by Edward Bannister
The Insolvency Act 1986 (“the Act”) is not an esoteric beast which can be ignored by institutional investors and their advisers but has a very direct relevance to property management, especially in view of the current state of the property market. The aim of this article is to give the property adviser a very basic background to some of the more relevant areas of insolvency and some possible steps that a landlord may wish to consider in the light of a tenant’s insolvency.
Administration
An application to the court for an administration order is made by petition and notice of the petition has to be given to any person who is entitled to appoint an administrative receiver; such a person can block the application for an administration order. However, once the administration order is in place no administrative receiver can be appointed.
While the administration order is in force there is a general moratorium on any proceedings against the company. Except with the consent of the administrator or the leave of the court:
(1) No steps may be taken to enforce any security over the company’s property.
(2) No proceedings “and no execution or other legal process may be commenced or continued, and no distress may be levied, against the company or its property”.
(3) Recent case law now suggests that a landlord exercising rights of peaceable re-entry against a tenant in administration needs leave, since such action is regarded as “other legal process” and the enforcement of security(*).
The administrator’s general duties are to manage the affairs of the company in accordance with the purposes for which the administration order was made. The administrator has very wide powers. He may do everything necessary for the management of the business and property of the company and, in particular, has the powers specified in Schedule 1 to the Act.
The administrator may (with the authority of the court) dispose of any property subject to a fixed charge as if it were not subject to that charge (without the chargee’s approval) provided that the court is satisfied that the disposal promotes the purposes for which the administration order was made and a sum equivalent to the market value of the property is applied by the administrator in discharging the sums secured by the fixed charge. The holder of the fixed charge is not, therefore, prejudiced if the net sale proceeds are less than the market value.
Administrative receivership
There has been a certain amount of confusion arising out of the distinction between an administrator and an administrative receiver. It must be emphasised that an administrator is appointed by the court whereas an administrative receiver is appointed by the holder of a charge over the whole (or substantially the whole) of the company’s property included in a floating charge.
The administrative receiver’s powers depend on the terms of debenture as supplemented by those contained in Schedule 1 to the Act in so far as they are not inconsistent with any of the provisions of the debenture. The basic function of the administrative receiver is to realise the assets of the company which are secured by the debenture (under which he was appointed) and he has a duty to obtain the best price reasonably obtainable; he has similar powers to dispose of property subject to a fixed charge to those of an administrator.
As with an administrator, anyone dealing with an administrative receiver in good faith and for value can assume that the administrative receiver is acting within his powers. An administrative receiver is deemed to be the company’s agent unless and until the company goes into liquidation and is personally liable on any contract entered into by him in carrying out his functions, except in so far as the contract otherwise provides.
Law of Property Act receiver
A secured lender may consider appointing an LPA receiver under section 101(iii) of the Law of Property Act 1925 especially if he holds only a fixed charge and is therefore unable to appoint an administrative receiver. The LPA receiver has limited statutory powers (essentially to receive and take action to recover rent) and it is therefore essential that the debenture itself extends the powers of an LPA receiver. His appointment would not preclude the appointment of an administrator.
He will be the agent of the company and the advantage of his appointment (to the lender) is that his costs are likely to be less than those of an administrative receiver as his duties relate to specific assets charged in favour of the appointer and not to the management of the insolvent company generally.
Winding-up/liquidation
A company can be wound up either voluntarily (a creditors’ or members’ voluntary liquidation) or by the court (a compulsory liquidation). On an insolvent liquidation the company generally ceases to carry on its business except for the purposes of the winding-up.
The powers of the liquidator are set out in Schedule 4 to the Act and in certain circumstances require the sanction of the court; the liquidator’s powers to charge, sell and transfer the company’s (leasehold/freehold) property are exercisable without sanction.
Where a company is being wound up by the court, any disposition of the company’s property made after the presentation of the winding-up petition is void, unless the court otherwise orders. Any distress or execution put in force against the company after commencement of winding-up is also void. Once the winding-up order has been made “no action or proceedings shall be proceeded with or commenced against the company or its property, except by the leave of the Court and subject to such terms as the Court may impose”.
Once a winding-up order has been made the liquidator has to bring under his control all the property of the company, but the ownership of that property remains with the company unless the court orders that such property vests in the liquidator.
Voluntary arrangements
A voluntary arrangement can be entered into where a company is in administration or liquidation but neither is an essential pre-condition to a voluntary arrangement. The proposer of the voluntary arrangement provides for some person to act as a nominee to supervise the voluntary arrangement.
If the creditors and shareholders approve the voluntary arrangement it takes effect as at the creditors’ meeting and binds every person who had notice and was entitled to vote at the meeting, whether or not they were actually present. Upon approval of the voluntary arrangement the supervisor takes over possession of all the assets included in the arrangement, but does not take over legal or beneficial ownership unless the voluntary arrangement provides otherwise.
Landlord’s proceedings against insolvent companies
Disclaimer
Only a liquidator can disclaim a lease. The landlord is unlikely to have a claim against the administrative receiver and would have to pursue the company direct. The administrator may be pursued only in certain circumstances. If the landlord pursues the company (in administration) he would need the leave of the court.
Essentially the liquidator may, at any time, give notice to the landlord of his intention to disclaim the lease. He must also serve notice on every person claiming under the company as underlessee or mortgagee. Any person who claims an interest in the property to be disclaimed or any person who is under any liability in respect of the disclaimed property (for instance, an original tenant or guarantor) may apply to the court and the court may make an order on such terms as it thinks fit for vesting the disclaimed property in the applicant. The order itself is sufficient to transfer title; the court shall not make a vesting order in respect of leasehold premises (under section 181 of the Act) except on terms making the applicant subject to the same liabilities and obligations as the company was at the commencement of the winding-up or (if the court thinks fit) subject to the same liabilities and obligations which the applicant would have had if the lease had been assigned to it at the commencement of the winding-up. It should be noted that mortgagees are usually unwilling to apply for a vesting order as they may find themselves saddled with an original tenant’s liability.
Where a mortgagee or underlessee is unwilling to accept a vesting order, the court may make an order vesting the company’s interest in the leasehold property in any person who is liable to perform the lessee’s covenants in the lease — eg an original tenant or guarantor of the lease — and that mortgagee or underlessee would then cease to have an interest in the property.
The disclaimer operates only in so far as it is necessary to determine the rights and liabilities of the company, but does not otherwise affect the rights or liabilities of any other person. Therefore, an original tenant who has assigned (and his guarantor) will not be released from its liabilities under the lease. Disclaimer does not automatically destroy a lease, which will remain in existence as a “dormant volcano”; a sublessee may be able to remain in possession (after disclaimer of the headlease) provided that the headlandlord does not take any action for forfeiture of the headlease. The subtenant would still retain his right to relief against forfeiture.
Distraint
The ability of a landlord to distrain is not affected by the appointment of a receiver or (subject to the terms of the arrangement) a supervisor. The right is suspended on the making of an administration order and can be pursued only with the leave of the administrator or the court. Essentially any distress commenced after the presentation of a petition for compulsory winding-up is void save with the leave of the court.
The right to distrain remains in place during a voluntary liquidation; however, the liquidator has a general power to apply to the court for a stay of proceedings under section 112 of the Act.
Action for rent
A landlord can (subject to the terms of arrangement) recover rent against a company which has entered into a voluntary arrangement or where an administrative receiver has been appointed in the usual manner.
Where a company is in compulsory liquidation or in administration then the same principles apply as to those applicable to distraint.
Once a company is in liquidation the landlord will have to prove for rent falling due before the commencement of the winding-up as an unsecured creditor; if the liquidator then continues the company’s occupation of the property “for the convenience of the winding-up” the rent may become a cost of the liquidation and be recoverable from the liquidator.
Forfeiture
The same principles apply as to those applicable to distraint. In relation to liquidation, it should be remembered that the purpose of liquidation is the better realisation of the company’s assets and, therefore, it is not the liquidator’s aim to hold on to property indefinitely. The jurisdiction to grant relief from forfeiture (under section 146 of the Law of Property Act 1925) applies only during the first year of the liquidation and, upon expiry of that one-year period (unless the tenant’s interest has been sold within that year), the court has no residual jurisdiction to grant relief from forfeiture: Official Custodian for Charities v Parway Estates Development Ltd (1984) 270 EG 1077. It should be noted that in that case the action for relief from forfeiture was brought in the tenant’s name because the mortgagees wanted to avoid giving personal covenants in respect of a vesting order made under section 146(4) of the Law of Property Act 1925.
Effect of forfeiture/disclaimer on underlessees and mortgagees
The length of this article does not allow me to address in any detail the rather complicated situations which can arise regarding underlessees’ and mortgagees’ interests, but the following may be of interest:
(a) If a tenant obtains relief from forfeiture the lease is reinstated as though it had never been forfeited, whereas a subtenant or mortgagee can apply only to the court for an order vesting the property in the applicant as at the date of the order; the old lease remains forfeited, the vesting order giving rise to a new lease.
(b) Under section 146(4) once the proceedings for forfeiture have been completed (without the knowledge of a mortgagee) that mortgagee might well lose the right to apply for relief from forfeiture: this particular problem is unlikely to concern an undertenant, who should receive notice of the forfeiture proceedings when the landlord executes the writ of possession.
(c) By virtue of section 6 of the Law of Distress Amendment Act 1908, the landlord can direct any subtenant to pay the subrent to the landlord.
This article serves only as a general introduction to what is a complex and extremely wide-ranging area of law. If a tenant becomes insolvent detailed advice and rapid action will need to be taken in order to minimise any potential loss to the landlord.
