Re Trident Fashions PLC: Exeter City Council v Bairstow  EWHC 400 (Ch)
In March 2007 the High Court ruled that that non-domestic rates are payable as an expense of the administration as a “necessary disbursement” under Rule 2.67(1)(f) Insolvency Rules 1986 (IR), in priority to payment of the administrator’s remuneration.
The changes to the administration regime made by the Enterprise Act 2002 saw the introduction of Rule 2.67 IR, which provides for the payment of expenses in the course of an administration and prescribes the priority of payment of those expenses ahead of the administrator’s remuneration. Although having many parallels with Rule 4.218 IR (which deals with the payment of expenses in liquidation) the administration expenses rule is less detailed. This has meant that since its introduction there have been several problems of interpretation and application for administrators when trying to determine whether a creditor’s claim constitutes an expense of the administration to which Rule 2.67 applies.
Re Trident Fashions PLC (Trident) is the most recent instance of the courts being asked to determine what constitutes an administration expense. The creditors in this case were a local authority seeking payment of non-domestic rates relating to retail premises occupied by the business whilst in administration. The court was asked to consider whether these rates were an “expense properly incurred by an administrator” (Rule 2.67(1)(a) IR) or a “necessary disbursement by the administrator in the course of the administration” (Rule 2.67(1)(f) IR).
Under the pre-Enterprise Act administration regime there was provision for the administrator to make payments in respect of contracts entered into by him in the course of the management of the company’s business. There was no provision for the payment of rates: the administrator had the power to make payment if he exercised his discretion to do so or if a court order for payment was made on the application of the local authority. In considering whether to make such an order the courts would take into account decisions relating to liquidation expenses but could also have regard to whether making the payment would jeopardise the interests of the administration as a whole.
In Trident the court determined that as Rule 2.67 IR was drafted in substantially the same terms as Rule 4.218 IR and after the House of Lords’ decision In re Toshuku Finance UK plc (2002) (where rates were held to be a necessary expense of a liquidation under Rule 4.218) it had been the intention when drafting Rule 2.67 that rates would also be an expense of an administration. As rates are a liability imposed on the company and not an obligation entered into by the administrator, the court held that rates were a “necessary disbursement” under Rule 2.67(1)(f) IR.
Applying the principles of payment of expenses in liquidation to rates incurred during an administration does, however, raise two problems: firstly there are statutory exemptions from liability to pay rates in respect of unoccupied premises available to liquidators that do not apply to administrators; secondly, unlike liquidators, an administrator cannot disclaim a lease and thereby terminate liability for rates. Further the judge did not consider that there would be any reason to distinguish between occupied or unoccupied premises when determining liability for rates.
The decision in Trident is going to have a significant impact on the distribution of administration assets to creditors whose debts do not fall within the classes of expenses. Unpaid rates can amount to substantial sums and, given the inability of administrators to take the same mitigating steps as a liquidator in respect of such debts, may make administrations less attractive to distressed companies occupying a number of premises. The decision also ends the possibility of administrators having the discretion not to pay rates where to do so would be contrary to the best interests of the administration and creditors as a whole. It was argued that this could also undermine the post Enterprise Act rescue culture