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England and Wales Court of Appeal (Civil Division) Decisions |
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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Pillar Denton Ltd & Ors v Jervis & Ors [2014] EWCA Civ 180 (24 February 2014) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2014/180.html Cite as: [2015] 1 Ch 87, [2014] WLR(D) 94, [2014] 3 WLR 901, [2014] BCC 165, [2015] CH 87, [2014] EWCA Civ 180, [2015] 1 CH 87, [2014] 3 All ER 519, [2014] 2 BCLC 204, [2014] 2 All ER (Comm) 826 |
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ON APPEAL FROM THE HIGH COURT,
CHANCERY DIVISION, COMPANIES DIVISION
Mr Nicholas Lavender QC (sitting as a Deputy Judge of the High Court)
20122443,2558,2559,2560
Strand, London, WC2A 2LL |
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B e f o r e :
LORD JUSTICE LEWISON
and
LADY JUSTICE SHARP
____________________
(1) PILLAR DENTON LIMITED (2) HIGHCROSS (NO.1) LIMITED (3) HIGHCROSS (NO.2) LIMITED (4) CSC (ELDON SQUARE) LIMITED (5) CSC LAKESIDE LIMITED (6) RAVENSCROFT PROPERTIES LIMITED V (1) MICHAEL JOHN ANDREW JERVIS (4) STUART DAVID MADDISON (3) GAME RETAIL LIMITED |
Appellants Respondents |
____________________
Mr Daniel Bayfield (instructed by Linklaters LLP) for the 1st and 2nd Respondents
Mr John McGhee QC & Ms Catherine Addy (instructed by Macfarlanes LLP) for the 3rd Respondent
Hearing dates : 12 and 13 February 2014
____________________
Crown Copyright ©
Lord Justice Lewison:
The issue
Background
"if a company which is in liquidation remains in beneficial occupation of a lease – that is to say, if it occupies the demised premises, or takes the rent, and thus obtains the benefit of the lease – the Court ought to do its very best to make the company pay the rent in full, and not merely a dividend."
Common ground
The landlords' argument
The contrary argument
Provable debts and administration expenses
"(1) In the case of rent and other payments of a periodical nature, the creditor may prove for any amounts due and unpaid up to the date when the company entered administration or, if the administration was immediately preceded by a winding up, up to the date that the company went into liquidation.
(2) Where at any date any payment was accruing due, the creditor may prove for so much as would have fallen due at that date, if accruing from day to day."
"The court will of course interpret rule 4.218 to include debts which, under the Lundy Granite Co principle, are deemed to be expenses of the liquidation. Ordinarily this means that debts such as rents under a lease will be treated as coming within paragraph (a), but the principle may possibly enlarge the scope of other paragraphs as well. But the application of that principle does not involve an exercise of discretion any more than the application of any other legal principle to the particular facts of the case."
Landlord's remedies for non-payment of rent
"the rent reserved is to be raised out of the profits of the land, and is not due until the profits are taken by the lessee."
Landlord's remedies in cases of insolvency
"(4) A landlord may not exercise a right of forfeiture by peaceable re-entry in relation to premises let to the company except—
(a) with the consent of the administrator, or
(b) with the permission of the court.
…
(6) No legal process (including legal proceedings, execution, distress and diligence) may be instituted or continued against the company or property of the company except—
(a) with the consent of the administrator, or
(b) with the permission of the court.
…
(7) Where the court gives permission for a transaction under this paragraph it may impose a condition on or a requirement in connection with the transaction."
"Where a company registered in England and Wales is being wound up by the court, any attachment, sequestration, distress or execution put in force against the estate or effects of the company after the commencement of the winding up is void."
"When a winding-up order has been made or a provisional liquidator has been appointed, no action or proceeding shall be proceeded with or commenced against the company or its property, except by leave of the court and subject to such terms as the court may impose."
The salvage principle
"Thus was created a discretion to allow a creditor to use a process of execution to recover in full a debt for which he would otherwise have had to prove in the liquidation. In subsequent years a body of precedent on the exercise of the discretion developed."
"But in some cases between the landlord and the company, if the company for its own purposes, and with a view to the realization of the property to better advantage, remains in possession of the estate, which the lessor is therefore not able to obtain possession of, common sense and ordinary justice require the Court to see that the landlord receives the full value of the property. He must have the same rights as any other creditor, and if the company choose to keep the estates for their own purposes, they ought to pay the full value to the landlord, as they ought to pay any other person for anything else, and the Court ought to take care that he receives it."
"Although these principles were evolved in relation to a statutory discretion to allow a process of execution to proceed, it was obvious to everyone that there could be no practical difference between allowing a landlord to levy a distress for rent falling due after the winding up and directing the liquidator that he should be paid in full."
"When the liquidator retains the property for the purpose of advantageously disposing of it, or when he continues to use it, the rent of it ought to be regarded as a debt contracted for the purpose of winding up the company, and ought to be paid in full like any other debt or expense properly incurred by the liquidator for the same purpose, and in such a case it appears to us that the rent for the whole period during which the property is so retained or used ought to be paid in full without reference to the amount which could be realised by a distress."
"My Lords, it is important to notice Lindley LJ was not saying that the liability to pay rent had been incurred as an expense of the winding up. It plainly had not. The liability had been incurred by the company before the winding up for the whole term of the lease. Lindley LJ was saying that it would be just and equitable, in the circumstances to which he refers, to treat the rent liability as if it were an expense of the winding up and to accord it the same priority. The conditions under which a pre-liquidation creditor would be allowed to be paid in full were cautiously stated. Lindley LJ said (at p 329) that 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."
"The principle … is thus one which permits, on equitable grounds, the concept of a liability incurred as an expense of the liquidation to be expanded to include liabilities incurred before the liquidation in respect of property afterwards retained by the liquidator for the benefit of the insolvent estate. Although it was originally based upon a statutory discretion to allow a distress or execution against the company's assets, the courts quickly recognised that its effect could be to promote a creditor from merely having a claim in the liquidation to having a prior right to payment in full. As in the case of other equitable doctrines, the discretion hardened into principle. By the end of the 19th century, the scope of the Lundy Granite Co principle was well settled."
"Expenses incurred after the liquidation date need no further equitable reason why they should be paid."
"In my judgment the inference is irresistible that from the time when the official receiver had been given leave to sell the company's assets and had taken advice as to the best method of doing so, his tactics were directed to carrying out that advice and that he retained the lease for the purpose of carrying it out and for the benefit of the liquidation. In those circumstances "common sense and ordinary justice" (to quote James L.J. at 6 Ch. App. 466) seem to me to require that from the end of July until November 19 the applicants should be entitled to be paid their rent in full unless the retention of the lease can, on the facts, fairly be regarded as having been for the joint benefit of the applicants and the company."
"Given those facts, it seems to me that from the date when he gave instructions to find a purchaser — that is some date in the early spring of 1972 — the liquidator must be treated as having remained in possession of this property with a view to the realisation of the property to the best available advantage, or, in other words, he must be treated as having kept the property in order to sell it or do the best he could with it. It is immaterial, I think, in considering the purpose for which the liquidator retained the property that, having regard to the amount of the rent and the amount which he expected to realise upon a sale of the property, it might have been more advantageous to him and to his trust estate to have realised it at an earlier date.
Given those facts, it seems to me that, applying well established principles, I must hold that Prudential, if it had not been put in funds by Granada, or Schick through Granada, would have been entitled to be paid, as an expense of the liquidation, rent for approximately one year. That would cover the four quarter days at the end of March, June, September and December 1972."
"In my judgment, if it is fair and reasonable that the landlords should not be entitled to rent in full while the liquidator is making up his mind and before he determines to retain the property, it must necessarily follow that it is equally fair that the landlords should not be entitled to rent in full from the date they receive notice of the fact that the liquidator has determined to disclaim."
"… that in accordance with the authorities the only period during which it is equitable for the landlords to claim rent in full, as opposed, to proving for a dividend, is the period during which the property was actually being retained by the liquidators for the benefit of the creditors in general. In the present case that period began when the voluntary liquidation started, and it ended on March 17, 1975, when the landlords received notice from the liquidators of the ex parte summons asking for leave to disclaim."
The earlier cases
"In all the cases in which an execution or distress had been allowed, it has issued before the date of the winding-up order. The only exception to the operation of the section when distress is issued after the winding up order is where the company has retained, not merely formal, but actual possession of the property for the purpose of carrying on the business of the liquidation…"
"…here the landlord is exercising his legal rights, and I think it is indisputable that no equitable ground has ever been made out for restraining the landlord from levying the distress, unless there have been some circumstances outside the levying, such as fraud, or unfair dealing, which would entitle the tenant to an injunction. Apart from that, it does not appear to me to be inequitable that the landlord should exercise his right of distress even though there be a subsequent winding up of the company."
"Thus was created a discretion to allow a creditor to use a process of execution to recover in full a debt for which he would otherwise have had to prove in the liquidation."
"Now a distinction seems to have been drawn in the cases between the position of a landlord where he could and where he could not come in and prove in the winding-up of the company. And this distinction is applied as between rent due at the date of the winding-up and that which has accrued since. It appears very clear that when the official liquidator remains in possession after the winding-up has commenced for the convenience of the liquidation of the company, the landlord ought to have some means of recovering the rent. I think a landlord might, under such circumstances, fairly say to the official liquidator that he must either pay a rent or go out of possession. It seems, therefore, to have been held that where the rent accrued after the winding-up, it must be assumed to have been for the convenience of the liquidation, and that, as against the official liquidator, the landlord had all the ordinary rights of a landlord against his tenant."
"The next inquiry is this, whether the rent which I ought to allow to be proved for, and the rent which I ought to allow to be paid in full or distrained for, are to be divided by the quarter days when the rent became due or by a reference to the commencement of the winding up. The order of the Vice-Chancellor Hall, which I have already referred to, directed the inquiry what rent was due at the commencement of the winding-up. Now, if that be the true inquiry, it appears to me plain that I must, to use the common expression, apportion the rent between the periods before and after the 27th of November, 1880, and, in my judgment, I ought so to do, because the Apportionment Act of 1870 has declared that all rent shall be considered as accruing from day to day, and shall be apportionable in respect of time accordingly. It declared that rents should be apportionable like interest on money lent. Now, how did the law stand before this Act was passed? Plainly in this way, that rent neither accrued due, nor was payable except on the day on which it was reserved; whereas interest or money lent accrued due de die in diem, although it might be payable at certain specified days. The effect of the section is to declare that rent, like interest, accrues due from day to day, and that the payments of rent, like the payments of interest, when they are periodical, shall be apportioned in respect of the time at which the rent, like the interest, accrued due.
Now, if that is the true construction of the Act, it follows that the rent which had accrued due up to the 27th of November, 1880, was a debt provable against the company under the liquidation, and that the rent which accrued after was not so.
In my judgment the rent which accrued due is that which ought to be proved for. The rent which cannot be proved for is that which ought to be paid in full."
"That appears to me to be consistent with the current of decision which has drawn the line with regard to the exercise of the power of distress in respect of rent accrued before and rent accrued after the winding-up. The practice certainly has grown up of allowing the lessor to distrain or to be paid in full in respect of rent after the winding-up; but with respect to rent before the winding-up, to allow him only his right to compete with the other creditors by proving in the winding-up."
"First, as to rent in arrear at the commencement of the winding-up. 1. If the landlord is a legal creditor of the company in respect of rent in arrear at the commencement of its winding-up, he is not allowed to distrain for the arrears of rent but must prove his debt like any other creditor: In re Traders North Staffordshire Carrying Company, where the distress was for tolls in arrear; In re Coal Consumers Association, where the liquidator retained possession, but not for any purpose of liquidation; Thomas v Patent Lionite Company, a case of voluntary winding-up followed by a compulsory order. 2. Moreover, in cases of this kind the circumstance that the liquidator has retained possession and carried on the company's works, has been held not to entitle a landlord or mortgagee (with a power of distress as and for rent) to distrain for rent in arrear in the winding-up: In re North Yorkshire Iron Company; In re Brown, Bayley & Dixon; In re South Kensington Co-operative Stores. 3. If, however, the landlord is not a legal creditor of the company by reason of the company not being his tenant, he is permitted to distrain even for rent in arrear at the commencement of the winding-up: In re Exhall Coal Mining Company. 4. And in such a case he will be allowed to distrain although the liquidator offers to allow the arrears to be proved as a debt in the winding-up: In re Regent United Service Stores.
Secondly as to rent accruing after the commencement of the winding-up. 1. If the liquidator has retained possession for the purposes of the winding-up, or if he has used the property for carrying on the company's business, or has kept the property in order to sell it or to do the best he can with it, the landlord will be allowed to distrain for rent which has become due since the winding-up: In re Lundy Granite Company; In re North Yorkshire Iron Company; In re Silkstone and Dodworth Coal and Iron Company; In re South Kensington Co-operative Stores, and see In re Brown, Bayley & Dixon, per Fry J. 2. But if he has kept possession by arrangement with the landlord and for his benefit as well as for the benefit of the company, and there is no agreement with the liquidator that he shall pay rent, the landlord is not allowed to distrain: In re Progress Assurance Company; In re Bridgewater Engineering Company."
"The notion is that, if the liquidator uses the property for the purposes of winding-up, it is just the same as where any costs are incurred in advertising the property for sale; it is part of the expenses incurred, and which ought to be paid in full.
What expenses has the liquidator incurred? Has he incurred the whole of this half-year's rent? He certainly has not yet. He has only incurred up to the present time whatever is incident to his actual possession: but how can I now, on this 11th of January, say that he has incurred this expense as on the 24th of June, 1895? I cannot now say how long he will require to occupy the property: that is a matter in which he has to exercise his discretion, with the assistance of the Court, if an order of the Court is required. I cannot see how I can bring this within the principle; and having found the principle laid down for me, I think I must follow it, though under somewhat novel circumstances. One thing is perfectly clear, namely, that the mere fact of the rent being due and payable does not make it leviable by distress, and I have to consider whether there is anything else which makes it leviable - anything to assist the landlord. It seems to me that there is not."
"That was, however, a case where the tenant was seeking to use apportionment to limit his liability for the consequences of his own default. Moreover, and perhaps more significantly, it was not a case which involved a supervening liquidation, receivership or administration. In my judgment the decision does not apply to the present circumstances and I ought to apply the decisions relied on by [the administrators].
I shall therefore direct that any liability owed to Norwich Union or Allied Irish in respect of periodical payments which are to be discharged as administration expenses, is to be treated as accruing on a day to day basis. I do not propose to make any direction which purports to govern the cases of payments due to other funders, but what I have said in relation to Norwich Union and Allied Irish will presumably act as a guide."
The rating cases
"It is admitted that the rate, in so far as it constituted a debt, was incurred after the liquidation and not before it, and therefore this is not a case in which it can be said that those who claim to be paid ought to come in and prove pari passu with creditors whose debts were incurred before the winding-up. If the vestry are creditors, they have become so since the commencement of the liquidation. And I cannot see why a debt in respect of rates should not be paid just as much as rent or anything else in respect of that which the liquidator acquires or uses after the liquidation has commenced.
If he takes new premises, he has to pay the rent in full. If he keeps up the old ones, he has also to pay. But whichever course he takes he has to pay the rates. Under the circumstances the test applied by Lord Justice Bowen is much the plainest and simplest. Here it is said that the liquidator occupied in a beneficial way within the meaning of the words in the rating statutes, and it cannot be disputed that he did."
What is the salvage principle?
"My Lords, it is important to notice Lindley LJ was not saying that the liability to pay rent had been incurred as an expense of the winding up. It plainly had not. The liability had been incurred by the company before the winding up for the whole term of the lease. Lindley LJ was saying that it would be just and equitable, in the circumstances to which he refers, to treat the rent liability as if it were an expense of the winding up and to accord it the same priority. The conditions under which a pre-liquidation creditor would be allowed to be paid in full were cautiously stated. Lindley LJ said … that the landlord "must shew 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."
"The principle evolved from the … cases is thus one which permits, on equitable grounds, the concept of a liability incurred as an expense of the liquidation to be expanded to include liabilities incurred before the liquidation in respect of property afterwards retained by the liquidator for the benefit of the insolvent estate." (Emphasis added)
"if the company for its own purposes, and with a view to the realisation of the property to better advantage, remains in possession of the estate, which the lessor is therefore not able to obtain possession of, common sense and ordinary justice require the court to see that the landlord receives the full value of the property."
The most recent cases
"… from which it follows, as Mr Jourdan submits and I accept, that the quarter's rent becomes payable in full from that date as one of the costs and expenses of the administration and would not fall to be apportioned should the administrators vacate the premises during that quarter."
"Although the authorities show that debts incurred before the liquidation do not obtain priority, they indicate that even on the salvage principle all liabilities under a contract incurred after the time of adoption of the contract by a liquidator are entitled to priority. … The salvage principle in liquidation indicates that if a liquidator adopts a contract for the purpose of the more beneficial conduct of a liquidation, all such liabilities under such contract after the date of adoption are entitled to priority."
"The landlord's case is that where a landlord seeks to forfeit a lease after an administration or liquidation has commenced and permission is refused, all the rent that is unpaid becomes payable irrespective of when it accrued due, if and to the extent it applies to a period of occupation by the administrators or liquidators concerned. The administrators submit that this is a heretical approach and the only rent that can become payable as an expense of the administration is rent falling due after (a) the administration has commenced and (b) the administrators have elected to retain the relevant property for the purposes of the administration or liquidation. They accept that the Apportionment Act 1870 is of no application to sums payable in advance and in consequence they accept that the whole of the sum due for the March quarter is payable as an administration expense even though permission to forfeit was given only a few days after the March quarter day."
"The principles to be derived from Lord Hoffman's speech are as follows:
(a) Rent that has accrued due down to the date relevant for proof is provable, as is rent due in the future - see IRs rr.12.3(1) and 13.12(1);
(b) Debts including future debts that are provable are paid pari passu with all other debts in the same class - usually those due to unsecured creditors;
(c) Liquidation expenses are incurred after liquidation has commenced and are normally not provable;
(d) Exceptionally, a liquidator or administrator who retains property by refusing permission to forfeit for the purpose of the liquidation or the administration concerned will become liable to pay rent which becomes payable in priority to all other creditors as a liquidation or administration expense.
On a proper reading of Lord Hoffman's analysis, it does not support the proposition that the exception referred to in (d) above extends to debts that have already become due at the date of the commencement of the liquidation or administration concerned. This is apparent from a consideration of the authorities referred to by Lord Hoffman as establishing the principle that he is summarising."
"In summary, therefore, in my judgment the position is as follows:
(a) Where rent is payable in advance and falls due for payment prior to the commencement of the liquidation or administration, then it is provable but not payable as a liquidation or administration expense even though the liquidator or administrator retains the property for the purposes of the liquidation or administration for the whole or part of the period for which the payment in advance was payable;
(b) Where rent payable in advance becomes due during a period when the liquidator or administrator is retaining the property for the purposes of the liquidation or administration, then the whole sum is payable as a liquidation or administration expense even though the liquidator or administrator gives permission to forfeit or vacates before expiry of the period for which the payment in advance is due; and
(c) Where rent is payable in arrears and accrues due during a period when the administrator or liquidator is retaining property for the purposes of the liquidation or administration, the liquidator or administrator will be liable to pay as an administration or liquidation expense at least the rent that accrues from day to day for so long as he or she retains possession of the premises for the purposes of the liquidation or administration. Whether the office holder will be liable to pay that part of the rent that has accrued in arrears that is referable to a period prior to the commencement of the administration or liquidation depends upon whether Silkstone is to be followed. That issue does not arise in this case.
In those circumstances and for those reasons I conclude that the landlords are not entitled to payment of the, or any part of the, rent that accrued due prior to the commencement of the administration."
Interplay between proof and salvage
"On a proper reading of Lord Hoffman's analysis, it does not support the proposition that the exception referred to in (d) above extends to debts that have already become due at the date of the commencement of the liquidation or administration concerned."
"Thus debts arising out of pre-liquidation contracts such as leases, whether they accrue before or after the liquidation, can and prima facie should be proved in the liquidation. In this respect they are crucially different from normal liquidation expenses, which are incurred after the liquidation date and cannot be proved for. In the Lundy Granite Co … the court was therefore exercising the discretion conferred by section 87 of the 1862 Act to decide that, contrary to the normal pari passu rule, a creditor who had a debt which was capable of proof at the date of liquidation should be paid in priority to other creditors. What was the justification for the exercise of such a discretion?" (Emphasis added)
Consequences
Result
Lady Justice Sharp:
Lord Justice Patten: