Factual and Procedural Background
This opinion concerns an application for directions under paragraph 63 of Schedule B1 to the Insolvency Act 1986, made by the administrators of various companies within the Game Group of Companies, including Company A. The application addresses the treatment of rent, service charge, and insurance payments under five sample leases, all of which had Company A as the tenant. The quarterly rent payments for these leases fell due on 25th March 2012, the day before the appointment of the administrators on 26th March 2012.
The landlords under these leases, referred to collectively as the Landlords, instigated this application. Company B acquired the business of the Game Group from the administrators by a business sale agreement dated 1st April 2012 and was granted a licence to occupy many, but not all, of the properties subject to four of the leases (“the Four Leases”). The fifth lease, referred to as the Eldon Square Lease, concerned a property never occupied by Company B but only by the administrators for a short period to remove goods.
The central issue is whether any part of the rent, service charge, and insurance payments due under these leases should be treated as expenses of the administration (thus accorded priority) rather than as debts provable in the administration. The administrators were appointed the day after the quarterly rent fell due.
Legal Issues Presented
- Whether rent, service charge, and insurance payments due before the administrators’ appointment but relating to periods after appointment should be treated as expenses of the administration or merely as provable debts.
- Whether rent and related payments falling due during the administration are payable in full as administration expenses even if the administrators cease to use the premises before the end of the payment period.
- The correctness and applicability of the principles established in the cases of Goldacre (Offices) Limited v. Nortel Networks UK Limited and Leisure (Norwich) II Limited v. Luminar Lava Ignite Limited.
- Whether the landlords should be permitted to appeal the directions made concerning the treatment of these payments.
Arguments of the Parties
Landlords' Arguments
- They challenged the decisions in Goldacre and Luminar, arguing that the principle applied therein (the Lundy Granite principle) requires the landlord to receive full value for the use of the property during administration.
- The principle concerns the use of property for the benefit of the administration and is based on “common sense and ordinary justice.”
- They contended that rent payable in advance should not automatically be treated as an administration expense, especially where the liability was incurred before administration.
- The principle applied in Goldacre and Luminar is a fiction to accord priority to rent as an administration expense, which they dispute should apply in this context.
- They sought permission to appeal the directions relating to the treatment of rent and service charges falling due before the administrators’ appointment.
Company B's Arguments
- Company B supported the administrators’ position that rent and related payments falling due after the administrators’ appointment should be payable in full as administration expenses.
- They did not dispute that the proposed appeal by the Landlords had reasonable prospects of success.
- They sought permission to cross-appeal against the direction that payments falling due after appointment are payable as administration expenses.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Goldacre (Offices) Limited v. Nortel Networks UK Limited [2010] Ch 455 |
Established that rent payable in advance during administration is payable as an administration expense if the administrator retains the property for the benefit of the administration. |
The court accepted Goldacre as correctly decided and applied its principle to treat rent due after appointment as an administration expense. |
| Leisure (Norwich) II Limited v. Luminar Lava Ignite Limited [2012] BCC 497 |
Confirmed and elaborated on Goldacre, clarifying treatment of rent payable in advance falling due before and after administration commencement. |
The court followed Luminar's reasoning on apportionment and expense treatment of rent and service charges. |
| Re WW Realisation I Limited [2011] BCC 382 |
Referred to Goldacre without disapproval, supporting its authority. |
Supported the standing of Goldacre as precedent. |
| Re Nortel GmbH and Bloom v. Pensions Regulator [2012] 1 All ER 1455 |
Referred to Goldacre without disapproval. |
Reinforced Goldacre’s authority in the Court of Appeal. |
| Australian Securities and Investment Commission v. Letten (No. 13) [2011] FCA 1151 |
Referenced Goldacre without disapproval in Australian jurisdiction. |
Supported international recognition of Goldacre’s principle. |
| Powdrill v Watson [1995] 2 AC 39 |
Discussed administrator’s adoption of contracts; distinguished from Lundy Granite principle. |
The court noted this case did not involve the principle at issue but influenced reasoning in Goldacre. |
| Lornamead Acquisitions Limited v. Kaupthing Bank HF [2013] 1 BCLC 73 |
Applied principle of judicial comity regarding following decisions of coordinate jurisdiction. |
The court applied this principle in deciding to follow Goldacre and Luminar. |
| Re Toshoku Finance UK Plc [2002] 1 WLR 671 |
Referenced in relation to the Lundy Granite principle and use of property during administration. |
Used to explain the basis for the treatment of rent as an administration expense. |
Court's Reasoning and Analysis
The court began by adopting the statement of agreed facts and acknowledged that the administrators were appointed the day after the quarterly rent fell due. It accepted the established authority from Goldacre and Luminar that rent payable in advance which falls due before administration is a provable debt, not an administration expense, even if the administrator remains in occupation. Conversely, rent falling due during the administration period is payable as an administration expense if the administrators use the premises for the benefit of the administration, regardless of whether they later vacate the premises before the end of the payment period.
The court noted that the Landlords challenged these decisions but recognized the principle of judicial comity and the view that a first-instance judge should follow a prior decision of coordinate jurisdiction unless convinced it was wrong. The court found no reason to depart from Goldacre and Luminar, accepting their correctness and applying their principles to the facts before it.
Permission to appeal was granted because the issue is of general importance and the appeal had reasonable prospects of success. The court acknowledged the significant financial implications involved and the desirability of obtaining authoritative guidance from the Court of Appeal. However, the court declined to decide hypothetical issues relating to rent liability for the short occupation period under the Eldon Square Lease, considering it disproportionate to do so at this stage.
Holding and Implications
The court made the following directions:
- Rent and service charges falling due before the administrators’ appointment (25th March 2012) are not payable as administration expenses but remain provable debts.
- Rent, service charge, and insurance payments falling due after the administrators’ appointment and during the period of occupation for the benefit of the administration are payable in full as administration expenses.
The court granted permission for the Landlords to appeal the directions related to payments falling due before appointment and for Company B to cross-appeal the directions related to payments falling due after appointment.
The decision directly affects the parties by clarifying the treatment of rent and related payments in administration but does not establish new precedent beyond affirming existing authorities. The court emphasized the importance of resolving this issue at the appellate level due to its wider significance for landlords, administrators, and stakeholders in insolvency proceedings.