Landlords will welcome a recent Court of Appeal decision that means they can recover rent from an administrator of a limited company tenant in administration, whenever the administrator was appointed.
The objective of an administration is to try to rescue the company and prevent it going into liquidation so an administrator will usually try to ensure the company continues trading.
If the company leases premises and the rent payable is an expense of the administration, it will (almost always) be paid in full to the landlord before money is paid to other creditors of the company. The landlord has priority, including over the administrators’ own remuneration and expenses (although not over claims under a fixed charge). However, if rent payable is not treated as an expense of the administration, but merely as a provable debt, the landlord ranks as an unsecured creditor with no such priority and will often not receive any rent.
In an important case in 2012, the High Court said rent that had fallen due before an administrator was appointed – for example, quarterly rent payable the day before an administrator was appointed – was not an expense of the administration. Therefore, it did not have to be paid in priority over other creditors, even if the administrators went on to trade from the premises for all or part of the remainder of that quarter.
Following that decision, many administrators made sure they were appointed the day after the date when a quarterly rental payment fell due, so they did not have to treat the payment as an administration expense.
However, in a new case involving £3m of unpaid rent the Court of Appeal rejected the administrator’s argument that as he was appointed the day after the rents became due, they were not an administration expense. Reversing the previous High Court decision, it ruled that:
- administrators must pay rent in relation to any period for which they keep possession of premises for the benefit of the administration, irrespective of when they were appointed;
- such rent is an expense of the administration, so the landlord has priority;
- such rent is treated as accruing from day to day.
Administrators must therefore now make rental payments for as long as they keep possession of premises for the benefit of the administration – ie on a ‘pay as you go’ basis. The rent is treated as accruing from day to day and is payable as an administration expense.
This ruling will apply equally to liquidators in the winding up of a limited company.
- In the event that a tenant looks likely to go into administration, landlords should try to recover rent that has fallen due quickly.
- Landlords should approach new administrators as soon as possible, and find out whether the administrator intends to continue use of the premises and whether this is for the benefit of creditors.
Case refs: Goldacre (Offices) Ltd v Nortel Networks UK Ltd  EWHC 3389
Leisure Norwich (II) Ltd and others v Luminar Lava Ignite Ltd (in administration) and others  EWHC 951 (Ch)
Pillar Denton & Others v. Jervis & Others  EWCA Civ 180
The two most important times in a company’s life are generally at the very start and end of its existence. It is at these critical times that directors often require guidance and support from a range of advisers. Accountants, Business Recovery specialists, Tax Advisers and most importantly Solicitors are needed.
The correct company structure should be one of the first issues addressed with Solicitors and other advisers. It is essential that the company structure allows for the right amount of flexibility whilst providing sufficient protection for those forming the company. Tollers have advised numerous organisations on the correct company structure and are happy to work in conjunction with advisers to achieve this.
Once the company structure has been decided, it is key that the documentation formalising the structure of the company, such as a shareholder agreement, is clearly drafted to minimise the risk of disputes occurring at a later stage. Failure to have detailed documentation governing the company could present a serious risk to its success.
It is also vital at the start of a company’s life that a comprehensive set of terms and conditions are in place to govern the company’s relationship with its customers. Tollers have assisted a number of company’s in Milton Keynes with the drafting of clear and concise terms and conditions, always taking an active approach in ensuring the client’s business is fully protected.
The end of a company’s life may come about in a variety of ways. Many companies are acquired by other companies who wish to increase their market share or expand into new areas of business. Where companies have struggled financially, often due to a customer going out of business, there are options to sell parts of the company through an insolvency process, to restructure the company or negotiate preferable payment terms with creditors to enable the company to continue trading.
Alternatively, a company may be forced into a formal insolvency procedure as a result of a dispute. Failure to pay creditors is the most common cause, however director and shareholder disputes are becoming increasingly prevalent in these straightened times. An attempt to wind up the company can be the last resort by parties to a dispute. However early advice, support and intervention can result in a better outcome for the parties involved.
Tollers have recently settled two large shareholder disputes which would have resulted in the companies being placed into administration or compulsory liquidation if the dispute had not been resolved. In both cases a creative approach to settlement has resulted in the businesses being able to continue to trade.
A company’s life may not come to an end as a result of financial issues. It may be due to a director wishing to retire or the need to use tax efficient methods to extract company funds. Solvent liquidations are becoming more popular. Those wishing to close down a company and ensure that outstanding liabilities are dealt with often opt for a liquidation, either solvent or insolvent, which has the benefit of creating a clean break for directors and shareholders alike.