On 2 March 2007 the High Court handed down the first decision on whether non-domestic rates are payable by an administrator as an expense, and in priority to his remuneration, under Rule 2.67 Insolvency Rules 1986 ("IR"). The judge determined that rates in respect of occupied business premises are a "necessary disbursement" (Rule 2.67(f) IR) of an administration.
Although it was not argued, the judge also expressed the view that this liability to pay rates incurred during the period of the administration would be unaltered if the property were unoccupied during this time.
What is an administration expense?
One of the changes to the administration regime made by the Enterprise Act 2002 was the introduction of Rule 2.67 IR that provides for the payment of expenses incurred in the course of an administration and prescribes the priority in which those expenses are to be paid before the remuneration of the administrator. Rule 2.67 has some parallels with Rule 4.218 IR (priority of expenses in a liquidation), but is less detailed and only describes some of the expenses payable in general terms. A continuing problem for an administrator is the current uncertainty as to what creditor claims are expenses of the administration that have priority over the administrator’s remuneration. The courts are gradually providing the much-needed clarification. The latest creditors’ claim for payment as an expense of the administration under Rule 2.67 IR to be considered by the court is a local authority’s claim for non-domestic rates in respect of retail premises occupied by a business during the period the company was in administration.
Payment of rates by administrators
Under the pre-Enterprise Act administration regime the administrator had discretion to decide how and in what order he should discharge obligations arising in the course of his management of the company’s business. There was provision for payments under contracts entered into by the administrator but as rates are a statutory, not a contractual, obligation they would not automatically be included as a debt payable from the assets of the administration. Although the administrator had the power to pay rates, a rating authority had no right to require payments; they would remain at the discretion of the administrator or subject to an order of the court to pay on application by the local authority.
In exercising its discretion to require the administrator to pay rates a court would be guided by the case law concerning liquidation expenses, but would balance the question of whether the administrator had to pay for the use of property in the administration against the interests of the administration as a whole, which could be jeopardised by the payment.
Although not previously tested in the courts, it has been argued in academic discussion that rates incurred during a company's administration should be paid (as they are in the case of a company in liquidation) if the premises have been occupied or used for the benefit of the administration.
In the matter of Trident Fashions Plc: Exeter City Council v Bairstow
Exeter City Council (“Council”) has succeeded in obtaining a declaration against Trident Fashions Plc (“Trident”) and Trident’s administrators that arrears of non-domestic rates are payable as a necessary disbursement under Rule 2.67 IR in priority to an administrator's remuneration. The court held that non-domestic rates are chargeable in connection with Trident’s rateable occupation of certain premises for the purposes of continuing its trade as a “necessary disbursement by the administrator in the course of the administration” (Rule 2.67(1)(f) IR), rather than an "expense properly incurred by an administrator" (Rule 2.67(a) IR) as they are liabilities imposed on the company and not subject to the discretion of the administrator.
This decision provides that rates in administrations are treated in the same way as they are treated in liquidations, removing the possibility for an administrator not to pay rates on the basis that to do so would have an adverse impact on the ultimate outcome of the administration. The court's view in this case was that as Rule 2.67(f) IR has been drafted in substantially the same terms as Rule 4.218(m) IR (and with the benefit of the House of Lords' 2002 decision in In re Toshuku Finance UK plc which held that rates were a necessary expense of a liquidation under that rule) the two rules are intended to have the same meaning.
However there are some important distinctions between administrations and liquidations to note:
- There is no statutory exemption from liability for unoccupied rates for companies in administration as there is in liquidation;
- An administrator, unlike a liquidator, cannot disclaim a lease.
This decision is going to have a significant impact on the distribution of assets in administrations. It introduces a potentially significant sum into the calculation of expenses to be met before payment of an administrator’s remuneration with the further consequence of reducing distributions available for floating charge holders and unsecured creditors. Given that an administrator cannot disclaim a lease of premises for which he is now liable for non-domestic rates, and the lack of exemption from liability for unoccupied rates in administration, this confirmation of liability for non-domestic rates may become an influential factor for a distressed company considering its options of insolvency procedure. It was argued before the court that administrations may become a less popular procedure, undermining the modern rescue culture in insolvency and threatening many otherwise viable businesses and the employment opportunities they represent.
This case concerned occupied premises, but the judge did not see there was any reason to distinguish unoccupied premises. However, an option that may be available to an administrator is to vacate the premises on appointment. This will then trigger a 3 month rate free period before unoccupied rates become payable.
The final point to note is that the decision is a statement of the law with retrospective effect. It now remains to be seen whether rating authorities will look back at past administrations and seek payment of rates that were not discharged by the administrator. If the administration order has already been discharged and the administrator has had his release, then no claim should be able to be brought.
Where the administrator has not had his release, then any such claims may be answered by an application under Rule 2.67(3) IR for the court to alter the priority of expenses to preserve any administrator's remuneration that has already been paid.