Recent court decisions putting administrators and landlords both to losses in the case of insolvent companies

Sumo

Trade bodies for the insolvency and commercial property sectors, R3 and the British Property Federation (BPF) have called on the government to overturn the controversial court decision that prevents rent owed to a landlord before the appointment of administrators from being counted as expense of the administration.

They said that in April the decision, in the case of insolvent nightclub operator Luminar, companies were given an incentive to appoint administrators just after a ‘quarter day’, the traditional deadline for quarterly advance payment of commercial property rent. This allowed administrators to trade the business from the rented premises for the remainder of the quarter without having to pay rent, with landlords unlikely to recover payment from the insolvency process as unsecured creditors.

It was silly that the administrators for a business in trouble and their creditors have to go to the courts to argue the fine distinction of the law on this, said Ian Fletcher, director of policy at the BPF. The administrator was trying to save a company, and the landlord was facing a significant loss. Both were not looking for any favours but just fairness, the old system of pay-for-what-you-use worked perfectly well before the courts set other precedents.

In the case of sports retailer JJB the administration was placed in administration yesterday, just after September’s ‘quarter day’ just four days after rent fell due after the group filed a notice of intention to appoint before quarter day in March.

Research by R3 suggests that 18% of retailers can be classed as ‘zombie’ companies, meaning that they are struggling to pay their debts as they fall due.

The Luminar decision has followed the Goldacre case in 2009 in which the judge found that any rent falling due after administrators were appointed would automatically rank as an expense of the administration, meaning that the landlord would almost always be paid off in full before other debts were settled.

Before the Enterprise Act came into force in 2002, whether or not rent was payable as an expense of an administration was a matter for the Court’s discretion. A convention developed under which most administrators would pay landlords the rent for the period for which premises were used, calculated on a daily basis from the date of their appointment until the date on which the premises were no longer required. The Enterprise Act, however, introduced a list of categories of expenditure which qualified as administration expenses, meaning that there was no longer any scope for discretion.

A commercial property lawyer said that changing the law to give effect to the pre-2002 position was the “most logical way” to address the issue. However, Parliament would need to pass primary legislation or make changes to the Insolvency Rules in order to do so.

R3 president Lee Manning said that recent case law had created a “horribly inequitable position” for both landlords and administrators depending on the precise timing of the administration.