Summary

Where property leased by a company in administration was retained by the administrator for the benefit of the administration, under the salvage principle the administrator had to pay the rent during the period for which he retained the property. The rent was treated as accruing from day to day and was payable as an expense of the administration.

Facts

The appellant landlords (L) appealed against a decision ([2013] EWHC 2171 (Ch), [2013] B.C.C. 618) concerning the extent to which rent falling due both before and after the appointment of administrators was to be treated as an expense of the administration. The third respondent company in administration (G) cross-appealed.

G was a high street retailer and was the tenant of hundreds of retail properties. The rent for most of those properties was payable quarterly in advance. On March 25, 2012 rent of £10 million became due. G was unable to pay and went into administration the following day. At first instance the judge relied on Goldacre (Offices) Ltd v Nortel Networks UK Ltd (In Administration) [2009] EWHC 3389 (Ch), [2010] Ch. 455 and Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd (In Administration) [2012] EWHC 951 (Ch), [2013] 3 W.L.R. 1132. He concluded that quarterly rent falling due in a period when administrators were using the property for the purposes of the administration amounted to an administration expense, but rent falling due before administration was simply provable as a debt in the administration, despite the administrator having retained the property for the purposes of the administration.

L submitted that under the salvage principle it was entitled to full payment of rent as an expense in the administration.

Held

(1) Whether the salvage principle applied was not a matter of discretion. It was a principle that informed the interpretation of the Insolvency Rules 1986 which contained the complete list of what could rank as an expense of the relevant insolvency process. It was a judge-made deeming provision under which the office-holder was deemed to have incurred the liability in the course of winding up or administration. The foundation of the principle was the application of equity to expand the concept of an expense of the liquidation to include "liabilities incurred before the liquidation in respect of property afterwards retained by the liquidator for the benefit of the insolvent estate", Toshoku Finance UK Plc (In Liquidation), Re [2002] UKHL 6, [2002] 1 W.L.R. 671 followed. Further, the fact that rent payable in advance could not be apportioned under the Apportionment Act 1870 did not inevitably lead to the conclusion that the salvage principle did not apply, Goldacre overruled. A true apportionment either relieved the tenant from part of the liability for rent, or transferred liability from one tenant to another. But in cases to which the salvage principle applied, there had been no termination of the lease and no change of tenant. The whole of the instalment of rent that fell due was a provable debt, so the tenant remained liable to pay it. Whether that liability was satisfied by a dividend or by a payment in full was not a question of apportionment (see paras 77, 80, 87 of judgment). (2) The formulation of the salvage principle in Lundy Granite Co, Re (1870-71) L.R. 6 Ch. App. 462 and Oak Pits Colliery Co, Re (1882) 21 Ch. D. 322 was not expressed in terms of when rent fell due or when rent accrued. It was framed by reference to the period during which the company used the landlord's property to its own advantage. It was in those circumstances that common sense and ordinary justice required the court to see that the landlord was paid. What he was to receive was the "full value" of the property. The full value would be taken to be the rate of rent reserved by the lease. The court could not see why common sense or ordinary justice should be defeated by the happenstance that a rent day occurred immediately before the date of administration if the rent falling due on that day covered a period during which the administrator retained possession of the property for the benefit of the administration. All that was necessary was to treat the rent as accruing from day to day, Lundy and Oak Pits applied. Equally, common sense and ordinary justice did not require a landlord to be paid rent in full for a period after the office-holder had vacated the premises, leaving the landlord free to re-let (paras 82-83). (3) Therefore, the true extent of the principle was that the office-holder must make payments at the rate of the rent for the duration of any period during which he retained possession of the demised property for the benefit of the winding up or administration. The rent would be treated as accruing from day to day. Those payments were payable as expenses of the winding up or administration. The duration of the period was a question of fact and was not determined merely by reference to which rent days occurred before, during or after that period, Goldacre and Luminar overruled, Traders' North Staffordshire Carrying Co, Re (1874-75) L.R. 19 Eq. 60 doubted, Coal Consumers Association, Re (1876) 4 Ch. D. 625 disapproved, Shackell & Co v Chorlton & Sons [1895] 1 Ch. 378 and Atlantic Computer Systems Plc, Re [1990] B.C.C. 454 approved. In Shackell, the judge had adopted a "wait and see" approach to advance payments falling due during a period of beneficial retention. That also represented the correct application of the salvage principle (paras 100-102).

Appeal allowed, cross-appeal allowed