The past quarter has seen a spate of cases on range of administration issues. Here we take a canter through some of the more topical ones.
High Court allows appeal on rent as an expense of the administration
The case of Re Games Station Limited (01/07/2013) saw the appointment of administrators to a high street computer games chain after a rent quarter day had fallen due. The administrators applied for directions on whether rent under a number of sample leases - falling due both before and after their appointment - was to be treated as an expense of the administration. The High Court ruled that it was bound by Goldacre and Luminar Lava Ignite, i.e. that rent falling due before the appointment was not an admin expense, but that falling afterwards does. However, the landlords in the action wanted to challenge the proposition that rent falling due before the appointment fell to be treated wholly as outside admin expenses. The High Court has given permission to appeal its rulings, on the basis that the arguments would benefit from a ruling in the Court of Appeal to gain a more final resolution of the ideas here.
Practitioners should watch this space for the appeal.
Guidance given on legal fees in defending insolvency action and administration expenses
Following the theme of expenses, the High Court also gave directions in Neumans LLP v Andrew Andronikou & others (24/07/2013) as to whether pre-administration legal costs of a company in defending a winding up petition should be treated as an expense of the administration.
Ruling that the company’s legal costs should form an expense of the subsequent liquidation but not the administration, the court considered that such fees were not a category of disbursement falling under Insolvency Rule 2.67(1), but could fall within Rule 4.218(3)(h) (the equivalent provision for liquidations), to the extent that were assets left to meet the costs. In consequence, solicitors acting for companies facing insolvency proceedings should ensure that their fees are secured by other means, or face losing out.
The collection of rent under sale and leaseback contracts of properties by administrators.
Administrators could not end administration by pursuing a different, "better" purpose of administration which had not been approved by the creditors
The Scottish case of Nimmo & Another, Joint Administrators of Station Properties Limited (12/07/2013) saw the Outer House of the Court of Session rule on whether administration can be concluded via a purpose other than that sanction by creditors. In this case, the stated (and approved) purpose of the administration was the making of a distribution to one or more secured or preferential creditors (the third - and lowest - limb of the purpose of administration). The administrators managed to achieve a result which would rescue the company as a going concern (the first, highest purpose of administration) and applied to conclude the administration as the objective had been achieved.
However, the court refused to allow this objective to be used. It stated that the administrators need to approve the creditors’ approval to pursue a different purpose than that approved, even though the new objective ranked higher than the original one. Although this decision seems to fly in the face of common sense, practitioners need to be aware that they cannot simply assume the achievement of a higher purpose will allow them - without more - to bring an administration to an end.
Funds sitting in a trust account to which pension scheme trustees were entitled could not be used to reduced a proof of debt submitted in administration
The case of Bestrustees plc v Kaupthing Singer & Friedlander Ltd (331/07/2013) raised a point which is likely to become a more common issue where pension scheme trustees hold security in some form of another for pension scheme liabilities.
In this case, the pension scheme trustees submitted a proof of debt in the administration of the scheme’s sponsoring employer, KSF. Prior to the administration, but when KSF was facing difficulties in 2008, the FSA directed it to open a trust account and credited certain sums into it. Shortly after, the trustees deposited the sum of £2 million into the account. The administration triggered the statutory debt to the scheme under Section 75 of the Pensions Act 1995. The trustees duly submitted a proof of debt for the Section 75 liability, but no credited was attributed to the money sitting in the trust account.
The administrators reduced the claim in the proof by the amount of the funds sitting in the account, and the trustees appealed. The company contended that not reducing the claim offended the rule against "double dipping". The trustees challenged that determination however.
Agreeing with the trustees, the court ruled that the administrators faced two problems. First, they had not challenged the amount of the Section 75 debt, nor the nil value ascribed to the trust fund. That fund essentially had no value due to uncertainties surrounding recoverability. The valuation of the Section 75 debt required an assessment of both the liabilities and assets of the scheme. Just as subsequent movements in the value of the trust fund may increase, so too the buyout level of the scheme liabilities might increase, and an account should be taken of that also. The second issue was that the funds in the trust account had always belonged to the trustees under a bare trust arrangement. As a result, the relationship between KSF and the trustees in relation to the fund was not one of debtor and creditor, and accordingly the obligation of KSF to pay the money to the trustees was not one which could be offset against the Section 75 debt, and the rule on "double dipping" did not apply. Any claim for unjust enrichment also failed, given the manifest shortfall which the trustees were facing.
Collection of rental payments by administrators did not amount to adoption of sale and leaseback contracts which would render the obligation to make phased payments by the company expenses of the administration
Finally, the case of Re UK Housing Alliance (North West) Limited (15/08/2013) raised the issue of whether contracts of a company in administration could be said to have been "adopted" by the administrators, thus rendering payments due from the company expenses of the administration.
UK Housing Alliance (North West) Limited (UKHA) was a property company which entered into sale and leaseback arrangements with property owners, under which it acquired properties from the owners for circa 70% of the value up front, with the remaining 30% being paid in arrears after 10 years. In return, UKHA leased the properties back to the previous owners on 10 year assured shorthold tenancies. UKHA was financed by an Icelandic bank, and provided a first legal mortgage to the bank over each property it acquired.
UKHA faced difficulties when property prices fell and the number of its tenants dropped off. It fell into arrears with its bank and eventually the bank appointed administrators. UKHA’s administrators continued to collect rents under the ASTs. When its bank entered administration, and sought distributions under its security UKHA’s administrators sought directions as to whether they had "adopted" the sale and leaseback arrangements by continuing to collect rents under the ASTs, and therefore whether the final 30% payments under the sale and leaseback arrangements constituted expenses of the administration.
The court ruled that it would be unfair to promote tenants’ unsecured claims to the final 30% payments above the collection of rent. The sale and leaseback arrangements had long since been concluded and there was never any provision in the original agreement that rent should be applied towards the final 30% payment for the purchase price. Had that been the case, then there would have been a strong argument that the final payments were admin expenses. However, the contractual arrangements contained no such provision - rent was entirely separate from, and not linked to, the final 30% payments. Accordingly the final 30% payments were pre-administration debts and provable in the ordinary way. Simple collection of the rents did not amount to "adoption" of the sale and purchase arrangements by the liquidator.
Interestingly, the court also granted leave for the bank to enforce its security, on the basis that refusal would cause significant loss due to the inability to distribute substantial cash assets to its own creditors.
When considering sale and leaseback arrangements, practitioners would do well to bear in mind the principles set out in this case. As this is a first instance decision, however, it would benefit from approval from the Court of Appeal or Supreme Court.