Vol 10 (2013) - Issue 1

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Illuminating for Insolvency Practitioners and Unsecured Creditors; But Turbulence for Landlords

The priority of insolvency expenses
In the course of his duties, an insolvency practitioner will incur necessary liabilities to third parties. For example, if the company continues to trade during its administration, the administrator may need to purchase raw materials, or occupy commercial premises. The costs and expenses properly incurred by an insolvency practitioner pursuant to his appointment over an insolvent estate are known as insolvency expenses.
A liability of the insolvent company can only rank as an insolvency expense if it falls into a number of broad, generic categories set out at: rule 2.67(1) of the Insolvency Rules 1986 (for administration expenses); or rule 4.218(3) of the Insolvency Rules 1986 (for liquidation expenses).
The significance of insolvency expenses is that they are paid out of any assets realised by the officeholder in priority to any distributions made to floating charge holders or unsecured creditors. This means that in general, post-insolvency liabilities (i.e insolvency expenses) rank in priority to the debts of creditors, incurred pre-insolvency.

The development of relevant caselaw
For over 140 years an exception to the basic rule on insolvency expenses (as outlined above) has existed, namely the 'Lundy Granite' principle.1 This principle relates to rent incurred pursuant to an obligation set out in a pre-liquidation lease. Although such rent is not incurred by the liquidator, where the liquidator actively retains or uses the premises (as opposed to passively holding them) for the purposes and benefit of the winding-up, rent accruing during that period of retention or use will be an expense of the winding up.
It should be noted that in Lundy Granite and subsequent cases, the court was not saying that the liability to pay rent had been incurred as an expense of the winding up. Instead, (if the circumstances are correct) the court has on various occasions decided that as the landlord was deprived of enjoyment of the property it would be 'just and equitable … to treat the rent liability as if it were [emphasis added] an expense of the winding up and to accord it the same priority'. In short, the landlord:

'must show why he should have such an advantage over the other creditors. It was not sufficient that the liquidator retained possession for the benefit of the estate if it was also for the benefit of the landlord. Not offering to surrender or simply doing nothing was not regarded as retaining possession for the benefit of the estate…'

Much more recently, in Goldacre (Offices) Ltd v Nortel Networks UK Ltd and to the further advantage of landlords, the Lundy Granite principle was extended to administrations, so that landlords of tenants in administration are allowed to claim rent as an expense of the administration where rent falls due during the administration and when administrators use the leasehold premises for the purposes of the administration (or, in other words, for the benefit of creditors).
Landlords of companies in either administration or liquidation therefore have the opportunity to be paid advance rent due, in priority to other creditors.
This principle, relating to rent due before an insolvency event, was considered in two cases decided earlier this year. As will be seen below, both decisions have eaten away at the advantage given to landlords by Goldacre.