investments Ltd v Duckworth [1979] Ch 127;
[1978] 2 WLR 741; [1978] 2 All ER 517; (1977) 36 P&CR 295
Yarmarine
(IW) Ltd, Re [1992] BCC 28
This was an
application by originating summons by the applicants, Cavendish Offices &
Houses Investments Ltd, challenging the decision of the first respondent, C G
Adams, as liquidator to disclaim an underlease dated January 16 1970 in respect
of which the second and third respondents, David Rogers and David Lewthwaite
respectively, were guarantors.
David
Neuberger QC and Matthew Collings (instructed by Brecher & Co) appeared for
the applicants; John Davies (instructed by Elborne Mitchell) represented the
first respondent; John McDonnell QC and Kathryn Lampard (instructed by Wilde
Sapte) represented the second and third respondents.
Giving
judgment, MR E C EVANS-LOMBE QC said: This case concerns the application
of Cavendish Offices & Houses Investments Ltd (to which I will refer
hereafter as ‘Cavendish’) in the voluntary winding up of Hans Place Ltd (to
which I will refer as ‘the company’) seeking relief against: Christopher Guy
Adams, the liquidator of the company as first respondent, David Rogers and
David Lewthwaite, as second and third respondents in their capacity as
guarantors of an underlease made between Cavendish as underlessors, the company
as underlessees and the second and third respondents as guarantors of the
premises at 21 and 22 Hans Place, Kensington (to which I will refer as ‘the
premises’). The relief sought is associated with the liquidator having
disclaimed the underlease soon after his appointment as liquidator, thereby, it
is contended, releasing the guarantors from their obligations to Cavendish as
landlords.
By the
originating summons, as amended by leave of Millett J on June 8 1992, Cavendish
seek an order that: (i) Mr Adams be removed as liquidator of the company; (ii)
his disclaimer of the lease dated
declaration that notwithstanding the disclaimer the second and third
respondents remain liable as guarantors of the lessees’ obligations under the
underlease and consequential orders for payment of amounts due under that
underlease. The material facts in the case are not now in dispute. By a lease
dated October 28 1968 and made between Viscount Chelsea and Cadogan Estates Ltd
as lessors, and Cavendish as lessees, 21 and 22 Hans Place were let for a
period of 32 years from December 25 1967 to Cavendish for an annual rent of
£10,500 without rent reviews. Accordingly, as of today, there remain seven
years to run of the period of the lease.
By an
underlease dated January 16 1970, Cavendish sublet those premises to the
company then known as Supertravel Ltd, for a period expiring shortly before the
expiry of the lease at a rent of £22,000 pa subject to rent reviews. By clause
2(3) of the underlease the company entered into a repairing covenant in respect
of the premises. The second and third rspondents were parties to the underlease
as guarantors. Their guarantee is contained in clause 6 of the underlease in
the following terms:
6. The
Guarantors in consideration of the demise hereinbefore contained being made by
the Lessor at their instance and request hereby agree with and guarantee to the
Lessor that the Lessee will at all times during the continuance of this demise
pay the rents hereby reserved and all other sums and payments agreed to be paid
by the Lessee at the respective times and in the manner hereinbefore appointed
for payment thereof and will also duly perform observe and keep the several
stipulations hereinbefore on the part of the lessee contained and that the
Guarantors will pay and make good to the Lessor all losses costs and expenses
sustained by the Lessor through the default of the Lessee in respect of any of
the beforementioned matters . . .
There then follows
an immaterial proviso. It is of note that the second and third respondents
entered into no direct covenants with Cavendish to pay rent or to accept a
lease in the event of the company’s default.
The provisions
for review of rent under the underlease are contained in the schedule. The
provisions of the underlease and the schedule were, on two occasions, amended
by supplemental deed, but which amendments are not material to this judgment.
By 1991 the rent payable under the underlease had been increased to the sum of
£175,000 pa. That figure was to be increased with effect from Lady Day 1992 to
£180,000 pa and to £185,000 pa in 1993. It follows that by late 1991 Cavendish
were making a substantial profit rent over the amount payable by them under the
underlease (sic).
On April 25
1984 the second respondent and the third respondent parted company. A company,
Columbus Trust Group Ltd (to which I will refer as ‘Columbus’), purchased the
whole of the issued share capital of the company. The third respondent (to whom
I will refer as ‘Mr Lewthwaite’) had at that time rather more than 25% of the
shares of Columbus, the balance of the shares being held by two insurance
companies. A Mr Janson joined the board of Columbus to represent the interests
of one of those insurance companies. Thereafter the second respondent, though
not released from his obligations as guarantor of the underlease, ceased to
have anything more to do with the company.
In 1986 Mr
Lewthwaite resigned as managing director of the company as a result of
disagreements over management policy. On August 5 1986 the company changed its
name to its present name, Hans Place Ltd. What had been the company’s travel
agency business, which had been transferred to Columbus in 1984 upon Columbus’
purchase of the company’s shares, continued to be carried on by Columbus, which
changed its name to Supertravel Ltd. This business was ultimately hived down
into an operating subsidiary, which in turn took the name Supertravel Ltd.
By 1991 Mr
Janson, through a company, controlled 45% of the issued shares of Columbus. Of
those shares, 35% was controlled by the insurance company which he had no
connection with and 15% of the shares were controlled by Mr Lewthwaite.
On May 8 1991
Columbus went into creditors voluntary liquidation, whereupon Mr Lewthwaite,
through a company, purchased from Columbus’ liquidator the whole of the shares
of the company and also of the operating subsidiary of Columbus to which the
travel agency business had been transferred and which had adopted the name of
Supertravel Ltd. Thereafter he attempted to revive the fortunes of the travel
agency business. This proved impossible and Supertravel Ltd ceased trading in
October 1991.
Meanwhile, Mr
Lewthwaite had been attempting to subunderlet those parts of the premises which
were unoccupied in order to produce funds with which to meet the rent becoming
due under the underlease. He describes those efforts in paras 15 to 20 of an
affidavit sworn by him in these proceedings on June 12 1992. I will not repeat
them here. Suffice it to say that his account of his efforts was unchallenged
and those efforts were substantially unfruitful. An attempt to surrender the
lease to Cavendish was declined by Cavendish.
On October 7
1991 the company received notice from the subtenant of the top floor of the
premises, paying some £37,000 pa in rent, to terminate its subunderlease with
effect from early 1992. On November 25 1991 Strutt & Parker, the estate
agents employed by the company, wrote to Mr Lewthwaite on the prospects for assigning
or subletting the whole of the premises. In that letter they say:
The current
market does not make it easy to estimate the length of time of a marketing
programme and one should consider 9 months as a minimum for finding either an
assignee for the premises or a tenant or a number of tenants on a subletting
basis. In the case of subletting to a number of tenants this minimum period
could be even longer. In addition it will be necessary to grant a rent-free
period for anything up to one year depending on the length of the lease,
covenant and size of accommodation taken. Such a rent-free period does not
assume that there are any major works of repair necessary on the building.
Meanwhile, Mr
Adams, an insolvency practitioner, had been approached for advice in late
October 1991 and Mr Lewthwaite had sought the advice of solicitors and counsel,
which was given to him in conference on November 6 1991. A note of the advice
of counsel was passed to Mr Adams and forms part of the evidence before me. Mr
Lewthwaite was advised that if the company went into liquidation and the
liquidator disclaimed the lease, this would not only release the company from
all future obligations to pay rent but would also have the effect of releasing
the guarantors from their obligations to Cavendish.
It having
emerged that it was not possible to find an assignee or a subtenant or
subtenants for the premises comprised in the underlease for a consideration
sufficient to meet the rent becoming due under the headlease, on November 18 1991
the directors of the company resolved to give notice under the provisions of
section 98 of the Insolvency Act 1986, to the creditors of the company, for the
purpose of passing a resolution to place the company in creditors voluntary
winding up. That meeting was to take place on November 26 1991.
On that day,
the members of the company resolved in favour of a winding up and appointed Mr
Adams as liquidator. At the creditors meeting which followed on the same day,
which was attended by two representatives of Cavendish, Mr Adams’ appointment
was confirmed. On the same day, Mr Lewthwaite delivered to Mr Adams a notice to
elect pursuant to section 178(5) of the Insolvency Act 1986 and the liquidator
entered into a notice to disclaim as prescribed by section 178(2). On the same
day, copies of the notice of disclaimer were sent to the various persons and
companies interested in the underlease, including Cavendish.
It seems that
prior to November 26 1991 there was outstanding rent due under the underlease
from the company to Cavendish amounting to £21,750. Mr Lewthwaite has paid that
amount to Cavendish. A statement of affairs of the company shows it to be
insolvent though the figures are not large. The only asset of the company, if
such it can be called, is the sublease.
The
originating summons was issued on January 20 1992, at which point it sought
relief removing the liquidator and discharging the disclaimer only. It was
amended on June 8, pursuant to leave, adding the second and third respondents
and seeking a declaration in the alternative that their liability under their
guarantees survived the disclaimer and consequential orders for the payment of
rent becoming due under the underlease.
Before me, Mr
Neuberger QC, for Cavendish, did not press for that part of the relief in the
originating summons which sought removal of Mr Adams as liquidator. He also
expressly disclaimed any suggestion that either the liquidator or Mr Lewthwaite
had acted in any sense mala fide. None of the deponents were
crossexamined. In particular, the liquidator was not challenged on those
passages in the affidavit sworn by him at paras 14, 15 and 16, where he makes
plain that he considered the only course open to him in the interests of the
company’s creditors was to disclaim the underlease as onerous property.
Similarly, Mr
Neuberger did not press for the relief sought to be introduced by the amendment
of the originating summons. In Stacey v Hill [1901] 1 QB 660, the
Court of Appeal decided in a bankruptcy case that the effect of the disclaimer
provisions contained in section 55 of the Bankruptcy Act 1883, and in
particular subsection (2) of
due under a lease to a landlord was relieved of his future obligations under
that guarantee where the lease was disclaimed by the bankrupt’s trustee in
bankruptcy.
I shall have
to return to these statutory provisions in greater detail later in this
judgment, but suffice it to say for the present that the provisions of subsection
(2) do not materially differ from the provisions of section 178(4) of the
Insolvency Act 1986 pursuant to which section the liquidator gave notice to
disclaim in this case. That Stacey v Hill remains good law and
binding upon me is plain from the decision of Sir Edward Megarry V-C in Warnford
Investments Ltd v Duckworth [1979] Ch 127, where the vice-chancellor
was considering a case where a lease had been assigned by individual lessees to
a company which subsequently went into creditors voluntary liquidation. The
liquidator disclaimed the lease and the lessors sued the original lessees under
their covenant to pay rent. In his judgment, at p 138, the vice-chancellor
said:
(3) Generally speaking, the guarantor of rent due
under a lease is in a very different position towards the lessor from that of
an original lessee. Like any other guarantor, from the start the liability of a
guarantor is merely collateral, or accessory, or secondary: the terms used in
the authorities vary. There never is a period when the guarantor alone is
liable to the lessor for the rent, in the way that initially the lessee is
alone liable for it to the lessor. Instead, the guarantor is merely liable to
pay if the principal debtor does not. It follows that once the liability of the
principal debtor for future payments is at an end, so also is the liability of
the surety.
(4) With these basic propositions in mind, I turn
to disclaimer in bankruptcy. Stacey v Hill . . . seems to me to
be a clear example of the liability of a surety perishing when there ceases to
be any primary liability to make any further payments. Where there has been no
assignment of a lease, and the lease is disclaimed on the bankruptcy of the
original lessee, the lease is at an end, and so is any obligation of the lessee
under it to pay any future rent. It follows that the liability of anyone who
has guaranteed the payment of that rent is also at an end. With no lease in
existence, and with the reversioner able to do as he wishes with the property,
free from the lease, the surety cannot and ought not to be made liable for any
more rent.
Stacey v Hill has recently been followed as applying to the
disclaimer provisions of section 178 of the Insolvency Act 1986 by Hoffmann J
in Re No 1 London Ltd [1991] BCLC 501 and by Millett J in Re
Yarmarine (IW) Ltd [1992] BCC 28.
The ratio of
the decision in Stacey v Hill was not followed in the Irish High
Court by Keane J in Maurice Tempany v Royal Liver Trustees Ltd [1984]
BCLC 568. The judge in that case refused to construe subsection (3) of section
209 of the Irish Companies Act 1963, whose provisions are precisely similar to
subsection (2) of section 323 of the Companies Act 1948, being applied by the
vice-chancellor in the Warnford Investments Ltd case, so as to release
guarantors of rent from their obligations to the landlord.
Mr Neuberger
conceded that the decision of the Court of Appeal in Stacey v Hill bound me to
conclude that if the disclaimer in the present case were allowed to stand, the
second and third respondents would be released from their obligations to
Cavendish under their guarantees. However, he expressly reserved to the
applicants the right to challenge the decision in Stacey v Hill should
the matter go further.
It follows
that I am only concerned with the second head of relief sought in the
originating summons, namely an order reversing the decision of the liquidator
to disclaim the underlease. That application is made under the provisions of
section 168(5) of the Insolvency Act 1986 applicable in a voluntary winding up
as a result of the provisions of section 112(1) of that Act.
Section 168
provides relevantly as follows:
(3) The liquidator may apply to the court (in the
prescribed manner) for directions in relation to any particular matter arising
in the winding up.
(4) Subject to the provisions of this Act, the
liquidator shall use his own discretion in the management of the assets and
their distribution among the creditors.
(5) If any person is aggrieved by an act or
decision of the liquidator, that person may apply to the court; and the court
may confirm, reverse or modify the act or decision complained of, and make such
order in the case as it thinks just.
Mr Neuberger
based his submission that the court should make an order reversing the
liquidator’s decision to disclaim the underlease on the judgment of Maugham J,
as he then was, in Re Katherine et Cie Ltd [1932] 1 Ch 70. In that case
the judge was considering an application for leave to disclaim by a liquidator
where the obligations of the company in liquidation to pay rent in respect of
the lease being disclaimed had been guaranteed. The judge declined to do so on the
ground that the effect of the decision in Stacey v Hill would be
to release those guarantors from liability to the landlords and, balancing the
consequential effect on the landlords against the advantages to the estate of
the company in liquidation, the court, in the exercise of a discretion whether
to grant leave, should come down in favour of refusing it. In his judgment at p
78, Maugham J having considered a passage in the then current edition of Williams
on Bankruptcy, said:
However that
may be, it seems to me that the case of a disclaimer in liquidation is very
different from that of a disclaimer in a bankruptcy and, whatever may be the
overriding considerations which, in Ex Parte East and West India Dock Co
caused Lord Selbourne to take the view that the injury of persons not directly
interested ought not to be borne in mind, I see no reason why, exercising my
discretion under s267 of the Companies Act 1929 ought not to consider matters
of that kind. I would add that sub-s2 of s267, tends to show that disclaimer is
not intended to affect the rights and liabilities of third persons. In my
opinion the Court may properly balance the advantages and disadvantages of a
disclaimer to be gained by the liquidator in the liquidation of the assets and
by persons affected by the disclaimer.
Re Katherine
was cited by Walton J without disapproval and
applied in Re Distributors & Warehousing Ltd [1986] BCLC 129*,
shortly before the new legislation came into force.
*Editor’s
note: Also reported at [1986] 1 ELGR 90.
The provisions
of section 267 of the Companies Act 1929 consolidated similar provisions in the
Companies Act 1928, which first introduced into companies winding up a power in
a liquidator to disclaim onerous property including leaseholds, which had
existed in bankruptcy since the Bankruptcy Act 1869, section 23, and whose
provisions were substantially similar to those introduced into the bankruptcy
jurisdiction by section 55 of the Bankruptcy Act 1883. Those provisions were
substantially re-enacted in the Companies Act 1948, section 323, as follows:
323.–(1) Where any part of the property of a company
which is being wound up consists of land of any tenure burdened with onerous
covenants, of shares or stock in companies, of unprofitable contracts, or of
any other property that is unsaleable, or not readily saleable, by reason of
its binding the possessor thereof to the performance of any onerous act or to
the payment of any sum of money, the liquidator of the company, notwithstanding
that he had endeavoured to sell or has taken possession of the property or
exercised any act of ownership in relation thereto, may, with the leave of the
court and subject to the provisions of this section, by writing signed by him,
at any time within twelve months after the commencement of the winding up or
such extended period as may be allowed by the court, disclaim the property . .
.
There then
follow provisions which I need not quote, and subsection (2) then continues:
The
disclaimer shall operate to determine, as from the date of disclaimer, the
rights, interests and liabilities of the company, and the property of the
company, in or in respect of the property disclaimed, but shall not, except so
far as is necessary for the purpose of releasing the company and the property
of the company from liability, affect the rights or liabilities of any other
person.
Section 323
was replaced, in 1985, by provisions now consolidated into the Insolvency Act
1986, section 178. The relevant provisions of that section are:
(2) Subject as follows, the liquidator may, by
the giving of the prescribed notice, disclaim any onerous property and may do
so notwithstanding that he has taken possession of it, endeavoured to sell it,
or otherwise exercised rights of ownership in relation to it.
(3) The following is onerous property for the
purposes of this section —
(a) any unprofitable contract, and
(b) any other property of the company which is
unsaleable or not readily saleable or is such that it may give rise to a
liability to pay money or perform any other onerous act.
(4) A disclaimer under this section —
(a) operates so as to determine, as from the date
of the disclaimer, the rights, interests and liabilities of the company in or
in respect of the property disclaimed; but
(b) does not, except so far as is necessary for
the purpose of releasing the company from any liability, affect the rights or
liabilities of any other person.
Section 323(3)
of the 1948 Act provided:
(3) The court, before or on granting leave to
disclaim, may require such notices to be given to persons interested and impose
such terms as a condition of granting leave, and make such other order in the
matter as the court thinks just.
The equivalent
provisions in the 1986 Act are those contained in section 179, as follows:
179–.(1) The disclaimer under section 178 of any
property of a leasehold nature does not take effect unless a copy of the
disclaimer has been served (so far as the liquidator is aware of their
addresses) on every person claiming under the company as underlessee or
mortgagee and either —
(a) no application under s181 below is made with
respect to that property before the end of the period of 14 days beginning with
the day on which the last notice served under this subsection was served; or
(b) where such an application has been made, the
court directs that the disclaimer shall take effect.
(2) Where the court gives a direction under
subsection (1)(b) it may also instead of or in addition to any order it
makes under section 181 make such orders with respect to fixtures, tenant’s
improvements and other matters arising out of the lease as it thinks fit.
Equivalent
provisions to those contained in the other subsections of section 323 of the
1948 Act appear in sections 178, 179, 181 and 182 of the 1986 Act. There are
differences, such as time periods between the old and new legislation, but, in
my judgment, the only differences which could be described as differences of
substance are contained in the sections of the 1948 Act and the 1986 Act which
I have just quoted. These differences, to be summarised, are the removal of the
requirement for leave to be granted by the court before a liquidator could
effectively disclaim onerous property, and the comparison between section
323(3) of the 1948 Act and section 179 of the 1986 Act. The former subsection
empowers the court to require notices to be given ‘to persons interested’, of
the application for leave to disclaim so as to give them an opportunity to
attend and make representations; the latter section requires, before the
disclaimer can be effective, that a copy of the disclaimer be served, but only
on underlessees and mortgagees of the leasehold claiming under the company in
liquidation. However, the difference between these two provisions i made less
stark by the fact that rule 4.188 of the Insolvency Rules 1986 subrule (3)
requires the liquidator to send a copy of any notice of disclaimer:
to every
person who (to his knowledge) —
(a) claims an interest in the disclaimed property
or
(b) is under any liability in respect of the
property not being a liability discharged by the disclaimer.
Mr Neuberger’s
contention was that the alterations to the law of disclaimer in companies’
liquidation brought about by the 1985 Act were procedural only. Under the 1948
legislation the court exercised control over decisions by the liquidator to
disclaim onerous property including leaseholds by, on the application for leave
to disclaim, exercising its discretion whether to grant such leave. Under the
new legislation the court’s discretion comes into play, after the decision of
the liquidator to disclaim, on the application of parties interested in the
property being disclaimed and aggrieved by that decision, to the court under
section 168(5). Mr Neuberger submitted that there was no reason to adopt a
different approach to the exercise of the court’s discretion to give or
withhold leave to disclaim under the 1948 legislation than to the exercise of a
discretion whether to reverse a liquidator’s decision to disclaim under the
provisions of section 168(5). In particular, Mr Neuberger submitted that under
the 1948 Act and its predecessors, a practice had been established based on the
decision of Maugham J in Re Katherine that leave to disclaim would be
refused where its effect would be to release guarantors for payment of rent
under the lease being disclaimed. In the normal case, as in this case, he
submitted, the disadvantage to the landlord would outweigh the advantage to the
estate of the company in liquidation from being able to disclaim the lease. It
must be borne in mind that in companies liquidation by contrast with
bankruptcy, the assets of the insolvent company do not vest in the liquidator
and accordingly he cannot be made personally liable, without more, for payment
of the rent becoming due.
It follows, so
Mr Neuberger submits, that applying the approach of the court in Re
Katherine to the decision in the present case whether to reverse the
liquidator’s decision to disclaim under section 168(5) of the 1986 Act that the
court should come down in favour of reversing that decision.
Mr McDonnell
QC’s submissions for the second and third respondent guarantors were supported
by those of Mr Davies for the liquidator. They were made under two heads, the
first that the Insolvency Act 1985, by removing the requirement for leave
before a liquidator could disclaim onerous property, either intentionally or
unintentionally (it mattered not which), effected a substantive alteration to
the law. Prior to the 1986 Act the decision whether to disclaim was in the
discretion of the court albeit that was a discretion which did not come to be
exercised until a liquidator had decided that disclaimer was appropriate and
had applied to the court for leave. By contrast, after the Insolvency Act 1985,
the decision whether to disclaim was the liquidator’s. That decision was only
to be interfered with where it could be shown to have been effected by mala
fides or to have been so perverse that no reasonable liquidator could have
arrived at it.
Mr McDonnell’s
second head of argument was made in the alternative and on the assumption that
the court was against him on the first. On the assumption that the 1985 changes
in the law were procedural only, none the less the reasons behind the decision
in Re Katherine should not be applied to the court’s decision whether to
set aside the liquidator’s disclaimer because that case was wrongly decided.
The interest of the landlords in the position of Cavendish did not fall within
the class of interest to which the court should pay heed. The court should only
pay heed to the interest of the creditors as a body. On either basis, the court
should decline to interfere.
I will deal
first with the rival contentions as to whether there has been a substantive
change in the law as to disclaimer so as to affect the court’s approach where
it is dealing with a challenge by a landlord whose rent is guaranteed to the
decision of a liquidator to disclaim the relevant lease.
Mr McDonnell
contended that any application to reverse that decision has to be made under
section 168(5). That section, and subsections (3) and (4) are re-enactments of
the provisions of section 246(3), (4) and (5) of the 1948 Act. Section 80 of
the Bankruptcy Act 1914 provided:
If the
bankrupt or any of the creditors of any person, is aggrieved by any act or
decision of the trustee, he may apply to the court, and the court may confirm,
reverse, or modify the act or decision complained of, and make such order in
the premises as it thinks just.
very similar
words to those contained in section 168(5). Mr McDonnell cited Leon v York-O-Matic
Ltd [1966] 1 WLR 1450, which was a decision on section 246(5) of the 1948
Act. The case concerned a challenge by an ex-director, shareholder and creditor
of a company in liquidation to a proposed sale by the liquidator of certain
assets of the company alleged to be at an undervalue. Plowman J by analogy with
decisions under section 80 of the Bankruptcy Act 1914 refused to interfere with
the liquidator’s decision. At p 1455 he quotes from a decision of Harman J in ex
parte the Debtor v Dodwell [1949] Ch 236 as follows:
I need not, I
think, attempt to define what these circumstances are. They cannot, I think (in
the absence of fraud), justify interference in the day-to-day administration of
the estate, nor entitle the bankrupt to question the exercise by the trustee in
good faith of his discretion, nor to hold him accountable for an error of
judgment. Administration in bankruptcy would be impossible if the trustee must
answer at every step to the bankrupt for the exercise of his powers and
discretions in the management and realisation of the property.
Plowman J then
continued:
Now here, as
I have said, there is no question of fraud, and, having considered all the
evidence, which is fairly voluminous and lengthy, I am not satisfied that the
liquidator here did not exercise his discretion bona fide; nor am I satisfied
that he acted in a way in which no reasonable liquidator could have acted.
Mr McDonnell
contends that on familiar rules, which Mr Neuberger did not challenge,
governing the construction of statutes, where you find a provision in previous
legislation re-enacted in a new Act, it must be taken to have been re-enacted
subject to all the pre-existing authorities on the construction of those
provisions in the previous legislation. It follows, so he submits, that
notwithstanding the width of the words:
. . . may . .
. make such order in the case as it thinks just,
in section
168(5), those words can only be construed as allowing the court to reverse the
decision of the liquidator where the court is satisfied that that decision was
taken in some way mala fides or was so perverse as to demonstrate that
no liquidator properly advised could have taken it. In the present case there
is no suggestion of mala fides on the part of the liquidator and it is
impossible to say that a decision to disclaim the underlease, which is the
source of the company’s misfortunes and the substantial reason for its
liquidation, could be a perverse decision.
I accept Mr
McDonnell’s submissions. It does seem to me that in this field the 1985
Insolvency Act now consolidated into the 1986 Act worked a substantive change
in the law which requires a new approach by the court when considering
challenges to a liquidator’s decision to disclaim onerous property. The removal
of the requirement of leave seems to me to do more than simply alter the
procedure by which the court continues to control the decision by a liquidator
to disclaim. The decision to disclaim becomes simply one
distribution of the assets of the company in liquidation, conferred on him by
the Insolvency Act. Any challenge to the exercise of that power can only be
made under section 168(5). By removing the requirement for leave and
substituting nothing specific to the disclaimer provisions in its place, the
legislature must be taken to have intended that any control of the liquidator’s
decision to disclaim must hereafter arise under the general provisions for
control of liquidators now found in section 168, but which has existed in
previous legislation governing winding up and which exists and has existed in legislation
governing bankruptcy as over the years interpreted and applied by the courts.
Mr Neuberger
argues that even if that be right, the words of the subsection confer on the
court a power ‘to make such order in the case as it thinks just’. Those are wide
words and permit the court to look at the circumstances of the proposed
disclaimer de novo and exercise a discretion of its own. In other words,
the court is permitted to sit in the liquidator’s chair. Mr Neuberger
distinguished Plowman J’s decision in Leon v York-O-Matic Ltd together
with the bankruptcy authorities under section 80 of the Bankruptcy Act 1914
cited in that judgment, as all being examples where a challenge was being made
to commercial decisions of a liquidator or trustee in bankruptcy in, for
instance, the sale of assets either by the bankrupt himself or exdirectors and
shareholders of a company in liquidation. It was obvious, so he contended, that
the court could not permit the decisions of liquidators and trustees in
bankruptcy to be routinely challenged by such applicants under section 168(5),
or its equivalent sections, simply where all that was being alleged was that
the liquidator or trustee had committed an error of judgment. It followed, so
he contended, that there should be no requirement that the applicant must
establish mala fides or perversity in the liquidator in order to
challenge his decision to disclaim, where the applicant was a third party such
as a landlord who could clearly demonstrate that he would be seriously adversely
affected by the decision to disclaim.
I am not
persuaded by this argument. There is no justification in the wording of section
168 and in particular in the wording of subsections (4) and (5) for there being
any two-tier test for the exercise of the court’s power to reverse or modify
any decision of the liquidator. The decision in Leon v York-O-Matic has
stood unchallenged since 1966 and is based on two decisions under equivalent
bankruptcy legislation, one of which is in the Court of Appeal, Re Peters, ex
parte Lloyd (1882) 47 LT 64.
It follows
that, in my judgment, there being no challenge to the bona fides of the
liquidator nor suggestion that his decision to disclaim could be categorised as
perverse, the court should not interfere with his decision to disclaim the
underlease.
That is
sufficient to dispose of the case. However, in case the matter should go
further, I should express my views, albeit briefly, on the alternative way in
which Mr McDonnell put his case.
Mr McDonnell
argued that in taking account of the interest of a landlord, albeit one of a
class of creditors of the company in liquidation, to preserve for himself a
right to sue guarantors, Maugham J in Re Katherine was departing from
the purpose and policy of section 267 of the Companies Act 1929 which is the
same purpose and policy behind the equivalent 1948 Act provisions and the
provisions for disclaimer now found in section 178 of the 1986 Act. It was his
contention that a liquidator ought only to take into account the interest of
the insolvent estate, that is the interest of the creditors as a class and not
the individual interest of one or more of them where that interest differed
from that of the class. In the present case, he submitted, it was demonstrable
that the interests of the creditors as a body would be served by a reduction,
as far as possible, of the proof of debt resulting from the failure by the
company to pay rent for the unexpired period of the lease. True it was that if
Cavendish were able to have recourse to the guarantors for payment of the whole
of the rent becoming due in the future under the under lease, they would have
no right to prove in the liquidation of the company. However, that would not
achieve the desired effect because the guarantors would have a right to prove
for any such sum which they were required to pay, under their right to be
indemnified by the company against any obligations arising under their
guarantees. By contrast, if the liquidator disclaims the under lease, the
landlord’s only right to prove arises under section 178(6) of the 1986 Act.
That subsection provides:
Any person
sustaining loss or damage in consequence of the operation of a disclaimer under
this section is deemed a creditor of the company to the extent of the loss or
damage and accordingly may prove for the loss or damage in the winding up.
The loss or
damage in question, Mr McDonnell contends, can only be the discounted present
value of the right to receive rent for the unexpired seven years of the
underlease, but after the deduction of a figure representing the discounted
value of the right to receive rent over the same unexpired period at a rent
assessed by the court to be achievable today.
Mr McDonnell
cited a number of authorities to me, but I hope it will not seem to be
disrespectful to his helpful argument if I only refer to one of them, but which
was the basis of what (in my judgment) was the high point of his criticism of
the decision in Re Katherine. That was the case of Re East and West
India Dock Co (1881) 17 Ch 759, a case which is cited in the judgment of
Maugham J. The headnote of that case reads:
In determining
whether leave should be given to a trustee in bankruptcy to disclaim a
leasehold interest of a bankrupt, the Court ought to have regard only to the question
whether the disclaimer will be for the benefit of the persons interested in the
administration of the bankrupt’s estate, and ought not to have regard to any
collateral considerations, such as the injury which the disclaimer might
occasion to third parties.
Leave to
appeal to the House of Lords refused, on the ground that the appeal would be
from the discretion of the Court.
This was a
case where the original lessee of a lease had assigned it to an assignee who
subsequently went bankrupt. The original lessee gave notice to the trustee in
bankruptcy to elect whether or not to disclaim the lease. The trustee applied
to the court for leave to disclaim, as he was required to do by the then
bankruptcy legislation. The disclaimer was opposed by mortgagees of the
leasehold from the bankrupt on the ground that disclaimer would destroy their
security. At first instance the registrar, taking the view that disclaimer
would not affect the landlord’s rights to proceed against the original lessee,
nor the security of the mortgagee, gave leave. The landlords appealed. The case
was decided under the provisions of section 23 of the Bankruptcy Act 1869. At
the time the matter came before the Court of Appeal, it had not been decided,
as it later was in further litigation in the same bankruptcy, that the
disclaimer did not affect the right of a landlord to proceed against the
original lessee under the covenant for rent contained in the lease. The
judgment was delivered by Lord Selborne, the Lord Chancellor. In his judgment at
p 764 he says, having considered a rule of procedure pursuant to which the
registrar had been acting, the following:
Therefore that
rule was evidently made, and indeed it only could be made, for the effectual
execution of the 23rd section of the Act and of the objects of that section.
What were those objects? It appears to
us that the object was to cut short by disclaimer all liability of the
bankrupt’s estate in the classes of cases which are there referred to, and
which include beyond all question future liability under leases. The object was
to cut it short by disclaimer, leaving any person who might be injured by the
operation of the section to prove in the bankruptcy for whatever he could
establish to be the value of the injury done to him. On the face of the section
it appears to us that the power given by it is to be exercised with a view to
the administration in bankruptcy of a bankrupt’s estate, and for the benefit of
all persons interested in that administration. Therefore, if in a particular case
it appears clear that, looking at that object alone, the disclaimer ought to be
allowed, the Court would be introducing considerations foreign to the purpose
of the Legislature if, for collateral reasons connected with the position of
other persons, it should refuse to allow it, and thus leave on the bankrupt’s
estate a burden which under that section might be got rid of, and ought to be
got rid of, if those collateral considerations did not prevail.
Then we must
consider how that applies to the present case. No suggestion has been made that
there is any reason for not allowing the disclaimer, which has been allowed by
the order under appeal, except the interest of the lessors as between
themselves and (not the bankrupt’s estate) but the person by whom the lease was
assigned to the bankrupt; and the proposition really comes to this, that the
Court ought never to allow a disclaimer under this section where the bankrupt
is the assignee of a lease and the lessor is willing to offer such an
undertaking as has now been offered to the Court.
That was an
undertaking not to claim against the estate for rent becoming due in the
future. Lord Selborne continues:
Well that is
a startling proposition to be suggested as a matter of law; and if we were to
say that the Court is bound to exercise its discretion in that way, we should
be laying down a law, not only not discoverable from the 23rd section, but, to
my mind, very inconsistent with the policy which is expressed on the face of
that section.
Maugham J, in
his judgment in Re Katherine, dealt with this passage in the judgment of
Lord Selborne by saying in the first place that it was a dictum forming
no part of the ratio decidendi of the decision, second, that the
decision was made under bankruptcy legislation
third, that the position in bankruptcy was inherently different. He does not
make clear why, but it seems probable that he meant the difference brought
about by the fact that the assets of the bankrupt vested in the trustee who
would become liable personally to pay the rent under any lease not disclaimed
or otherwise disposed of.
Lord Selborne
based his view that the interests of the lessors ought not to be considered in
deciding whether leave to disclaim should be granted, on what he perceived to
be the policy behind section 23 of the Bankruptcy Act 1869. As he interpreted
that section, it is difficult to discern how there could be a different policy
behind disclaimer provisions in succeeding Bankruptcy Acts and in Companies
Acts when provisions permitting disclaimer were transplanted into the companies
winding up. For this reason, Maugham J’s method of distinguishing the decision
in Re East and West India Dock Co looks questionable. However, it should
be noted that Lord Selborne, in his short judgment on the application for leave
to appeal to the House of Lords, clearly expressed the view of the Court of
Appeal that an appeal to the House of Lords would be an appeal from the
exercise of a discretion of the court (perhaps more accurately, from a refusal
to disturb the exercise of a discretion by the registrar) and not from a
decision on a point of law.
What Mr
McDonnell was asking me to do in not following Maugham J’s decision in Re
Katherine is to come to a positive conclusion that a court, when reviewing
the decision of a liquidator to disclaim a lease, and also (presumably)
liquidators in arriving at such a decision, ought never to take into account
the interests of lessors to preserve their right to claim against guarantors
for rent due under the relevant lease, this notwithstanding that there may be
cases where to refuse to disclaim in those circumstances might have no material
impact on the interests of the general body of creditors. Based on the decision
of Re Katherine, the practice of the Companies Court was, on
applications for leave to disclaim, to take such interests into account. I am
not prepared, since I do not have to do so for the purpose of deciding this
case, to depart from the decision in Re Katherine and so rule that that
well-established practice was incorrect. Furthermore, bearing in mind the wide
wording of section 168(5), I am not prepared to rule that under the new
legislation such considerations could form no part of the material upon which
the court could base its decision as to what it thought ‘just’. It does seem to
me, however, that in the present case and for the reasons submitted by Mr
McDonnell which I have sought to summarise above, if the court were exercising
an original discretion whether to permit disclaimer, which in my judgment it
should not save in circumstances of mala fides or perversity by the
liquidator, there are plain advantages to the general body of creditors and to
the administration of the company’s affairs arising from a disclaimer which the
competing advantage to Cavendish ought not to overrule and the disclaimer
should stand.
However, the
matter does not arise for decision because I have found that there are here no
circumstances which justify the interference by the court in the decision of
the liquidator to disclaim the under lease. It follows that I would dismiss the
application.
Application
dismissed with costs.
