When taking an appointment, administrators are often required to make a number of quick decisions based on limited information. Should the business be traded? Are there any loss making sites? How many employees do I need to retain? Making the right (or wrong) call could have a significant impact on realisations. 

More recently and following the decisions in Goldacre and Luminar, key questions have been – does the business trade from/use leasehold premises? If so, how and when is rent payable?  These decisions have lead to the ‘post-quarter day insolvency’, as administrators want the benefit of a property for the longest possible period without having to pay rent as an expense of the administration.  Whether the ‘post-quarter day insolvency’ concept will survive the upcoming appeal in Game Station is doubtful.

Before these decisions, the standard practice in the industry was to ‘pay as you go’ and for rent to be apportioned based on the administrators’ actual occupation.

However, the cases of Goldacre and Luminar established that:

  • any rent which becomes payable during an administration must be paid in full, as an administration expense; and
  • any rent which became due before an administration is not payable as an administration expense, but is a provable (unsecured) claim

The effect of these decisions is that the whole of a quarter’s rent is payable as an administration expense even if the administrators of a company are in actual occupation of a property only for the date on which the quarter’s rent falls due.  On the other hand, if a company goes into administration after the September quarter day (say 1 October 2013) then the rent due on the September quarter day is an unsecured liability, and only the rent payable on the December quarter day is payable as an expense of the administration.

In reality this arbitrary approach is unsatisfactory to both landlords and administrators. There is more and more legal criticism of the Courts’ legal justification for the Goldacre and Luminar decisions.

Rent is a liability that arises from a company having entered into a lease with a landlord.  Unless an administrator occupies a company’s premises for the benefit of the company’s creditors, rent will always rank as an unsecured claim.  In Nortel, the Supreme Court was of the view that a ‘necessary disbursement’ expense (which is the category which rent could fall into) could only arise from either:

  • a statutory liability that is either expressly or impliedly made payable by the company notwithstanding its insolvency;
  • a liability arising out of something that the office holder has done during the insolvency.

The decision in Nortel suggests a less mechanical approach to expenses and a new emphasis on steps taken by the administrator as leading to a liability being incurred before it can be categorised as an expense.

Fortunately the Courts have an opportunity to address the issue of when rent is payable as an expense, when the Court of Appeal considers the appeal in the Game Station case.

If, as expected, the Court of Appeal in Game Station reverses the decisions in Goldacre and Luminar, this could present a problem for administrators who took a ‘post-quarter day insolvency’ relying on those decisions.  The effect of a reversal would be that the new decision represents the law as it always was – meaning out of pocket landlords could look to challenge how rent has been categorised by administrators and seek to claw back unpaid rent as an administration expense.

Administrators wishing to avoid this uncertainty, could try to enter legally binding agreements with landlords, with payments being made to a landlord based on the administrators’ use of premise and with the landlords giving up any right to make any other claim against the administrators or the insolvent estate.  However if a landlord is not co-operative the cautious approach would be to ensure there will be sufficient funds in the administration to pay for use of the leasehold properties both on a ‘pay as you go’ basis and on the Goldacre/Luminar basis.

For now, all we can do is wait and see whether the Court of Appeal decides to play with administration expenses once again…

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.