Good news

There is always a conflict between treating creditors of an insolvent company fairly and allowing insolvency practitioners sufficient leeway to facilitate a disposal of a business as a going concern.  The general view is that such a disposal will always produce a better result for the creditors than the simple asset sale approach of a liquidation.  Over recent years this conflict has given rise to increasing tension between joint administrators trying to package up the profitable elements of high street retail businesses and commercial landlords who want the rent to be paid if the tenant business continues to trade from the landlord’s premises under the protective bubble of an administration.

Two recent decisions* have swung the pendulum of convenience towards insolvency practitioners and away from commercial landlords.  Enshrined principles have allowed insolvency practitioners to duck and dive using old common law rules applied to the payment of an annual rent on a quarterly basis.

The basic principles supported by these cases are that the rent payable in respect of premises which are shut by the joint administrators is an unsecured creditors’ claim (and is unlikely to be paid in most administrations) whereas the rent due in respect of the premises that continue to trade under the auspices of the administration is an expense of the administration (and is to be paid ahead of the joint administrators’ fees) but only in so far as the administration is actually in place when the rent falls due for payment on the usual quarter days.

This has led to a spate of appointments where the administration does not start until the day after a quarter day and the business is sold prior to the next quarter day so that the joint administrators do not have to pay any rent as an expense of the administration notwithstanding that dozens of shops might have been trading quite profitably during the intervening period.

This inequitable situation was addressed by the Court of Appeal in a judgment delivered yesterday in a case arising out of the administration of Game Retail Limited.  The 20-page judgment is a cracking skip through the relevant case law and, with eminent good sense, concludes that the warped logic of the previous two cases needs to be undone and that joint administrators must pay the commercial rent due in respect of the commercial properties -from which they continue to trade in an administration. -The rent –must now be calculated on a daily basis for the number of days that the business actively trades from the premises concerned.  This is excellent news for commercial landlords.  Not such good news for insolvency practitioners and banks, particularly if this judgment is applied retrospectively.

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*Goldacre (Offices) Limited v Nortel Networks UK Limited 2009

Leisure (Norwich) II Limited v Luminar Lava Ignite Limited 2012

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.