Charge it to the dust

The Chancery Bar has always been a resource available to solicitors requiring specialist advice and representation for their clients. The ease with which this resource can be tapped is perhaps particularly appreciated in the field of insolvency law where clients often leave it to the last minute to seek advice, allowing their solicitors little time for research.

This article focuses on an administrator's liability to pay rent and rates where they continue to occupy rented property for the purposes of the new administration regime, by reference to the Court of Appeal's judgment in Innovate Logistics Ltd (in administration) v Sunberry Properties Ltd [2008] EWCA Civ 1321; [2009] BCC 164 and Mr Justice David Richard's judgment in Exeter City Council v Bairstow [2007] EWHC 400 (Ch); [2007] Bus LR 813.

Insolvency Act

The Insolvency Act 1986 provides for a statutory moratorium on the making of an administration order by postponing the enforcement of substantive rights including a landlord's right to sue for rent and a rating authority's right to sue for non-domestic rates.

Under the new administration regime, which was introduced by the Enterprise Act 2002, different considerations apply to the company in administration's liability for rent from those that apply to the same company's liability for rates even where the rent and rate relate to the occupation of the same property for the same purpose.

The root of the distinction is the fact that the company's obligation to pay rent during the period of the administration arises under the terms of a pre-existing lease that was binding on the company before it went into administration, whereas the obligation to pay rates depends on day-by-day occupation by the company during the administration. Insolvency barristers take different positions on the relevance of this distinction to the new administration regime's aim of facilitating corporate rescues.

Administrators' expenses

The subject of administrators' expenses lies close to the heart of all administrators and everyone who contracts with them because they are payable in priority to other liabilities of the company.

Under the new administration regime, the expenses which qualify for priority as administrators' expenses under s.99(3) of sched.B1 of the Insolvency Act 1986 are listed in Rule 2.67(1) of the Insolvency Rules in order of priority for payment. Rule 2.67(1) provides, in so far as is relevant here:

'(1) The expenses of the administration are payable in the following order of priority:

(a) expenses properly incurred by the administrator in performing his functions in the administration of the company;

'¦

(f) any necessary disbursements by the administrator in the course of the administration '¦'

In the event that the assets of the administration are insufficient to satisfy all of the administrator's expenses, the court has the power to vary the order of priority under Rule 2.67(3).

Although para.99 of sched.1B of the 1986 Act provides that the expenses now listed in Rule 2.67(1) are payable when the administrator ceases to hold office, in practice they are frequently discharged during the administration as they fall due for payment.

Rent

An often overlooked aspect of the decision in the Innovate Logistics case is the Court of Appeal's confirmation that rent payable under a lease entered into prior to the administration is not automatically an administrator's expense under the new administration regime even where the property continues to be occupied for the purpose of the administration.

Administrators lack the power bestowed on liquidators to disclaim a lease as onerous property. It follows that as long as the lease endures, the company in administration remains liable for rent during the period of administration '“ regardless of occupation. Where the administrator decides not to occupy the property for the purposes of the administration there is, of course, no question of the continuing rent being payable in priority to other pre-administration liabilities.

But, even if the administrator continues to occupy the property for the purposes of the administration, e.g. by continuing to trade from shop premises, the landlord has no automatic right to be paid rent during the occupation in priority to pre-administration creditors, for two reasons.

First, the provision in sub-para.99(4) of sched.B1 of the 1986 Act that gives super-priority to liabilities under contracts entered into by the administrator has no application to company contracts pre-dating the administration even where the administrator turns them to the advantage of the administration.

Secondly, rent falling due during the administration cannot be automatically payable as an administrator's expense for the purposes of sub-para.99(3) of sched.B1 because the company was already obliged to pay the rent under the lease regardless of whether the administrator decided to occupy the property for the purposes of the administration.

The landlord's remedy if the administrator occupies the property but does not pay the rent falling due is to apply to the court under para.43 of sched.B1 of the 1986 Act for permission to enforce the terms of the lease.

In Innovate Logistics, at paras 56 & 66, the Court of Appeal made it clear that the landlord has no absolute right to be paid contractual rent as an administration expense.

In such a situation the court has instead a wide discretion to order the administrator to pay arrears of rent since the start of the administration and rent as it falls due until the end of the administration.

The Court of Appeal confirmed that, in exercising its discretion under para.43 of sched.B1, the court should continue to carry out the balancing exercise described in In Re Atlantic Computer Systems plc [1992] Ch 505 in relation to the old administration regime. As a result, the court will continue to balance, on the one hand, the legitimate interest of the landlord of the property occupied for the purposes of the administration and, on the other, the legitimate interests of the company's creditors in rescuing the company as a going concern or achieving a better result than otherwise possible by occupying the premises.

Rates

Rates on non-domestic property incurred under Part III of the Local Governance Finance Act 1988 are a personal charge levied on the 'occupier' of occupied property and the 'owner' where property is unoccupied.

Under the old administration regime, rates were not automatically expenses of the administration payable in priority to other liabilities but the court was able, in an appropriate case, to direct the administrator to pay rates as a liability of the administration in accordance with the Court of Appeal's approach in In Re Atlantic Computer Systems plc, referred to above.

Under the new administration regime this has changed. In Exeter City Council v Bairstow [2007] EWHC 400 (Ch); [2007] Bus LR 813, Mr Justice David Richards held that under the new regime rates are now automatically payable as administration expenses. The defendant was not represented but, because of the importance of the case, the Attorney General agreed to the appointment of a barrister as counsel for the court to ensure the court would hear skilled argument on both sides.

Mr Justice David Richards first rejected an argument that rates fell within Rule 2.67(1)(a) ('the administrators' expenses properly incurred by the administrator in performing his functions in the administration of the company'), holding at para.52 that this rule only covers expenses for which the administrator has made himself personally liable. This is consistent with the House of Lords' interpretation of similar wording in s.19(4) of the 1986 Act under the old administration regime in Centre Reinsurance Co. v Freakley [2007] Bus LR 284.

However, he went on to hold that rates were 'necessary disbursements by the administrator in the course of the administration '¦' within Rule 2.67(1)(f).

Mr Justice David Richards felt compelled to reach this conclusion because the wording of Rule 2.67(1)(f) was identical to the 'necessary disbursements' provision applicable to liquidators' expenses (Rule 4.218(1)(m)). The House of Lords had held in In re Toshoku Finance UK plc [2002] 1 WLR 671 that liabilities imposed on a company in liquidation such as corporation tax on profits and rates fell within rule 4.218(1)(m) as 'necessary disbursements'. Since In re Toshoku Finance UK plc had been decided a year before Rule 2.67(1)(f) had been introduced, and the rule-making authorities must have been aware of it, the judge had to conclude that those authorities deliberately chose to use the same terms in Rule 2.67(1)(f) as in Rule 4.218(1)(m) so as to achieve the same result in both insolvency procedures.

In holding that rates were 'necessary disbursements', the judge rejected counsel for the court's argument that Rule 2.67(1)(f) ought to be given a different meaning from Rule 4.218(1)(m) because of its different context. Counsel argued that Rule 2.67(1)(f) concerned administration, where the overriding purpose of the regime was to promote the rescue of companies, whereas Rule 4.218(1)(m) concerned liquidation, where the purpose was to wind up the company. Counsel also argued that, as a matter of policy, rates ought not to be automatically expenses of the administration because liability for rates would act as a strong deterrent to a decision by an administrator to continue to trade from the premises. Instead, he argued, under the new administration regime rating authorities should be required to apply to the court for permission to enforce payment of rates as they had under the old regime.

Mr Justice David Richards accepted that the automatic treatment of business rates as an expense of the administration was likely to reduce the chances of achieving a rescue in some cases. However, he took the view that it was the makers of the Insolvency Rules, not the courts, who should balance the competing interests in deciding whether rates, corporation tax and other impositions ought to be payable as administrators' expenses in priority to other liabilities.

Appeal: 'just a matter of time'

Given the constraints placed upon him by the House of Lords' decision in In re Toshoku Finance, Mr Justice David Richard's decision in Exeter City Council v Bairstow cannot be faulted. But it is regrettable that the flexible approach to administration expenses, which formerly applied to both rent and rates, is no longer applicable to rates.

As a practical matter, the need to apply to the court for permission to enforce the payment of rent or rates if the administrator did not pay voluntarily may have tended to make landlords and rating authorities more flexible when it came to their strict legal rights than they might otherwise have been, thereby enhancing the chance of a successful rescue. Under the new regime this incentive to compromise no longer exists in the case of rating authorities. Although Exeter City Council v Bairstow has not been appealed, it is just a matter of time before an enterprising barrister takes the issue to the Court of Appeal and beyond.