There is a prevailing view that landlords have not fared well in recent developments in insolvency law aimed at furthering a culture of corporate rescue. However, landlords should give a broad welcome to a recent case which sought to deal with the complicated question of what expenses should be considered as “expenses of an administration”.

Administrators to the rescue

The aim of the administration regime introduced by the Insolvency Act 1986 was to rescue, reorganise or realise the assets of a company and thereby obtain a better result than might otherwise be achieved through winding up. In order to assist an administrator in achieving these laudable aims, he was given the protection of a statutory moratorium.

During that moratorium, a landlord’s traditional rights to forfeit a lease or distrain for rent were curtailed, as was their ability to sue for arrears; opportunities for rent recovery during the moratorium were, by and large, restricted to seeking payment from potentially liable third parties (subtenants, guarantors or former tenants). If there were no such parties, the landlord simply had to sit on his hands whilst the administrator took stock, decided on his options and worked through them. For large and complicated administrations, this process often took many months.

Costs of the administration

Costs incurred by the administrator in carrying out his duties were classified as “expenses of the administration” and were given priority by the 1986 Act; some were to be paid even before the administrator took his own fee. The difficulty was that the 1986 Act provided no definition of what sort of costs came within this category and the courts did little to assist, refusing to define rigid categories. Instead, the administrator was to apply his discretion as to what expenses should be paid and any disgruntled parties were left to apply to court if they felt they had been unfairly treated.

The situation was different for liquidation, perhaps unsurprisingly, given that this was a regime dedicated not to company rescue, but rather to final distribution and extinction. Rule 4.218 of the Insolvency Rules expressly defined what could constitute expenses in a liquidation and the House of Lords subsequently confirmed that expenses listed in that rule could not be denied their priority status.

Enterprising changes

The Enterprise Act 2002 sought to provide something of a facelift for insolvency law and, as of 15 September 2003, changes were introduced to the rules governing administrations. These changes extended to the question of administrator’s expenses and Rule 2.67 was duly added to the Insolvency Rules.

It did not go unnoticed by those in the know that this new rule bore a striking resemblance to existing Liquidation Rule 4.218 and there followed some debate over whether this resemblance was deliberate or mistaken. How could the ambition of administration as a rescue regime really be furthered by removing the flexibility it had previously enjoyed on the question of expenses?

Driven by ratings

In Exeter City Council v Bairstow & Others (2007), the court was asked to confirm whether the administrators of Trident Fashions (previously Ciro Citterio Menswear) were liable to pay, as an expense of the administration, business rates which had accrued both on occupied and unoccupied properties during the course of the administration. Trident Fashions had nearly 100 outlets and unpaid rates across these properties ran to over £2.6 million. It was accepted that, had Trident Fashions been in liquidation, these rates would have been payable under Rule 4.218 as a “necessary disbursement”, ie, as an expense of the liquidation. Were the administrators now similarly liable under the new Rule 2.67?

Despite well-reasoned arguments to the contrary, arguments which drew the court’s attention to the fundamental difference in purpose between administration and liquidation, the court decided that the rule-making authorities must have intended the new Rule 2.67 (for administration expenses) to mean the same as the preexisting Rule 4.218 (for liquidation expenses). As such, both occupied and unoccupied business rates were necessary disbursements, falling to be classified as expenses of the administration and prioritised in accordance with the rules.

Good news for landlords

The impact of this decision on the question of business rates is self-evident. Rating authorities should now chase administrators rather than landlords for business rates on premises which are either being used by a tenant company in administration or which have been vacated without formal agreement.

In addition, however, and perhaps more importantly, this case also raises the real prospect that rents, service charges and other sums payable under a lease will similarly be reclassified as expenses of the administration. Acceptance of this principle would, in turn, mean payments to landlords, potentially rank in priority to other business creditors who are left to labour under the general moratorium, awaiting liquidation or other uncertain outcomes.

If nothing else this decision should, in practice, encourage administrators to progress their plans with greater transparency and speed or otherwise risk calls for expenses payments to be made from the assets of the failing company. From the landlord’s perspective, advice should be sought as soon as notification of a tenant’s administration is received. This will allow early confirmation to be sought from the administrator that both business rates and payments falling due under the lease are to be considered as expenses of the administration. The statutory moratorium, it seems, now provides slightly less luxurious protection.