Factual and Procedural Background
This case concerns an application by the joint administrators of Company A, London Bridge Entertainment Partners LLP ("the Company"), for directions under paragraph 63 of Schedule B1 to the Insolvency Act 1986. The central dispute relates to whether the Company's obligation to provide further security to the Landlord, London Trocadero (2015) LLP ("the Landlord"), under clause 5 of a rent deposit deed dated 2 November 2007 ("the Rent Deposit Deed") is a debt capable of being treated as an expense of the administration, or whether it is a contractual obligation enforceable outside the administration process.
The Landlord owns The London Pavillion, a prominent building in The City, and leased parts of the building to the Company under leases commencing in 2007. The Company used the premises as a museum. The Company entered administration on 29 September 2017, and the joint administrators were appointed. Rent due under the lease for the quarter commencing 1 October 2017 was unpaid, leading the Landlord to withdraw funds from the Rent Deposit to satisfy the unpaid rent. The Landlord then demanded the Company replenish the Rent Deposit pursuant to the Rent Deposit Deed, which the Company failed to do.
The Landlord applied for permission to forfeit the leases, which ultimately occurred on 22 December 2017 after the administrators consented. The Landlord also sought directions that the Company's obligation to top up the Rent Deposit be treated as an expense of the administration. The administrators opposed this and sought directions on whether they should decline to provide further security. The court was asked to determine the status of the top-up obligation and related procedural applications.
Legal Issues Presented
- Whether the Company’s obligation to provide further security under clause 5 of the Rent Deposit Deed is a debt owed to the Landlord capable of falling within the principle in Re Lundy Granite Co Ltd (1871) LR 6 Ch App 462 in the Company’s administration, rather than a contractual obligation enforceable outside administration.
- Whether providing further security under clause 5 would contravene the pari passu rule or the statutory scheme for administration under Schedule B1 of the Insolvency Act 1986.
- Whether, depending on the answers to the above, the Landlord’s applications should be struck out or dismissed.
- Issues relating to costs and any further relief the Court considers appropriate.
Arguments of the Parties
Administrators' Arguments
- The Lundy principle is limited to provable debts, and the top-up obligation under clause 5 is not a provable debt but an obligation to provide security for a debt.
- The Rent Deposit is held on trust by the Landlord, who only has a conditional right to withdraw sums from it under the Deed’s terms.
- The top-up obligation is not an absolute debt payable to the Landlord but an obligation to maintain security, and thus the Landlord is not a creditor in respect of that obligation.
- The top-up obligation offends the rule against double proof because the Landlord already has provable claims under the Lease for rent and dilapidations, and cannot claim twice for the same debt.
- The obligation to top up is not an administration expense and providing further security would contravene the pari passu rule and statutory insolvency scheme.
Landlord's Arguments
- The Lundy principle is a free-standing equitable principle not limited to provable debts and can elevate liabilities to administration expenses even if they are not provable debts.
- The obligation to top up the Rent Deposit is independent of the rent obligations under the Lease and thus does not offend the rule against double proof.
- The landlord is entitled to the full value of the property, which includes all obligations under the Lease and Rent Deposit Deed, not just rent.
- The Administrators’ failure to replenish the Rent Deposit breaches the Deed and justifies elevating the top-up obligation to an administration expense.
- The Landlord’s claims for losses consequent upon forfeiture, though not provable debts, are properly secured by the Rent Deposit and should be treated as expenses of the administration.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Re Lundy Granite Co Ltd (1871) LR 6 Ch App 462 |
Establishes the "Lundy principle" whereby a liquidator or administrator retaining leased premises for the benefit of the estate must pay rent as an expense of the insolvency, elevating certain pre-insolvency debts to expense status. |
The court considered whether the top-up obligation under the Rent Deposit Deed fell within this principle and concluded it did not. |
| Re Nortel GmbH (in administration) [2013] UKSC 5 |
Sets out the statutory priority waterfall for debts and expenses in administration and liquidation. |
The court applied the priority framework to determine that the top-up obligation would contravene the pari passu rule if treated as an administration expense. |
| In re Toshoku Finance UK plc [2002] UKHL 6 |
Explains the equitable basis and origins of the Lundy principle and its application to insolvency expenses. |
The court relied on this authority to analyse the nature of the liability and the scope of the Lundy principle. |
| Re Jervis and others v Pillar Denton Ltd [2014] EWCA Civ 180 |
Clarifies the treatment of rent payable in advance during administration and the application of the Lundy principle, overruling prior inconsistent authorities. |
The court adopted the reasoning in Jervis to reject the "adoption principle" and to emphasize the equitable foundation of the Lundy principle beyond rent or periodical payments. |
| Barclays Bank v TOSG Trust Fund Ltd [1984] AC 626 |
Sets out the rule against double proof, preventing creditors from claiming dividends twice on the same debt. |
The court applied this rule to determine that the top-up obligation would offend against double proof if allowed as a separate claim. |
| In re Kaupthing Singer & Friedlander Ltd (No 2) [2012] 1 AC 804 |
Discusses the rule against double proof and its rationale. |
The court endorsed this analysis in considering whether the top-up obligation could be separately proved. |
| Exeter City Council v Bairstow [2007] EWHC 400 (Ch) |
Addresses the nature of administration expenses and distinguishes them from provable debts. |
Used to support the distinction between pre-administration liabilities and expenses incurred during administration. |
| In re Silkstone and Dodworth Coal and Iron Co (1881) 17 Ch D 158 |
Discusses the principle that a liquidator retaining possession must pay the rent as an expense of the liquidation. |
The court found this authority did not support extending the principle to obligations other than rent. |
| In re Levi & Company Limited [1919] 1 Ch 416 |
Held that liquidators in possession must pay liabilities such as dilapidations in full as an expense of liquidation. |
The court rejected this authority as no longer good law, inconsistent with the equitable basis of the Lundy principle as explained in Jervis. |
| Powdrill v Watson [1995] 2 AC 394 |
Considers adoption of contracts by administrators and the application of the Lundy principle. |
The court viewed the comments on the Lundy principle as obiter and inconsistent with later authorities. |
| New Hampshire Insurance Company v Magellan Reinsurance Company [2009] UKPC 33 |
Discusses that an obligation to provide security for a debt is not itself a debt. |
The court found this authority of limited assistance due to differing jurisdictional context. |
Court's Reasoning and Analysis
The court began by examining the nature of the obligation under clause 5 of the Rent Deposit Deed, concluding that it is an obligation to provide security rather than an absolute debt payable to the Landlord. The Landlord's right to withdraw funds from the Rent Deposit is conditional and governed by the terms of the Deed, which creates a fixed charge over the deposit but leaves the Company with an equity of redemption.
The court rejected the submission that the Lundy principle is limited to provable debts, recognizing it as an equitable principle that can, in theory, elevate non-provable liabilities to expenses, though this is challenging to establish.
On the issue of whether the top-up obligation is provable, the court found it qualifies as a "liability to pay money or money's worth" under the Insolvency Rules but is conceptually distinct from a debt payable absolutely to the Landlord.
Regarding the rule against double proof, the court acknowledged its purpose to prevent double dividends on the same debt. Applying this, the court found the top-up obligation to be in substance reflective of the Landlord’s provable claims under the Lease and thus offending the rule against double proof.
The court then considered whether the top-up obligation should be treated as an administration expense under the Lundy principle or otherwise. It analyzed relevant authorities, including the distinction between rent and other liabilities, the "adoption principle," and the equitable foundations of the Lundy principle as clarified in Re Jervis.
The court rejected the "adoption principle" as inconsistent with modern authority, particularly Lewison LJ’s judgment in Jervis, which emphasized the equitable nature of the Lundy principle and rejected strict timing or adoption-based approaches.
The court found that the rent for the period of the administrators’ beneficial occupation, which had already been paid via the Rent Deposit withdrawal, qualified as an administration expense under the Lundy principle. However, the top-up obligation sought to secure other claims, such as dilapidations and losses consequent upon forfeiture, which were either provable claims or not provable at all, and not referable to the period of beneficial occupation.
The Landlord failed to demonstrate any equitable basis or justification for elevating the top-up obligation to expense status. The court emphasized that the statutory insolvency scheme and the pari passu rule prohibit re-ordering of liabilities simply on grounds of fairness. The Landlord’s decision to withdraw rent from the Rent Deposit was voluntary, and any remedy for alleged improper advice lies outside the insolvency process.
Accordingly, the court concluded that the obligation to provide further security under clause 5 does not fall within the Lundy principle, would contravene the pari passu rule if treated as an expense, and should not be enforced by the administrators.
Holding and Implications
DISPOSED OF
The court held that the Company's obligation to provide further security under clause 5 of the Rent Deposit Deed is not a debt capable of falling within the Lundy principle and should not be treated as an administration expense. Providing further security would contravene the pari passu rule and the statutory scheme for administration. Consequently, the joint administrators are entitled to decline to provide any further security to the Landlord.
The Landlord’s applications, including the Amended Application and the Unfair Harm Application, were dismissed. The direct effect is that the administrators are not required to top up the Rent Deposit. No new precedent was established beyond the application of existing insolvency principles to the specific contractual and factual context of this case.