Minding the Gap

JCAM Commercial Real Estate Property XV Limited -v- Davies Haulage Limited [2017] EWCA Civ 267

Summary

The Court of Appeal has closed an important loophole benefitting tenants that are considering options for insolvency.

Tenants filing a statutory notice of an intention to appoint an administrator benefit from an interim moratorium, where there is a holder of a qualifying floating charge over the tenant’s assets, which is frequently the case. However, following this judgment, it will no longer be possible for tenants to file these notices in circumstances where their “intention” merely amounts to a “conditional proposal”.

This will prevent tenants from using successive notices purely to obtain the benefit of a prolonged moratorium that would prevent the landlord from taking enforcement action such as forfeiture or debt recovery proceedings.

The facts

This case concerned action taken by Davies Haulage Limited (the “Tenant”) to avoid claims made by JCAM Commercial Real Estate Property XV Limited (the “Landlord”) for substantial arrears of rent and interest.

The Tenant occupied warehouse premises in Crewe. Originally he had agreed a repayment plan with the Landlord, but it then defaulted, owing over £261,000 plus interest. When the Tenant defaulted, the Landlord sent a letter dated 18 January 2016, stating that it would seek possession if payment was not made within 7 days. It duly issued possession proceedings on 28 January 2016.

However, unbeknown to the Landlord, the Tenant had already filed a statutory notice of its intention to appoint an administrator at the High Court on 22 January 2016. It therefore claimed the benefit of a moratorium, meaning that no action could be taken against it without the leave of the Court. As soon as the notice expired, the Tenant filed a further notice of intention to appoint an administrator, thereby extending the moratorium. In the end, a total of four successive notices were filed.

In the meantime, the Tenant’s insolvency advisors wrote to the Landlord to confirm that the notices had been filed to protect the Tenant from the Landlord’s proceedings and that the Tenant was working hard to find a buyer for its business. They stressed that the Tenant was not in administration and indeed no administrators were ever appointed.

Towards the expiry date for the fourth notice, terms for the Tenant to enter into a company voluntary arrangement (“CVA”) with its creditors were approved. However, the CVA ultimately failed and the Landlord took further action at Court, seeking an order that the fourth notice be vacated on the basis that the Tenant had no real intention to appoint an administrator, and that the notices it had filed amounted to an abuse of process.

The first decision

In his evidence given in the County Court, the sole director of the Tenant made it clear that he had not believed a CVA would be successful when the notices were filed. Instead, he felt that a sale of the business on a “pre-pack” basis would have resulted in the best outcome for all concerned. This was necessary to preserve the benefit of valuable haulage licences, on which administrators would be unable to rely if they had taken over the running of the business. Consequently, whilst there was evidence that the appointment of an administrator had been considered, it was clear that the Tenant had no settled intention to do so.

Nonetheless, the Judge at first instance found in favour of the Tenant on the basis that the wording of the statute rendered it sufficient for the Tenant to show that it merely “proposed” to appoint an administrator. The Judge said that this construction of the legislation was compatible with a director’s duty to act in the best interests of the company, while “he clings on to the hope that administration will not be necessary”.

The Landlord appealed.

The Court of Appeal decision

The Court of Appeal reversed the original decision and found in favour of the Landlord. On reviewing the original decision, the Judge noted that:

  1. In the context of the legislation, the words “proposes” and “intends” are synonyms. The effect is that a director who files a notice confirming the proposal to appoint an administrator must also intend to do so; and
  2. As a matter of ordinary language, there is no clear difference in the meaning of the two words, and neither word is more certain in its context than the other.

The Court also took other relevant factors into account as well as the linguistics of the statute. In particular, the Judge noted the following:

  1. The purpose of the notice procedure is to protect the right of a qualifying floating charge holder (“QFCH”) or other person entitled to appoint an administrative receiver, to make an appointment of their own. In this case, there was a QFCH, but if there had not been, there would have been no right for the Tenant to file a notice to obtain an interim moratorium. If there was no true intention to appoint an administrator, the process would have no discernible purpose.
  2. The notice process works where there is a true intention to appoint an administrator, as it is obligatory in these circumstances. If the intention is not genuine, use of the notice process would open the door to a QFCH appointing an administrator. This could frustrate a tenant’s true intention, for example to enter into a CVA.
  3. As a matter of public policy, existing legislation restricts the availability of a moratorium in aid of a CVA. However, by serving successive notices, a company could obtain a moratorium outside of the accepted insolvency processes.

While the Court stopped short of holding that the Tenant’s tactics had amounted to an abuse of process, on the basis that the director had honestly thought he was entitled to rely on the notices filed, the consequence was that the fourth notice was deemed to be of no effect.

Our comments

This decision is good news for landlords that are faced with the prospect of tenant insolvency, as it is now clear that a “conditional proposal” to appoint an administrator will not entitle a company to give notice of an intention to appoint an administrator. Tenants facing difficulties must therefore hold a true intention to appoint an administrator, if they wish to obtain the benefit of an interim moratorium. Given the potential consequences of a failure to satisfy this test, we anticipate that fewer tenants will be trying to use the loophole now that it has been tightened so effectively.