Goldacre (Offices) Ltd v Nortel Networks UK Ltd

Factual and Procedural Background

The case concerns whether rent due and future rent for two long leases on property held by the Defendant company (now in administration) in The City is payable as an expense of the administration. The leases pre-date the administration. Since the administration began, the administrators have used part of the premises for the purpose of the administration and have paid rent, although some payments were late. The Applicant, the landlord, seeks clarity on whether future rent payments are administration expenses, as the administrators wish to understand their obligations to guide their conduct. The court proceeded to give a prompt decision at the parties' request.

Legal Issues Presented

1. Whether rent falling due and future rent payable under leases for property used by administrators constitutes an administration expense under the Insolvency Rules.
2. The proper interpretation and application of the Lundy Granite principle (also known as the salvage or liquidation expenses principle) in the context of administration.
3. The extent of the administrators' liability to pay rent when only part of the property is used and the effect of sub-tenancies and rent assignment notices.
4. Whether the rent falls within rule 2.67(1)(a) or (f) of the Insolvency Rules 1986 as amended, governing administration expenses and disbursements.
5. The relevance and applicability of precedent cases including In Re Salmet International Ltd, Exeter City Council v Bairstow, In Re Toshoku Finance UK Plc, and others regarding the priority and treatment of rent as an expense.

Arguments of the Parties

Applicant's Arguments

• The administrators, having decided to continue using any part of the properties for the administration’s benefit, must pay rent in full as an administration expense, based on established authority and the Insolvency Rules post-Enterprise Act 2000.
• The decision in In Re Salmet International Ltd should not be followed, and the more recent decision in Exeter City Council v Bairstow supports the mandatory nature of such payments.
• The Lundy Granite principle applies, meaning rent incurred while the administrators use or retain the property for the administration is to be treated as an expense with priority.
• Rent payable in advance for a quarter is payable in full and not subject to apportionment under the Apportionment Act 1870, as supported by Ellis v. Rowbotham and related authorities.
• Administrators cannot limit their rent payments proportionally by reference to the part of the premises they occupy; full rent is due if any part is used for administration benefit.

Defendant's Arguments

• Disbursements are only "necessary" if the administrators choose to make them or if the court orders it on a proper jurisdictional basis; no such basis exists here.
• There is a significant difference between rule 4.218 (liquidations) and rule 2.67(1) (administrations), especially due to the absence of the word "chargeable" in the latter, limiting rent as an administration expense.
• Payments should be tailored to the actual use of the premises by the administrators, implying a proportionate rent payment rather than full rent.
• No threat of forfeiture or distress has been made by the landlord, which the Defendant argues is relevant to the necessity of payment.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
In Re Salmet International Ltd [2001] BCC 796	Previous authority on rent as an administration expense.	Rejected for the present administration; the court preferred more recent authority.
Exeter City Council v Bairstow [2007] 4 All ER 437	Mandate that expenses regime applies to administrations; rent payable as an administration expense.	Followed as persuasive authority supporting mandatory payment of rent as an administration expense.
In Re Toshoku Finance UK Plc [2002] 1 WLR 671	House of Lords decision on liquidation expenses; corporation tax payable as liquidation expense.	Applied analogously to administration expenses and the Lundy Granite principle.
In Re Lundy Granite Co., ex p. Heavan (1871) 6 Ch App 462	Lundy Granite principle: rent payable as liquidation expense when liquidator uses property.	Principle applied to administration; rent treated as an administration expense if property used.
In re Oak Pitts Colliery Co. (1882) 21 Ch D 322	Support for the Lundy Granite principle regarding rent as an expense.	Approved and cited by the court as foundational authority.
Powdrill v. Watson [1995] 2 AC 394	Contracts adopted by administrators/liquidators give rise to liabilities entitled to priority.	Supports that liabilities incurred after adoption of contracts are expenses with priority.
Re S. Davis and & Co. Ltd. [1945] Ch 402; Re Levi & Co. Ltd. [1919] 1 Ch 416	Liquidator liable for dilapidations as liquidation expense.	Supports that retention/use of leasehold premises incurs full liability for rent and related obligations.
Ellis v. Rowbotham [1900] 1 QB 740	Apportionment Act 1870 and effect on rent payable in advance.	Quarterly rent payable in full in advance is not subject to apportionment on vacation.
Shackell v. Chorlton [1895] 1 Ch 378	Previous authority on rent apportionment.	Overruled by the court for the present context.
In re Linda Marie Ltd. [1988] 4 BCC 463	Rent accepted as a necessary disbursement of the liquidator.	Not decided on the point; court decides in favour of Applicant here.
Sunberry Properties Ltd v. Innovate Logistics Ltd. [2009] 1 BCLC 145	Discretionary approach to payments by administrators under occupational licences.	Distinguished; not binding on the court to adopt a proportionate payment approach here.
In re Atlantic Computers Systems Plc [1992] Ch 505; In re Kentish Homes Ltd. [1993] BCLC 1375	Discretionary treatment of post-liquidation liabilities.	Rejected by House of Lords and court as inconsistent with Toshoku and Lundy Granite principle.
Centre Reinsurance International Co v. Freakley and Others [2006] 1 WLR 2863	Interpretation of section 19(4) of Insolvency Act 1986 regarding liabilities incurred personally.	Distinguished from rule 2.67(1) in administration context; not determinative here.
Lehman Brothers International (Europe) [2009] EWHC 2545	Interpretation of "necessary" disbursements in administration.	Supports broad interpretation of necessity including fairness and justice in payment obligations.

Court's Reasoning and Analysis

The court examined whether rent payable under leases for property partially used by administrators qualifies as an administration expense under the Insolvency Rules 1986 as amended. The court accepted the Applicant's submission that the matter is governed exclusively by the rules and that if rent falls within these rules, payment is mandatory rather than discretionary.

The court relied heavily on the Lundy Granite principle, as expounded by Lord Hoffmann in the House of Lords decision in In Re Toshoku Finance UK Plc, which holds that where a liquidator (and by analogy an administrator) uses or retains leasehold premises for the benefit of the liquidation or administration, the rent is to be treated as an expense of the process with priority. The principle evolved from a discretionary remedy to a mandatory legal principle.

Applying this principle, the court found that rent falls within rule 2.67(1) of the Insolvency Rules, either under subparagraph (a) as an expense properly incurred by the administrator or alternatively under subparagraph (f) as a necessary disbursement. The court rejected the Defendant's argument that the absence of the word "chargeable" in rule 2.67(1)(a) distinguishes it from liquidation rules.

The court also considered the meaning of "necessary" disbursements, adopting a broad interpretation that includes payments made in fairness and justice, not limited to strict necessity or threats of forfeiture. The court noted that the administrators’ failure to recognize this obligation unfairly harms the landlord.

Regarding the amount payable, the court rejected the Defendant's argument for proportionate rent based on partial use, emphasizing that the rent is payable in full for the quarter in advance, consistent with the Apportionment Act 1870 and related case law. The court distinguished the Court of Appeal decision in Sunberry Properties Ltd v. Innovate Logistics Ltd, which involved different facts and was based on concessions.

The court further emphasized that the rescue culture underpinning the Insolvency Act does not exclude application of the Lundy Granite principle to administrations. It also highlighted that administrators often carry on business similarly to liquidators, making the principle applicable.

Finally, the court acknowledged that while there may be discretion over remedies such as forfeiture or distress, there is no discretion over whether rent is an administration expense when the property is used by administrators.

Holding and Implications

The court held that the rent due on the next quarter and future rent payable under the leases for property partially used by the administrators is payable as an administration expense under rule 2.67(1) of the Insolvency Rules 1986.

This ruling means the administrators must pay the full rent as it falls due, regardless of partial use, and cannot apportion rent according to the extent of occupation. The ruling confirms the application of the Lundy Granite principle to administrations, aligning administration expense treatment with liquidation principles.

The decision directly affects the parties by requiring the administrators to meet the landlord’s rent claims as administration expenses, providing certainty on the administrators’ obligations. No new legal precedent was created beyond clarifying the application of existing principles and rules to the facts of this administration.