[View without highlighting]
[Printable RTF version]
[Buy ICLR report:  1 Ch 87]
[Buy ICLR report:  3 WLR 901]
[View ICLR summary:  WLR(D) 94]
||Neutral Citation Number:  EWCA Civ 180
||Case No: A2/2013/2005
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT,
CHANCERY DIVISION, COMPANIES DIVISION
Mr Nicholas Lavender QC (sitting as a Deputy Judge of the High Court)
||Royal Courts of Justice
Strand, London, WC2A 2LL
||24 February 2014
B e f o r e :
LORD JUSTICE PATTEN
LORD JUSTICE LEWISON
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
(1) MICHAEL JOHN ANDREW JERVIS
(4) STUART DAVID MADDISON
(3) GAME RETAIL LIMITED
Mr Antony Zacaroli QC & Ms Hannah Thornley (instructed by Berwin Leighton Paisner LLP) for the Appellants
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
HTML VERSION OF JUDGMENT
Crown Copyright ©
Lord Justice Lewison:
- The issue on this appeal is the treatment of rent payable under a lease held by a corporate tenant that enters administration. When is the rent no more than a provable debt; and when does it rank as an expense of the administration?
- The question arises in the context of the administration of the Game group of companies. One of the companies in the group ("GSGL") was the tenant of many hundreds of leasehold retail properties from which the group traded. In relation to most of those properties rent was payable quarterly in advance on the usual quarter days (25 March, 24 June, 29 September and 25 December). On 25 March 2012 approximately £10 million in rent became due under the various leases. It was not paid. The group entered administration on the following day. Some stores were closed down immediately; but trading continued in other stores which were included in a swift sale of the business and assets of the group to Game Retail Ltd, which was not part of the group. We were told that approximately £3 million of the March rent remains outstanding in respect of those stores.
- At the heart of the appeal is the question whether part of an instalment of rent payable in advance can be treated as an expense in the context of insolvency. Two decisions at first instance have decided that it cannot. In Goldacre (Offices) Ltd v Nortel Networks UK Ltd  EWHC 3389 (Ch);  Ch 455 HH Judge Purle QC decided that if a quarter's rent (payable in advance) fell due during a period in which administrators were retaining the property for the purposes of the administration, the whole of the quarter's rent was payable as an administration expense even if the administrators were to give up occupation later in the same quarter. The corollary of that decision is Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd  EWHC 951 (Ch);  3 WLR 1132. In that case HH Judge Pelling QC decided that where a quarter's rent payable in advance fell due before entry into administration none of it was payable as an administration expense even if the administrators retained possession for the purposes of the administration. The rent is simply provable as a debt in the administration. Sensibly, the judge in our case (Mr Nicholas Lavender QC) simply followed those two decisions without sustained argument, and granted permission to appeal.
- The landlords' appeal was presented by Mr Antony Zacaroli QC and Ms Hannah Thornley. The response of Game Retail Ltd was presented by Mr John McGhee QC and Ms Catherine Addy. The administrators, represented by Mr Daniel Bayfield, have taken a neutral stance.
- One consequence of these two decisions is that it has become more common for companies to enter administration on the day immediately following a quarter day, thus avoiding liability to pay the rent in full even if they retain possession of their leasehold property. From the perspective of the landlords the position is exacerbated by a swift sale of the business to a new company that can, in effect, trade for the first three months rent free. Unsurprisingly, landlords are discontented with the legal position. Hence this appeal. It is common ground that if the landlords succeed in establishing that part of an instalment of rent payable in advance is capable of being treated as an administration expense, then the principle must work in both directions. In other words, if rent payable in advance falls due during the period when the administrators retain possession, it too must be apportioned if they subsequently go out of possession during the quarter. That is the subject of a contingent cross-appeal. This would, I think, be the sensible result. As Vaughan Williams J put it in Re New Oriental Bank Corporation (No 2)  1 Ch 753, 757:
"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."
- The real question is whether in the light of a substantial body of case-law that result is open to us. In my judgment it is; and for the reasons that follow I would allow both the appeal and the cross-appeal.
- It is common ground that at common law rent (whether payable in advance or in arrear) is not apportionable in respect of time; and it is also common ground that rent payable in advance is not apportionable under the Apportionment Act 1870. The latter proposition is the result of the decision of this court in Ellis v Rowbotham  1 QB 470, although the landlords may wish to challenge its correctness if this case goes further. The application of the common law, as modified by the Apportionment Act 1870, is clear. For example as Mr McGhee QC rightly submits, in the absence of an implied term to the contrary, a tenant under a lease containing a conditional break clause must pay the whole of a quarter's rent payable in advance that falls due before the break date even if the period covered by that payment extends beyond the break date: PCE Investors Ltd v Cancer Research UK  EWHC 884 (Ch);  2 P & CR 5. By the same token if a landlord forfeits for non-payment of rent he is entitled to recover as rent the whole of a quarter's rent payable in advance which fell due before the date of the forfeiture even if the forfeiture date is in the middle of the quarter covered by that payment: Canas Property Co v KL Television Services  2 QB 433.
- It is also common ground that whether rent is payable as an administration expense is not a question of an exercise of the court's discretion. Either it counts as an expense, or it does not. If rent falls within the principle known variously as the "salvage principle," "the liquidation expenses principle" or "the Lundy Granite principle" it is an administration expense. If not, not. The origins and development of the principle, which I shall call the "salvage principle", were explained by Lord Hoffmann in Re Toshoku Finance Ltd  UKHL 6;  1 WLR 671. However, since the point at issue in that case was a different one, it is necessary to go over some of that ground.
The landlords' argument
- The essential point for the landlords is that whether rent payable in advance is apportionable at common law or under the Apportionment Act 1870 is irrelevant. The landlords do not seek to divide the rent in any way. What is in play is not the common law or the Apportionment Act, but the salvage principle. And that principle does not rest on any principle of the common law, but on the intervention of equity. Over the years that principle has been consistently applied, and operates as a gloss on the correct construction of the statutory rules of priority of debts both in liquidation and administration.
The contrary argument
- The contrary argument is that the application of the salvage principle is crucially dependent on the date at which liability for rent accrues due. The only basis on which a liability can be apportioned is on a basis which applies generally across the law. There is no special rule applicable to cases of insolvency; and there is no equitable power to apportion. The cases consistently demonstrate that apportionment can apply only to cases of rent or other periodical payments payable in arrear. It cannot apply to instalments of rent payable in advance, the whole of which accrue due on the rent day. There is no unfairness about this. It is simply a consequence of modern landlords' choice to reserve rent payable in advance.
Provable debts and administration expenses
- The basic definition of "debt" is found in rule 13.12 of the Insolvency Rules 1986. Rule 13.12 (1) says that it includes (a) any debt or liability to which the company was subject on the date when the company went into liquidation (or entered administration) and (b) any debt or liability to which the company may become subject after that date by reason of any obligation incurred before that date. It does not matter whether the debt or liability is present or future, certain or contingent or fixed or liquidated: rule 13.12 (2). Rule 13.12 (5) applies these provisions to administrations.
- On the face of it liability to pay rent as it accrues due under a lease taken by the company before its entry into administration (or liquidation) is a liability to which it becomes subject as a result of an obligation incurred before the relevant date. Accordingly, it falls within the definition of "debt". The general rule is that all debts are provable: Insolvency Rules 1986 rule 12.3.
- However, special provision is made for rent and other periodical payments. Rule 2.87 provides:
"(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."
- A similar rule applies to winding up: Insolvency Rules 1986 rule 4.92.
- It is clear, therefore, that in the case of rent payable in advance the landlord is entitled to prove for any rent that had accrued due before the date when the company went into liquidation (or entered administration). A creditor may also prove for a debt of which payment was not yet due at the date of the entry into administration. But if he is paid a dividend before the due date then the amount of the dividend is adjusted: Insolvency Rules rule 2.89. The equivalent rule for liquidation is rule 4. 94. If the lease remains on foot it is thus common ground that the landlord is also entitled to prove for instalments of rent as they fall due: Metropolis Estates Co Ltd v Wilde  2 KB 536; Christopher Moran Holdings Ltd v Bairstow  2 AC 172, 187.
- The expenses of an administration are dealt with in rule 2.67. Rule 2.67 (1) (a) deals with "expenses properly incurred by the administrator in performing his functions in the administration of the company". Rule 2.67 (1) (f) deals with "any necessary disbursements by the administrator in the course of the administration". This rule is modelled on rule 4.218 (which applies to expenses of a liquidation) and it is common ground that they are to be interpreted in the same way. In Toshoku Lord Hoffmann said at  that:
"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."
- Thus the salvage principle will apply to the interpretation of rule 2.67. Mr McGhee accepted that this was so in this court, but may wish to challenge that proposition if this case goes further.
- It is also common ground that the salvage principle and the right to prove for a debt are not mutually exclusive. Thus the mere fact that a debt is a provable debt does not mean that the salvage principle cannot apply.
Landlord's remedies for non-payment of rent
- Part of Mr McGhee's argument depended on comparing the landlord's remedies for non-payment of rent outside the context of insolvency with the curtailment of those remedies by the Insolvency Act 1986 and the Insolvency Rules. It is therefore necessary to set them out briefly.
- Where the rent is unpaid on the due date the landlord may of course sue for it. He is entitled to sue anyone who has contracted to pay that rent (such as an original tenant or an assignee who has entered into a covenant to pay contained in a licence to assign), subject to the effect of the Landlord and Tenant (Covenants) Act 1995. He is also entitled to sue any person with whom he has privity of estate at the relevant time. If the rent is payable in advance the relevant time is the rent day. However, if the rent is payable in arrear, and the tenant in possession on the rent day had only had possession for part of the period covered by the rent, then the landlord may only sue the tenant in possession for an apportioned part of the rent. The outgoing tenant will remain liable for the remainder: Parry v Robinson-Wyllie Ltd (1987) 54 P & CR 187. One of the cases on which Mr McGhee relied (The Swansea Bank Ltd v Thomas (1879) LR 4 Ex D 94) is simply an illustration of this principle.
- Mr McGhee submitted that the same principle applied to distress. He said that a landlord was not entitled to distrain for more rent than was owed by the tenant in possession. He supported that proposition with the decision of Mr John Crowley QC, sitting as a deputy judge of the High Court, in Wharfland Ltd v South London Co-Operative Building Co Ltd  2 EGLR 21. Mr Crowley held that a landlord was not entitled to distrain for rent on the goods of an assignee of a lease to the extent that the arrears of rent in question had accrued before the date of the assignment. His decision appears to me to depend on equiparating liability to pay rent and vulnerability to distress. In my judgment, with all respect to Mr Crowley, his judgment does not really engage with the nature of distress. The traditional common law view about rent was that it was a thing that issued out of the land. It was partly for that reason that in Clun's Case (1604) 10 Co Rep 128a the court held that rent was not apportionable in point of time. As the court put it:
"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."
- It is for that reason that the landlord is, in principle, entitled to distrain on any goods that he finds on the land, whether they are the goods of the tenant or not. There are, of course, exceptions to this general rule some of which are creations of the common law and some of which owe their origin to statutory intervention.
- Although at common law rent was not apportionable in respect of time, it was apportionable in respect of estate. Clun's Case itself recognised that by referring to a case in which the tenant had been evicted from part of the land. But that was not the only case in which rent was apportionable in respect of estate. Thus if the tenant assigned part of the property comprised in a tenancy, the assignee only had privity of estate with the landlord as respects that part; and thus was only liable for an apportioned part of the rent. The cases are reviewed in Smith v Jafton Properties Ltd  EWCA Civ 1251;  Ch 519.
- The landlord's right to distrain is founded on the principle that the rent reserved by his demise issues out of the land and he distrains by taking possession, in the nature of a pledge, of goods and chattels found upon such land: British Mutoscope and Biograph Co Ltd v Homer  1 Ch 671, 674. Even where there has been an assignment of part of the land (with the result that the tenant of each part is only liable for an apportioned part of the rent) the landlord is entitled to enter any part of the demised property and distrain for the whole rent: Whitham v Bullock  2 KB 81; Smith v Jafton Properties Ltd at  (v). He is entitled to do this, even though the tenant of each apportioned part of the lease only has privity of estate as regards that part of the leased property that he holds. Accordingly vulnerability to distress is not dependent on identity between the rent in arrear and privity of estate.
- Thus the premise underlying Mr Crowley's decision is, in my judgment, ill-founded. But quite apart from that we are not dealing with a case in which there has been a change of tenant. The company has remained the tenant throughout the relevant period. What has changed is that instead of being able to pay its debts as they fell due, it ceased to be able to do so. Even if we were dealing with a (hypothetical) change of tenant, it is not a change to which the landlord has consented. Thus part of the reasoning on which Mr Crowley based his decision (namely that the landlord in that case had consented to the assignment) does not apply to our case.
- The final point to make about distress is that the ancient common law right was simply a right to enter the demised property, and to seize and impound goods. Thus the distress was complete once the goods were impounded. At common law there was no right to sell the goods impounded, but that right was conferred on landlords by statute as long ago as 1689. However, the fact that the distress was complete on impounding helps the modern reader to understand some of the nineteenth century cases about distress.
- In addition to the remedies of action and distress the landlord will also be entitled to forfeit the lease for non-payment of rent. This remedy arises from the mere fact that rent is unpaid. It does not depend on the personal liability of the tenant in possession to pay the arrears. If the landlord does forfeit then in the usual case the tenant in possession will be entitled to relief against forfeiture if he pays the whole of the rent in arrear (whether it is his personal liability or not).
- The point that the court made in Clun's Case, namely that rent is not due until profits are taken by the tenant, also explains why in the absence of express wording rent is payable in arrear. During the nineteenth century this was the normal way in which rent was paid. It is not until relatively modern times that the norm changed. Nowadays rent is generally made payable in advance. The fact that in the nineteenth century rent was normally payable in arrear must be constantly borne in mind when considering the statements of principle formulated in the nineteenth century cases. The essential point is that where rent was payable in arrear the tenant had already enjoyed the full benefit of occupation for the relevant period by the time that the rent fell due. There was no question of a continuing supply by the landlord in return for that payment of rent. In that respect a landlord under a lease reserving rent payable in arrear was in no different position to any other creditor who had supplied a company with goods or services but who had not been paid when the company became insolvent.
- As we have seen at common law rent was not apportionable in respect of time, but was apportionable in respect of estate. Successive Acts of Parliament allowed rent to be apportioned in respect of time in some circumstances; but ultimately the Apportionment Act 1870 allowed all rent payable in arrear to be apportioned in respect of time. What does that mean? What it means is that if, for example, the lease comes to an end between rent days the tenant is only liable for an apportioned part of the rent. No one is liable for the remainder. If, on the other hand, the lease is assigned between rent days the outgoing tenant is liable for the rent down to the date of the assignment, and the incoming tenant is liable for the rent thereafter. A true apportionment thus either creates liability for part of the rent or transfers liability from one person to another.
Landlord's remedies in cases of insolvency
- The landlord's rights to remedies against a company in administration are curtailed by paragraph 43 of Schedule B1 to the Insolvency Act 1986. The relevant parts of that paragraph provide:
"(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."
- Remedies against companies in liquidation are also curtailed by the Insolvency Act 1986, although the precise scope of the sections in question is still to some extent uncertain. Section 126 applies between the presentation of a winding up petition and the making of a winding up order. During that window an application may be made to the court to stay "any action or proceeding against the company". It is a matter of some debate whether a distress or peaceable re-entry falls within that section. The court's power is to stay the action or proceeding "on such terms as it thinks fit". Section 128 (1) provides:
"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."
- This apparently unqualified prohibition is, however, capable of being overridden by the grant of permission by the court either under section 126 or under section 130 (2) which provides:
"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
- The origins of the salvage principle can be traced back to Re Exhall Coal Mining Co Ltd (1864) 4 De GJ & S 377. In that case a winding up order was made against the company on 6 February 1864. However, earlier on the same day, but after the presentation of the petition, the landlord put in a distress for rent on goods then on the land. The Court of Appeal in Chancery, affirming the Master of the Rolls, allowed the distress to proceed. In order for the landlord to have been entitled to distrain at all, the rent must have fallen due. So this must have been a case in which the landlord was allowed to distrain for rent which had accrued due before the date of the petition. It appears that the lease was held, not by the company itself, but by trustees for the company; but that fact played no part in the reasoning of the two Lords Justices.
- Lord Hoffmann observed in Toshoku at 
"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."
- It is clear from this passage that Lord Hoffmann did not regard the existence of a provable debt as incompatible with the salvage principle. Likewise in Nortel GmbH  UKSC 52;  3 WLR 504 at  Lord Neuberger, referring to the salvage principle, said that "a liability which would otherwise be a provable debt can be, on special facts, an expense of the administration or liquidation."
- In Re Lundy Granite Co ex p Heavan (1870-71) LR 6 Ch App 462 the landlord was permitted to distrain for rent which had accrued due after the winding up. The principle underlying the decision was formulated by James LJ as follows:
"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."
- It is this case which gave one of its names to the principle; and must in my judgment be taken to be an authoritative exposition of what it entails. The principle thus formulated was evidently approved by the House of Lords in Toshoku. Lord Hoffmann commented at :
"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."
- In Re Oak Pits Colliery Co (1882) 21 Ch D 322 Lindley LJ rationalised the underlying principle as follows:
"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."
- In Toshoku Lord Hoffmann commented at :
"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."
- If I may venture a comment of my own, although Lindley LJ had distinguished between the two categories of case according to when the rent fell due, the underlying principle was not formulated in the same way. He did not say that the rent should be paid in respect of those rent days that fell during the period of retention for the benefit of the winding up. Rather he said that the rent should be payable in full "for the whole period during which the property is so retained or used". I will call this period the period of beneficial retention. It is by no means clear, therefore, that Lindley LJ was applying a strict accruals basis of liability. In addition Lindley LJ added that the principle was to be applied without reference to the amount that could have been realised by a distress. Clearly by 1881 the salvage principle had outgrown its origins in the law of distress.
- Lord Hoffmann observed at :
"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."
- This passage does, in my judgment, regard the principle as one that is founded on equitable grounds, and not on the common law or statute. That the principle is founded on equity is emphasised by Lord Hoffmann's later observation at  that:
"Expenses incurred after the liquidation date need no further equitable reason why they should be paid."
- In connection with this principle Lord Hoffmann referred to three modern cases which he regarded as having applied it. The first was Re ABC Coupler and Engineering Co (No.3)  1 WLR 702. The company had a 21 year lease of a factory at a rent payable quarterly in advance on the usual quarter days. A winding up order against the company was made on 7 June 1962. There was plant and machinery in the property, which the liquidator took steps to realise in July 1962. The sale took place in the autumn and the lease was surrendered on 19 November. It will be apparent that under the terms of the lease a quarter's rent fell due on 24 June (before July) and another quarter's rent fell due on 29 September (which would have covered the period ending on 24 December). If liability depended on the date when the rent fell due, then no part of the June rent should have been payable in full, and the whole of the September rent should have been payable in full. But that is not what Plowman J did. Having referred to the relevant cases, he said:
"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."
- That is the order that he made. Thus the period for which the rent was payable in full was not defined by reference to rental periods, but to the factual question: for what period did the liquidator retain the property for the benefit of the winding up? This was not a decision, therefore, that was based on the accrual of rent, and it was referred to without disapproval in Toshoku as an illustration of the salvage principle. It was also cited by Lord Neuberger in Re Nortel GmbH at  as an illustration of the principle. It is, however, fair to say that the point was expressly conceded, but since counsel who made the concession was Mr John Arnold QC I think that Mr Zacaroli also has a fair point when he says that the concession represented the understanding of the profession at the time.
- Lord Hoffmann also referred to Re Downer Enterprises Ltd  1 WLR 1460 as another illustration of the principle. The company was the assignee of a lease. The rent appears to have been payable in advance on the usual quarter days. The company went into liquidation in November 1971. At some time before April 1972 the liquidator instructed agents to market the lease and it was assigned to a purchaser in January 1973. Rent had been accruing due since the liquidation. Pennycuick V-C said:
"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."
- It is noticeable that although the period of beneficial retention ended in January 1973 the liquidator was directed to pay the whole of the rent that fell due on the December 1972 quarter day. However, as Mr Zacaroli pointed out Pennycuick J was carrying out a fairly rough and ready exercise. His conclusion was that the landlord was entitled to be paid rent in full for "approximately" one year. Whether the extent of the payment ought to be determined by reference to the date at which the rent actually fell due or by reference to the period of beneficial retention was not argued or discussed.
- The last of the cases to which Lord Hoffmann referred on this topic was Re HH Realisations Ltd (1975) 31 P & CR 249. The company held a 99 year lease which contained a geared rent review clause taking effect as from 1 October 1974. On 6 March 1974 it went into liquidation. The liquidators negotiated the sale of the lease but they rescinded the agreement. On 5 March 1975 they applied to the court for leave to disclaim the lease. The landlords were served with the application on 17 March 1975. On 25 April 1975 the registrar gave leave to disclaim. On 8 May the company formally disclaimed the lease. Templeman J held that the landlords were entitled to be paid the rent in full down to 17 March when the landlords received notice of the application to disclaim. By then it must have been clear to them that the liquidators were not retaining the lease for the benefit of the winding up. He said:
"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."
- He concluded:
"… 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."
- There are three points to make about this. First, Templeman J justified his decision by reference to what was "equitable". Second, although the report does not reveal what the rent days were, it seems unlikely that 17 March was one of them. Third, it is not clear whether Templeman J was contemplating an apportionment of rent, or payment in full of those instalments of rent that fell due during the period of beneficial retention.
- Since these three cases do not present an entirely consistent picture, it is necessary to go back over some of the earlier cases.
The earlier cases
- In Re Exhall Coal Mining Co Ltd we have seen that the landlord was permitted to continue with a sale of goods distrained for rent that had accrued due before the commencement of the winding up. However, we do not know whether the rent was payable in advance or in arrear. If it was payable in arrear (which is probable), then the tenant would have had the full benefit of the period of occupation for which the rent was payable before the onset of insolvency. It is also relevant to note that since the rent had become due before the date of the winding up it was clearly a provable debt. But the fact that it was a provable debt did not preclude the landlord from retaining the benefit of the distress and proceeding with the sale.
- In Re Progress Assurance Co (1870) LR 9 Eq 370 the Progress Assurance Co retained possession of offices following the making of a winding up order on 22 June 1869. In September of that year the landlord issued a distress for the amount of the rent then due. Lord Romilly MR said that the distress could not be allowed to stand. He said:
"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…"
- Thus the general principle (in which a landlord was allowed to proceed with the distress) concerned cases in which the rent had already accrued due before the date of the winding up order. In such cases it is obvious that the landlord could have proved for the rent in the winding up, but was nevertheless allowed to proceed with the distress. One of the features that was of importance was whether the distress had been levied before the onset of insolvency. If it had, then the landlord was prima facie entitled to continue to enforce his rights at common law, and the question then became whether there was some equitable principle upon which he should be stopped. The exercise of the court's discretion in that kind of case was not, therefore, dependent on the date at which the rent had accrued, but when the landlord put in train the enforcement of his rights. This point emerges most clearly from Venner's Electrical Cooking and Heating Appliances Ltd v Thorpe  2 Ch 404. That was a case of rent payable annually in advance on 25 March. The rent due on 25 March 1915 was not paid. On 2 July 1915 the landlord levied a distress, and on 5 July the tenant company went into liquidation. The landlord had impounded the goods but had not yet sold them; and the question was whether the sale could proceed. Because the landlord had impounded the goods, the distress was complete. This court held that since the rent was payable in advance it was not apportionable. Thus at common law the landlord was entitled to the whole of the rent that became due before the commencement of the winding up; and he had already distrained for it. The argument was that it was not equitable for the landlord to sweep up the company's assets to the prejudice of its other creditors. The court went on to hold that the landlord was entitled to enforce his common law rights. Lord Cozens-Hardy MR said:
"…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."
- Since the whole of the rent had accrued due before the commencement of the winding up, the salvage principle was not in play; and the facts of the case do not reveal whether the property had been retained for the benefit of the winding up. This case simply deals with the question of restraining the consequences of a remedy that had already been put into force. It certainly does not support the proposition that a landlord who is owed rent payable in advance that accrued due before the date of the winding up is restricted to a right to prove in the liquidation.
- In Re Lundy Granite Co the company had agreed to take an assignment of a lease of Lundy Island and took possession, although the assignment had not been completed. So the original tenant was still the lessee. A winding up order was made on 19 November 1868. The liquidator continued to pay the rent up to 24 June 1869 but apparently on behalf of the original tenant. The landlord had not recognised the company as his tenant. The landlord then distrained on goods of the company for the rent due on 25 December 1870. Although the company was not the tenant the Court of Appeal in Chancery began by considering what the position would have been if the company had been the tenant. It was in that context that James LJ formulated the principle approved in Toshoku (see  above). Mellish LJ agreed. The only novel point was whether the same principle applied in a case where the landlord was not the company's creditor; and the court held that it did.
- Re Traders' North Staffordshire Carrying Company (1874) LR 19 Eq 60 concerned distress for arrears of toll payable by a canal company to a railway company. The nature of a toll suggests that it was payable in respect of past rather than future services. The distress took place three days after the passing of a resolution to wind up the canal company. Three weeks later a winding up order was made, but the goods had not yet been sold. Sir George Jessel MR, who tried the case, was clearly unhappy at the reasoning both in Re Exhall Coal Mining Co Ltd and in Lundy Granite, and "explained" them on the narrow basis that they were only concerned with cases in which the landlord sought to distrain against the goods of a person who was not his tenant (and therefore not his debtor) and against whom he had no right to prove. Since, in the case before him, the railway company had a right to prove in the liquidation of the canal company the distress was void. As far as Re Exhall Coal Mining Co Ltd is concerned I cannot see that Sir George's "explanation" formed any part of the court's reasoning. Moreover, I do not consider that this explanation of the cases can stand in the light of Toshoku. In that case having referred to the origins of the principle in Re Exhall Coal Mining Co Ltd Lord Hoffmann said at :
"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."
- It is quite plain from this explanation that as far as Lord Hoffmann was concerned the landlord was a creditor of the company, otherwise he would not have been able to prove in the liquidation. In Re Lundy Granite, as we have seen, the court began by considering what the position would have been if the company had been the tenant; and only then went on to consider whether the same principle applied where it was not. Equally, in discussing Lundy Granite itself although Lord Hoffmann acknowledged that one reason for allowing the distress to proceed was that the company was not the landlord's tenant, he regarded the second reason (quoted at  above) as the more important one, thus disagreeing with Sir George Jessel's explanation of the principle.
- Re Coal Consumers Association (1876) 4 Ch D 625 concerned the lease of a colliery part of which was a dead rent (i.e. a rent payable whether the colliery was worked or not) and part of which was a surface rent. The dead rent had accrued to 30 June 1876, but a winding up order had been made on 11 February 1876, so the amount claimed by the landlord was made up of rent accrued partly before and partly after the winding up. Malins V-C said:
"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."
- Again it is not possible to tell from the report whether the rent was payable in advance or in arrear. But the last sentence of the quoted extract makes better sense if the rent was payable in arrear. However, the simple distinction that Malins V-C drew between provable debts and non-provable debts does not appear to me to have been justifiable. As we have seen, in Exhall Coal Mining Co Ltd the rent had already accrued due before the winding up order and must have been a provable debt. The principle stated by Lord Romilly MR also makes it clear that distress was allowed in relation to rent that had already accrued due before the date of the winding up. What was important in both cases was not the date at which the rent accrued due, but the date at which the distress was levied. Moreover, rent that fell due after the date of the winding up would also have been provable as and when each instalment of rent fell due.
- Re North Yorkshire Iron Company (1878) 7 Ch D 661 was another case in which rent had accrued partly before and partly after the winding up. Again one cannot tell from the report whether the rent was payable in advance or in arrear. Nor can one tell from the report the days on which rent was payable. Hall V-C said that leave to distrain would not be given for rent that had accrued due before the winding up; and that the creditor must prove for that rent in the winding up. Since that point had been expressly conceded on the authority of Traders' North Staffordshire Carrying Company and Coal Consumers Association, that statement is unsurprising. But he found on the facts that the property had been retained by the liquidator for the convenience of the winding up and allowed the landlord to distrain for rent that had accrued due since the date of the winding up. What he in fact did was to order an inquiry to ascertain the amount due for rent at the commencement of the winding up and the amount that had since accrued due. If all that was needed was to count the rent days that had occurred since the date of the winding up that would appear to have been a relatively simple exercise. But if some form of fact finding exercise was needed then the order for an inquiry is more understandable.
- In Thomas v Patent Lionite Co (1881) 17 Ch D 250 a landlord distrained for rent due from a company before it went into liquidation. The report does not say that the rent was payable in advance. However, the distress was not begun until after the passing of the resolution for winding up. Sir George Jessel MR, reversing Malins V-C, said that the court "has a judicial discretion to allow a landlord to distrain, and ought to do so where the landlord is not a creditor of the company and cannot prove for his rent. But, as a general rule, if he can prove the Court will not allow him to distrain". Brett LJ agreed. We have already seen that Sir George Jessel MR took a very narrow view of the decision in Exhall Coal Mining Co Ltd and Lundy Granite (which he repeated in argument in Thomas v Patent Lionite Co). Moreover, since he framed his decision as a "general rule" he must have allowed for the possibility of exceptions. Cotton LJ seems to have based his judgment on the fact that the landlord had not yet sold the goods before the winding up intervened, although it appears on the facts that the landlord had already impounded them.
- In Re South Kensington Co-Operative Stores (1881) 17 Ch D 161 the company held a lease under which rent appears to have been due on the usual quarter days. The report does not reveal whether it was payable in advance or in arrear, although the order that Fry J made shows that it was in fact payable in arrear. The rent was paid up to 24 June 1880, but nothing was paid thereafter. A winding up petition was presented on 27 November 1880. The liquidator was appointed on 10 December. The company had continued in occupation of the property. The landlord accepted that he should prove in the liquidation for the rent due on 29 September; and the issue was how the rent falling due on 25 December should be treated. One point that was argued by both sides was whether the Apportionment Act 1870 applied. The grounds on which it was argued that it should not apply do not appear from the report of counsel's argument, but there was no argument based on an allegation that the rent was payable in advance. Fry J picked up the fact that in Re North Yorkshire Iron Company Hall V-C had ordered an inquiry into what rent had accrued due since the winding up. He said:
"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."
- The fact that Fry J directed that the rent payable on 25 December should be apportioned as at 27 November is a clear indication that the rent was payable in arrear. Had it been payable in advance it would have covered the period from 25 December 1880 to 25 March 1881. It is, I think, clear that Fry J did apportion the rent because of the Apportionment Act, and not in reliance on any other principle. However it is by no means clear why Fry J thought that the rent that he ordered to be paid in full was not a provable debt.
- Fry J returned to the question of distress in insolvency in Re Brown Bayley & Dixon (1881) 18 Ch D 649. That case concerned distress for interest due under a mortgage, which necessarily must have been payable in arrear because of the nature of interest; and which, even at common law, accrues from day to day. He identified two principles that pointed in different directions. The first was that as far as possible the independent rights of independent persons ought to be respected. The second was that the creditors of a company ought to be treated equally and that, so far as possible, the court should not give any preference or priority between the various creditors. He held that the proper reconciliation of these principles was that the line was to be drawn at the date of the commencement of the winding up. All claims of creditors before that date should be dealt with on the principle of equality; but with regard to rights after that the company should be in no better position because it had become insolvent. He added:
"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."
- The reasoning does not engage with the salvage principle; but is in my judgment a general proposition about equality as between creditors. As such I cannot disagree.
- Re Oak Pits Colliery Co (1882) 21 Ch D 322 is perhaps the most influential of the cases that have considered the salvage principle. In that case the company took a 25 year lease in 1858. In 1879 the landlord and the company agreed a surrender of that lease and the grant of a new lease. The company then brought plant and machinery onto the land. In January 1880 a petition was presented to wind up the company, and an order was made and a liquidator was appointed in the usual way. The liquidator did not take possession of the land but took no steps to surrender. The plant and machinery remained on the land for about a year and a half until it was sold. Negotiations for the sale of the plant and machinery had taken place in May 1880, but they came to nothing. In May 1881 the company's mortgagee tried to sell the plant and machinery, but again without success. In that same month the liquidator advertised the plant and machinery for sale. On 30 May the landlord took out a summons for leave to distrain on the plant and machinery or to have the proceeds of sale paid to him. On the 3 June, 1881, the sale took place, and the plant and fixtures in question were sold for £179. Kay J held that the landlord was entitled to the full rent due since the winding up, but the Court of Appeal overruled him. Lindley LJ gave the judgment of the court. He held that Kay J had, quite simply, been wrong on the facts and that the liquidator had never taken possession of the land in question. It might be said that that was the ratio decidendi of the case, and that the rest was obiter. But Lindley LJ went on to discuss the law. He encapsulated his view of the then state of the law which I must set out in full.
"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 cases to which Lindley LJ referred in dealing with the case of rent that had accrued due before the date of the winding up did not, as far as I can tell, include any case in which the rent in question was payable in advance so as to cover occupation for a period that post-dated the date of the winding-up. This first group of cases was not, therefore, dealing with a payment that straddled the onset of insolvency. In those cases the supply covered by the rent payment had already taken place and the insolvent tenant was receiving no further benefit from that payment of rent. The first of the cited cases in this group (Traders North Staffordshire Carrying Company) is, I think, of doubtful authority in formulating the principle. The second (Coal Consumers Association) also failed to appreciate the true effect of the decision in Exhall Coal Mining Co Ltd. The third (Thomas v Patent Lionite Company) is at best only authority for a general rule, to which there may be exceptions. In dealing with the cases that concerned rent falling due after the date of the winding up, Lindley LJ expressly approved both North Yorkshire Iron Company and South Kensington Co-operative Stores in both of which, as we have seen, the rent was apportioned. It seems very unlikely, therefore, that Lindley LJ intended to differentiate rigidly between rent that accrued due before the date of the winding up and rent that accrued afterwards merely by reference to the rent days themselves. It seems equally unlikely that he intended that if a rent day happened to fall within the period during which the property was retained for the benefit of the winding up the whole of that rent should be payable in full, irrespective of when the property ceased to be so retained. Moreover, as I have said, when he came to rationalise the principle he said that the rent should be payable in full "for the whole period" of beneficial retention. Since he also expressly approved Lundy Granite it is also unlikely that he intended to lay down any different principle to that formulated by James LJ.
- In Shackell & Co v Chorlton & Sons  1 Ch 378 the company occupied a leasehold shop under a lease at a rent payable on the usual quarter days "two quarters' rent to be always due and payable in advance if required." The rent was paid up to 29 September 1894. The winding up commenced on 20 December 1894. The rent due on 25 December was not paid, and on 28 December the landlords demanded payment both of the rent due on 25 December (which was payable in arrear) and also two quarters' rent in advance up to 24 June 1895. On 1 January 1895 the company sought an injunction restraining a distress. The liquidator was retaining possession of the premises for the benefit of the winding up. Kekwich J held that the rent due on 25 December should be apportioned, so that the landlord had to prove for the rent due up to 20 December, but was entitled to be paid in full for the period between 20 December and 25 December. So far as the rent payable in advance was concerned he said:
"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."
- Thus Kekewich J in effect adopted a "wait and see" approach. He did not hold that the whole of the rent that accrued due during a period when the liquidator retained possession had to be paid in full. How much would be payable in full would depend on the length of the period of beneficial occupation. It is also notable that there was no discussion of apportionment or of the Apportionment Act 1870. There is no reason to suppose that Kekewich J misunderstood the scope of the Apportionment Act. The decision did not, in my judgment, depend on apportionment at all. It depended on the judge's application of the principle that he formulated at the beginning of the quoted extract.
- This, then, was the state of the law as at the end of the nineteenth century. The salvage principle was applied both to rent payable in arrear and to rent payable in advance. We have seen from the modern cases to which Lord Hoffmann referred in Toshoku that the law continued to be applied in this way for the next century.
- The interplay between the salvage principle and apportionment arose in Re Atlantic Computer Systems plc (No 2)  BCC 454. The company's business was leasing computers. It went into administration and the administrators proposed to continue to collect rents due to the company. The question was how the company's liabilities to head lessors and hirers should be dealt with. Some of the relevant payments were payable in advance and some in arrear. The administrators argued that all payments should be apportioned, relying on Shackell & Co v Chorlton & Sons, Re ABC Coupler & Engineering Co Ltd (No. 3) and Re H H Realisations Ltd. The head lessors argued that payments in advance were not apportionable, by reference to Ellis v Rowbotham. Ferris J held that the payments should be apportioned. He said:
"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
- Mr McGhee placed some reliance on rating cases to which I should refer. Re National Arms and Ammunition Co (1885) 28 Ch D 474 was a case about rates. The company was wound up on 20 December 1882. It had almost ceased to carry on business before that date, but continued to complete several pending supply contracts and kept some finished articles on the premises with a view to sale. The rate was made in March 1883, for the calendar year 1883. This court held that the liquidator was bound to pay the rates, but the reasoning is not uniform. Baggallay LJ based his judgment on the application of the salvage principle, applying both Lundy Granite and Re Oak Pits Colliery. Bowen LJ based his judgment on the simple proposition that since the company was in rateable occupation it was liable to pay the rates, and that the liability for rates was incurred after the date of the winding up. Fry LJ based his judgment on the proposition that liability for rates was a liability incurred after the date of the winding up. It is now tolerably clear that the reasoning of Bowen LJ is the correct analysis: Toshoku at  and Nortel at .
- In Re Blazer Fire Lighter Ltd  1 Ch 402 the court was again concerned with liability for rates. The local vestry had made rates for the half year ending on 29 September 1894, payable in two instalments on 2 April and 2 July 1894. Plainly these were instalments payable in advance. The company had gone into liquidation on 2 March 1894. A caretaker was installed in the property which was ultimately sold on 6 September 1894. The vestry had been restrained from distraining for rates made subsequent to that date and the question was whether the injunction should be discharged. Vaughan Williams J held that the order should be discharged and that the vestry was entitled to be paid the rates in full. The argument was about whether the company was in rateable occupation. It was not argued that the rates should be apportioned so as to relieve the company from liability to pay in full after 6 September. The judge said:
"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."
- Thus he applied the reasoning of Bowen LJ, which had turned out to be the correct explanation for liability for rates. In my judgment, therefore, the rating cases do not bear on the problem in our case. As Lord Neuberger also pointed out in Nortel at  this is consistent with the fact that, at least in the modern law, liability for rates arises from day to day (although the position was different in the nineteenth century).
- Mr McGhee also showed us the decision of HH Judge Weekes QC in Re Nolton Business Centres Ltd  BCC 500. However, I found it very hard to see what exactly that case decided and why. Since it is at best no more than an analogy, I do not think it is necessary to discuss it further.
What is the salvage principle?
- In Toshoku Lord Hoffmann explained how the principle worked at :
"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."
- I accept that whether the salvage principle applies is not a matter of discretion. As Lord Hoffmann explained in Toshoku it is a principle that informs the interpretation of the rules which contain the complete list of what could rank as expenses of the relevant insolvency process: see  above. Thus in order to rank as an expense a liability must fall within the rules as interpreted in the light of the salvage principle. But it does not follow from that that the principle, once understood, is incapable of being applied to factual situations that did not confront our Victorian forebears. Although the salvage principle owes its origins to applications relating to distress for rent, it has long outgrown those origins. I agree with Mr Zacaroli that the rationale is a judge-made deeming provision under which the office holder is deemed to have incurred the liability in the course of the winding up or administration. The foundation of the principle is the application of equity. Lord Hoffmann makes this clear not only in the passage just cited ("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"), but in other passages as well. Thus at  he said:
"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)
- He contrasted this with liabilities incurred after the date of the winding up which need "no further equitable reason why they should be paid."
- Mr McGhee accepted that some form of deeming was necessary, but said that what was deemed to have happened was an assignment to the insolvent company (or possibly the office holder) at the beginning of the period of beneficial retention and a re-assignment back to the company at its termination. There is no trace of such a concept in any of the cases. It presupposes a highly artificial series of transactions (the notion of an assignment by a company to itself makes no real sense) to no purpose other than to bring by a side wind the technical common law rules about liability for rent. Even Lindley LJ, on whom Mr McGhee heavily relied, did not speak of an assignment but of a "debt contracted for the purposes of winding up the company".
- I do not see why the fact that rent payable in advance is not apportionable under the Apportionment Act 1870 leads inevitably to the conclusion that the salvage principle does not apply. As I have said a true apportionment either relieves the tenant from part of the liability for rent, or transfers liability from one tenant to another. But in cases to which the salvage principle applies, there has been no termination of the lease and no change of tenant. The whole of the instalment of rent that falls due is a provable debt, so the tenant remains liable to pay it. Whether that liability is satisfied by a dividend or by a payment in full is not a question of apportionment. The application of the salvage principle neither creates nor transfers any liability. What it does is to treat part of a single liability as an insolvency expense, by requiring that it be paid in full.
- Having posed the question in terms that encompassed debts whenever they accrued Lord Hoffmann continued by approving the rationalisation in Oak Pits Colliery, namely that the rationalisation was that the property was being retained for the benefit of the winding up. But he also approved the principle as formulated by James LJ in Lundy Granite that:
"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."
- In the first place this formulation of the principle has at least equal status with Lindley LJ's rationalisation of it. Second it is not expressed in terms of when rent falls due or when rent accrues. It is framed by reference to the period during which the company uses the landlord's property to its own advantage. It is in those circumstances that common sense and ordinary justice require the court to see that the landlord is paid. What he is to be paid is again not described by reference to the days on which rent falls due for payment. What he is to receive is the "full value" of the property. Where the property is held under the terms of a lease the full value will be taken to be the rate of rent reserved by the lease. I cannot see why common sense or ordinary justice should be defeated by the happenstance that a rent day occurs immediately before the date of entry into administration if the rent falling due on that day covers a period during which the administrator retains possession of the property or the benefit of the administration. As Ferris J said in Re Atlantic Computer Systems plc (No 2) all that is necessary is to treat the rent as accruing from day to day.
- It may not be a maxim of equity, but in simple terms: you can't have the penny and the bun. Equally, I cannot see that common sense or ordinary justice requires a landlord to be paid rent in full for a period after the office holder has vacated the premises, leaving the landlord free to re-let them.
The most recent cases
- The two most recent cases, and the trigger for this appeal are the decision of HH Judge Purle QC in Goldacre (Offices) Ltd v Nortel Networks UK Ltd and the decision of HH Judge Pelling QC in Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd.
- Goldacre was a case that was argued and decided in a single day. The company was the tenant of property held under a lease that had been made before its entry into administration. The detailed facts are not readily discernable from the report; but the following appear to be the most material. First the rent was payable in advance, probably on the usual quarter days. Second, following the company's entry into administration the administrators retained possession of part of the property for the benefit of the administration. Third, parts of the property were sub-let to others. The landlords had served notices under the Law of Distress (Amendment) Act 1908. That transferred to the landlord the company's right to receive rent from the sub-tenants. In effect, therefore, the landlord was recovering part of the rent in full. Fourth, the case concerned instalments of rent that fell due in the period during which the administrators retained possession for the benefit of the administration. The judge held that he had no discretion to exercise. Either the rent was payable as an expense of the administration or it was not. Neither side on this appeal suggests that this part of his judgment was wrong. He next held that in principle rent was an administration expense because of the salvage principle. Again, neither side disputes the correctness of that. The third question, which is of relevance to our appeal, concerns the extent to which rent is payable as a result of applying the salvage principle. The administrators argued that the payments "should be tailored to the use [of the premises] that they are making." The judge rejected that argument. He held that rent payable in advance was not apportionable under the Apportionment Act 1870:
"… 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."
- It followed from this conclusion that Shackell & Co v Chorlton & Sons was no longer good law; and ABC Coupler Engineering Co was of doubtful authority because the point had not been argued in that case. Thus the judge held that the whole of the rent that fell due on a rent day within the period of beneficial retention became payable as an expense of the administration.
- For the reasons I have given I do not consider that the fact that the rent was not apportionable under the Apportionment Act necessarily ousts the salvage principle. So I disagree with Judge Purle that the one follows from the other.
- The judge in part justified his conclusion by reference to the "adoption" of contracts as explained by the House of Lords in Powdrill v Watson  2 AC 394. However, that case concerned a very different point. In so far as the House of Lords considered the salvage principle it did so only by analogy (which it rejected). But what Lord Browne-Wilkinson said was that:
"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."
- That was the principle that Judge Purle applied in holding that the full quarter's rent was payable as an expense of the administration. However, the formulation of the principle in this way is inconsistent with the decision in Re HH Realisations. In that case the liquidators retained possession of the property for the purposes of the winding up. But Templeman J held that the rent was only payable in full until such time as the liquidators gave notice to the landlords of their intention to disclaim even though they retained possession for nearly two months longer. If the principle applied by Judge Purle was correct then the rent ought to have been payable in full for those additional two months. But it was not; and as we have seen, that decision was expressly approved in Toshoku at . It is also inconsistent with the cases in which rent was payable in arrear in which the landlord was allowed to recover only part of the rent that fell due on a rent day that fell within the period of beneficial occupation. Moreover, contrary to the way in which Lord Browne-Wilkinson expressed the principle, liability to pay rent under a lease is not a liability incurred after the onset of insolvency. It is, as we have seen from Toshoku at , a liability incurred when the lease was originally granted. In my judgment, therefore, the "adoption principle" (however it might apply in other factual situations) does not apply to periodical payments such as rent.
- Luminar was the corollary of the decision in Goldacre. In that case companies operating nightclubs held leases under which rent was payable quarterly in advance. Rent was due in June and September 2011; and in October 2011 the companies entered administration. The administrators intended to continue to trade until 1 January 2012 (i.e. until after the December quarter day). In fact they continued in possession until shortly after the March quarter day, and a few days later gave the landlords permission to forfeit the leases. They accepted that the rent due on the March quarter day was payable in full and presumably also accepted that the rent due on the December quarter day was also payable in full. The issue concerned the rent that fell due on the September quarter day. HH Judge Pelling QC summarised the respective arguments as follows at :
"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."
- It is plain, therefore, that the administrators (represented as it happens by Mr Zacaroli QC) did not argue for an apportionment of rent payable in advance where the rent day fell during a period of beneficial possession. Nor, it seems, did the landlords argue for apportionment of rent payable on a rent day that fell due before the date of entry into administration. The case was thus all or nothing on both sides.
- The judge considered the decision of the House of Lords in Toshoku and said at :
"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."
- Having considered a number of the authorities the judge concluded at :
"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."
- Judge Purle was not shown the decision of Ferris J in Re Atlantic Computer Systems plc (No 2). It was referred to in skeleton arguments before Judge Pelling, but not considered in his judgment.
Interplay between proof and salvage
- It seems to me that the nub of the judge's reasoning in Luminar is his decision that:
"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."
- Everything else flows from that. Was he right? I think not. First, it is plain from his explanation of Exhall Coal Mining Co that as far as Lord Hoffmann was concerned the right to prove for a pre-liquidation debt and the salvage principle were not mutually exclusive. I think that this is borne out by Lord Hoffmann's later discussion of the rationale for the salvage principle which he introduced at  as follows:
"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)
- This passage does not distinguish between debts accruing before liquidation and debts accruing afterwards. Both are capable of justifying the exercise of the discretion, if they fall within the salvage principle. Lord Hoffman reinforced this at  (referring to a "pre-liquidation creditor") and  (referring to "pre-liquidation debts"), in both cases as examples of the application of the salvage principle.
- I do not therefore agree with Judge Pelling's interpretation of Toshoku.
- In addition the stark division between rent that falls due before the date of entry into liquidation or administration and rent that falls due after that date does not correspond with the rule that the salvage principle does not take effect until the office holder actually retains beneficial possession of the property for the benefit of the insolvency. As ABC Coupler & Engineering Co demonstrates that period may not begin until some time after the date of entry into liquidation or administration. This aspect of that case was plainly approved in Toshoku at . And it may end before the date when the office holder actually gives up possession as in HH Realisations (also approved in Toshoku at ).
- The result of Goldacre and Luminar has left the law in a very unsatisfactory state. If rent is payable in arrear then the office holder must pay the rent as an expense of the liquidation or administration (as the case may be) for any period during which he retains possession of the property for the benefit of the insolvency process. If appropriate that liability will be apportioned so as to reflect, as precisely as possible, the true extent of the benefit. If, by contrast, the rent is payable in advance no such apportionment is possible. In some cases this will result in the office holder paying more than the true benefit (as in Goldacre). In other cases it will result in his paying less (as in Luminar).
- The true extent of the principle, in my judgment, is that the office holder must make payments at the rate of the rent for the duration of any period during which he retains possession of the demised property for the benefit of the winding up or administration (as the case may be). The rent will be treated as accruing from day to day. Those payments are payable as expenses of the winding up or administration. The duration of the period is a question of fact and is not determined merely by reference to which rent days occur before, during or after that period. This, in my judgment, is the way that James LJ formulated the underlying principle in Lundy Granite itself.
- In my judgment Judge Pelling lost sight of the fact that the salvage principle is founded in equity and not on the common law. How the common law would view an instalment of rent payable in advance is not determinative of how equity would treat it. In my judgment Shackell & Co v Chorlton & Sons and Re Atlantic Computer Systems plc (No 2) encapsulate the right approach. I would therefore overrule Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd and allow the appeal. As noted, in Shackell & Co v Chorlton & Sons Kekewich J adopted a "wait and see" approach to advance payments falling due during a period of beneficial retention. That, too, in my judgment, represents the correct application of the salvage principle. In my judgment Judge Purle was also wrong to apply the "adoption principle". I would therefore also overrule Goldacre (Offices) Ltd v Nortel Networks UK Ltd and allow the cross-appeal.
Lady Justice Sharp:
- I agree.
Lord Justice Patten:
- I also agree.
Copyright Policy |
Donate to BAILII