Factual and Procedural Background
This opinion concerns an application by Exeter City Council seeking a declaration that non-domestic rates on retail premises occupied by Company A during its administration are payable as expenses of that administration. Company A, which is now in liquidation, and its former administrators did not participate in the final hearing. The legal issue arises under the administration regime set out in schedule B1 to the Insolvency Act 1986, effective from 15 September 2003, and is of general importance to local authorities and companies in administration. The Attorney General appointed an Advocate to the Court to assist with submissions opposing the City Council's case.
Company A was incorporated in 2001, operated a retail business from multiple units including a property at [Number] Main Street, The City, and entered administration in September 2003 under the new administration regime. Two sets of administrators managed the administration until March 2005, when the administration ended and the company entered liquidation. Non-domestic business rates accrued during this period, with Exeter City Council claiming unpaid rates amounting to £45,074 for the period under the second administrators. The City Council sought declarations that these rates are expenses of the administration under rule 2.67 of the Insolvency Rules 1986 and paragraph 99 of schedule B1 to the Insolvency Act 1986.
Legal Issues Presented
- Whether non-domestic rates accruing on premises occupied by a company in administration under the new regime are payable as expenses of the administration under rule 2.67 of the Insolvency Rules 1986.
- Whether such rates fall within the categories of expenses "properly incurred by the administrator" under rule 2.67(1)(a) or as "necessary disbursements" under rule 2.67(1)(f).
- The implications of the administration regime's purpose, particularly the "rescue culture," on the classification and payment priority of business rates during administration.
- Whether the treatment of business rates as expenses in administration should follow the precedent established for liquidations under rule 4.218 of the Insolvency Rules 1986.
Arguments of the Parties
Appellant's Arguments (Exeter City Council)
- Business rates accruing during administration are expenses properly incurred by the administrators in performing their functions and thus fall within rule 2.67(1)(a).
- Alternatively, business rates are necessary disbursements in the course of administration under rule 2.67(1)(f), analogous to liquidations under rule 4.218(1)(m).
- The wording of rule 2.67 closely mirrors that of rule 4.218, and the House of Lords decision in In re Toshoku Finance UK plc supports the classification of such liabilities as expenses.
- Given the timing of the Insolvency Rules amendments, it is unlikely that the rule-makers intended a different meaning for administrations compared to liquidations.
Respondent's Arguments (Advocate to the Court)
- The interpretation of rule 2.67 must consider the distinct policy context of administrations, which prioritise company rescue over liquidation.
- Automatically treating business rates as expenses with priority would undermine the rescue culture by deterring administrators from continuing trading activities due to potentially large liabilities.
- The flexible approach from In re Atlantic Computer Systems plc should apply, allowing courts discretion to direct payment of such liabilities rather than automatic priority.
- Unlike liquidators, administrators cannot disclaim onerous property, and companies in administration are not exempt from unoccupied property rates, creating practical difficulties.
- Evidence from an insolvency practitioner highlights widespread concern that automatic priority for rates would negatively impact rescue efforts and funding.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| In re Toshoku Finance UK plc [2002] 1 WLR 671 |
Definition of expenses in liquidation under rule 4.218; business rates and corporation tax as necessary disbursements. |
Established that business rates accruing during liquidation are payable as expenses without requirement of benefit to estate; court extended this principle analogously to administration expenses under rule 2.67. |
| Centre Reinsurance International Co v Freakley [2006] 1 WLR 2863 |
Interpretation of section 19 of the Insolvency Act 1986 regarding administrator's personal liability for expenses. |
Confirmed that expenses must be properly incurred by the administrator personally to have priority; this construction influenced rejection of rule 2.67(1)(a) applying to rates. |
| In re Atlantic Computer Systems plc [1992] Ch 505 |
Flexible approach to payment of liabilities incurred during administration not automatically payable as expenses. |
Supported the view that courts have discretion to direct payment of liabilities, balancing interests without rigid priority rules. |
| Powdrill v Watson [1995] 2 AC 394 |
Recognition of the rescue culture underpinning administration regime. |
Used to emphasize policy considerations relevant to interpretation of administration expenses provisions. |
| In re Huddersfield Fine Worsteds Ltd [2005] 4 All ER 886 |
Application of rescue culture in new-style administrations; treatment of employment liabilities. |
Reinforced policy that administration provisions should promote rescue, influencing interpretation of expenses priority. |
| In re Allders Department Stores Ltd [2005] 2 All ER 122 |
Interpretation of statutory employment liabilities under rule 2.67(1)(f). |
Confirmed that certain statutory liabilities are not necessary disbursements, supporting a narrower interpretation of rule 2.67(1)(f). |
Court's Reasoning and Analysis
The court began by distinguishing the treatment of business rates in liquidations and old-style administrations, where established precedents clarify their status as expenses or not. The new administration regime introduced rule 2.67, closely paralleling rule 4.218 for liquidations, including categories of expenses such as necessary disbursements.
Applying the House of Lords' decision in In re Toshoku Finance UK plc, the court found that rates payable by a company in liquidation are necessary disbursements and thus expenses payable in priority. The court reasoned that the identical wording of rule 2.67(1)(f) to rule 4.218(1)(m) indicated an intention to apply the same meaning to administrations.
The court rejected the argument that business rates fall within rule 2.67(1)(a) as expenses "properly incurred by the administrator" because this would require personal liability by the administrator, which is not the case for rates simply accruing by occupation.
Regarding the policy concerns about the rescue culture, the court acknowledged the evidence that automatic priority for rates might deter administrators from continuing trading and impair rescue efforts. Nevertheless, the court held that the policy decision to classify rates as expenses with priority was made by the rule-making authorities through the adoption of rule 2.67, not by the courts.
The court noted the availability of the court's discretion under rule 2.67(2) and (3) to alter the order of priorities if assets are insufficient, providing some flexibility in practice.
Finally, the court extended its view to unoccupied property rates, concluding that no distinction exists between occupied and unoccupied property rates for the purpose of expenses under rule 2.67(1)(f).
Holding and Implications
The court declared that non-domestic business rates accruing during a company's administration under the new regime are payable as expenses of the administration under rule 2.67(1)(f) of the Insolvency Rules 1986 and paragraph 99 of schedule B1 to the Insolvency Act 1986.
This decision means that local authorities’ claims for business rates during administration rank as expenses with priority over floating charge holders and unsecured creditors. Although this may impose significant liabilities on companies in administration, potentially affecting rescue prospects, the court emphasized that this policy choice lies with the rule-making authorities, not the judiciary.
The court’s ruling provides clarity and consistency with the treatment of rates in liquidation, but it does not set a new precedent altering the court’s discretion to manage priorities in cases of insufficient assets. No broader implications beyond the direct effect on the parties were discussed.