England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION (COMPANIES COURT)
(MR. JUSTICE FERRIS)

		Royal Courts of Justice
		25th July 1990

LORD JUSTICE NICHOLLS:

1. This is the judgment of the court in a case which raises some important points concerning administrations under Part 2 of the Insolvency Act 1986. We shall need to add more detail at a later stage, but for the moment we can use a broad brush when setting out the essential facts. Atlantic Computer Systems plc, to which we shall refer as "the company", is the major operating company in the United Kingdom of a large and complex group of companies, the "Atlantic group", with interests in computer leasing. There are about 120 companies in the group, of which the majority are active trading companies. We were told that this group is, or was, the third largest leasing business in the world.
2. The ultimate parent of all these companies is British and Commonwealth Holdings plc. Earlier this year B & C stopped providing financial support for the Atlantic group. The company ceased to be able to pay its debts. On 18th April 1990 Mr. Justice Hoffmann made an administration order in respect of the company, specifying purpose (d) in section 8(3) of the Act as the purpose which making an administration order would be likely to achieve, viz., a more advantageous realisation of the company's assets than would be effected on a winding-up. Two partners in Price Waterhouse, Mr. J.F. Soden and Mr. R.C. Boys-Stones, were appointed joint administrators. The order was made on the application of Atlantic Computer Services Group plc, which is the company's immediate parent, and which is itself a substantial creditor of the company.
3. The 2,500 existing leases granted by the company in respect of computers fall into several different categories. For present purposes we need refer to only two categories. In both these categories the capital cost of acquiring the computers was provided by a bank or other financial institution ("the funder"). In the first category, which comprises some 632 cases on the administrators' calculations, the computer is owned by the funder and let to the company under a hire-purchase agreement. The company in turn, and as was intended by the funder, then let the computer to the "end user" under a further lease ("the sub-lease"). In the second category, which comprises some 76 cases, the procedure was similar save that the arrangement between the funder and the company was a lease (a "head lease") as distinct from a hire-purchase agreement. For present purposes nothing turns on the distinction between these two categories. The fundamental feature, common to both categories, is that the computers are the property of the funder. In many instances in the first category, the hire-purchase agreement provided for the company to assign to the funder the stream of income to which the company was entitled under the sub-lease. But here also, for the purpose of the initial questions which arise for decision, nothing turns on the presence or absence of this additional feature. Among the funders in one or both of these two categories of transactions are companies in the groups headed respectively by Norwich Union Life Insurance Society and Allied Irish Banks plc. We shall refer to the companies in these respective groups as "Norwich" and "AIB".
4. A few days after the administration order was made the administrators sent a circular to the end users notifying them of the administration order and telling them that payments due under the sub-leases should continue to be made to the company. Thereafter invoices were sent out periodically by the administrators. Substantial payments have been received by the administrators since 18th April. The money is set aside in designated bank accounts. Up to 8th June the administrators received from end users sums in excess of £1.7 million. Approximately £220,000 of this was in respect of sub-leases of computers owned by Norwich, and about £7,000 in respect of sub-leases of computers owned by AIB. The income stream from end users has now substantially dried up. Most end users have stopped paying. Some of them have said they will not pay until the company confirms that it will meet all its obligations under the sub-leases.
5. As to the head leases (in which expression we include hire-purchase agreements between funders and the company), substantial payments have fallen due, and are continuing to fall due, from the company to the funders, including Norwich and AIB. When the administration order was made the arrears owing to Norwich and AIB were about £976,000 and £Irll6,000 respectively. Over the 3-month period from 18th April to 18th July the indebtedness accruing due to Norwich and AIB respectively was about £1.1 million and £520,000. But since the date of the administration order no payments have been made by the administrators to Norwich or AIB, or to any other funders, in respect of head leases. And the administrators have declined to consent to Norwich and AIB exercising their rights to terminate the head leases.

The first question: administration expenses.

6. It is in these circumstances that the first question arises. The administrators have received and retained money payable under the sub-leases in respect of computer equipment which is the property of the funders. Are the administrators obliged, as Norwich and AIB contend, to pay as expenses of the administration all the sums falling due under the head leases? Mr. Justice Ferris upheld this contention: The core of his reasoning is to be found in the following passage in his judgment. Having considered certain authorities, he said:

"I think that the principle comes to this. If in the course of a corporate insolvency the liquidator or receiver uses or realises property belonging to a third party for the benefit of the corporation, then the proper price for that use or realisation, and also any liabilities such as rates or taxes which arise from such use or realisation, are to be treated as an expense of the winding up or receivership and paid accordingly. Where the use or realisation is based upon a contractual right, the proper price is that provided for by the contract. I think that this principle is based not upon any provision of the legislative regime governing the winding up or receivership but upon the fact that this is an ordinary consequence of the use of property belonging to another, and that the legislation does nothing to relegate the claim for payment on the part of the owner of that property to that of an unsecured creditor whose debt became due before the insolvency. If this is right, as I think it is, it would be strange if a similar principle did not apply to administrations under Part II of the 1986 Act."

7. The appeal came on speedily, before the formal order embodying the judge's decision had been drawn up. We were shown a draft order, agreed by the parties, which contains declarations to the effect that the rentals and supplemental rentals accruing due under the head leases from the date of the administration order were payable as an expense of the administration. Likewise with insurance payments, contractual interest and damages payable for breach of covenant to insure or maintain the equipment. The joint administrators have appealed against that decision.
8. The issue raised by this part of the appeal calls for a consideration of the relevant provisions of the 1986 Act. However, we must deal first with two preliminary matters which formed the basis of much of the argument presented to us on the proper interpretation of the Act.

The use of property by a liquidator: the "liquidation expenses" principle.

9. The first preliminary matter is to identify the principles to be distilled from the authorities relating to liquidation expenses on which the judge mainly relied. The relevant authorities go back over a hundred years to the Companies Act 1862. This Act established company law in a form which has continued unchanged in its essence up to the present. The cases in question arose out of the provision in that Act, section 87, which was the distant predecessor of section 130(2) of the 1986 Act. Section 130(2) provides that when a winding-up order has been made or a provisional liquidator appointed "no action or proceeding shall be proceeded with or commenced against the company or its property except by leave of the court and subject to such terms as the court may impose". Over the years the courts have been concerned to establish the principles on which the discretion to give or refuse leave under that provision should be exercised. In doing so they have been guided, as one would expect, by the purpose for which Parliament imposed the prohibition. For present purposes it is sufficient to note two classes of actions or proceedings for which leave is sought, viz., (1) where a person seeks leave in a liquidation to possess or repossess what in law is his own property and (2) where a person seeks leave in a liquidation to exercise a remedy over the company's property. An example of the first category is where a mortgagee seeks possession of property mortgaged to him. An example of the second category is where a rating authority seeks leave to distrain for unpaid rates. In the case of a lessor of land let to a company, the appropriate category depends on the remedy the lessor is seeking to exercise in respect of the arrears of rent owing to him. If he is seeking to exercise a right of re-entry, he falls into the first category. If he is seeking leave to distrain, he falls into the second category.
10. A judicial exposition of the purpose for which the prohibition on commencing or pursuing proceedings was imposed, and how this affects actions in the first category, can be found in the judgment of Lord Justice James in In re David Lloyd & Co. (1877) 6 ChD 339, 344:

"These sections in the Companies Act, and the corresponding legislation with regard to bankrupts, enabling the Court to interfere with actions, were intended, not for the purpose of harassing, or impeding, or injuring third persons, but for the purpose of preserving the limited assets of the company or bankrupt in the best way for distribution among all the persons who have claims upon them. There being only a small fund or a limited fund to be divided among a great number of persons, it would be monstrous that one or more of them should be harassing the company with actions and incurring costs which would increase the claims against the company and diminish the assets which ought to be divided among all the creditors. But that has really nothing to do with the case of a man who for the present purpose is to be considered as entirely outside the company, who is merely seeking to enforce a claim, not against the company, but to his own property. The position of a mortgagee under such circumstances is, to my mind, exactly similar to that of a man who said, 'You are in possession of my property by way of trespass, and I want to get it back again.' A landlord might say, 'You have property under lease from me; you have broken the covenants of the lease, and I have a right of re-entry in consequence of that breach.' The company ought not, because it has become insolvent or has been minded to wind up its affairs, to be placed in a better position than any other lessee with regard to his lessor. So with regard to a mortgagee. The mortgagee says, 'There is some property upon which I have a certain specific charge, and I want to realise that charge. I have nothing to do with the distribution of your property among your creditors, this is my property.' Why a mortgagee should be prevented from doing that I cannot understand. Power was given to the court to interefere with actions by restraining them or not allowing them to proceed, but this power was given because it was understood that the court would exercise it with a due regard to the rights of third persons, persons who were not members of the company, and who had not to come in and claim to share in the distribution of the company's assets among the creditors, and who were not therefore quasi parties to the winding-up proceedings. The court would have due regard to the rights of independent persons. A mortgagee is, to my mind, such an independent person ..."

11. Two points are to be noted regarding cases of this first type, which we can call "possession" cases: (1) in the absence of special circumstances, leave is given as of course, and (2) it is immaterial whether the arrears of rent under the lease, or the arrears of interest under the mortgage, accrued due before or after the commencement of the winding-up. In this type of case the claimant is not seeking an order for payment, or seeking to enforce an order for payment, although his claim for possession may well have the indirect effect of compelling the company to pay.
12. In contrast is the second type of case, where a person seeks leave to seize the company's property. There, prima facie, to grant leave would be inconsistent with the purpose for which Parliament imposed the prohibition on proceedings. This is so whether the claim, for example, in respect of arrears of rent, accrued pre-liquidation or post-liquidation. In In re Traders' North Staffordshire Carrying Co. (1874) L.R. 19 Eq. 60, Sir George Jessel M.R. refused to permit a canal company, having statutory powers of distraint for unpaid tolls, to distrain upon goods belonging to a company being wound up. He said (at page 63) :

"In substance it is getting payment by the creditor out of the goods of his debtor, and a preferential payment as between that creditor and the other creditors of the debtor, and, as I understand it, the very object and meaning of the Act of Parliament was to prevent any such preference being obtainable after the commencement of the winding-up."

13. However, the matter stands differently if the debt, in respect of which the creditor is seeking to exercise a remedy against the company's property, was a new debt incurred by the liquidator for the purposes of the liquidation. In such a case the grant of leave would not be inconsistent with the purpose of the legislation. In such a case it is just and equitable that the burden of the debt should be borne by those for whose benefit the insolvent estate is being administered. The court should exercise its discretion accordingly. The creditor should be at liberty to enforce his rights against the company's property if his debt is not paid in full. Further, and by way of corollary, since the debt was incurred for the purposes of the liquidation, it is properly to be regarded as an expense of the liquidation and it ought to be paid as such. The court will direct the liquidator accordingly.
14. This latter principle is not confined to new debts incurred by the liquidator. It applies also to continuing obligations under existing contracts such as leases which the liquidator chooses to continue for the benefit of the winding-up. Thus, the principle is applicable in respect of rent accruing due while a liquidator retains leasehold land for the purpose of the winding-up. The lessor should be paid in full, or be allowed to distrain. The principle is equally applicable in the case of other liabilities incurred in the course of winding-up; for example, where rates become due in respect of land occupied by a liquidator for the purpose of the winding-up: see In re International Marine Hydropathic Co. (1884) 28 Ch.D. 470. Indeed, the principle is of general application to the outgoings on property the possession of which is retained for the purpose of more advantageously winding-up the affairs of the company: see Lord Justice Baggallay in In re National Arms and Ammunition Co. (1885) 28 ChD 474, 478. In In re Lundy Granite Co. (1871) L.R. 6 Ch.App. 462, 466 Lord Justice James stated the underlying principle in a landlord-tenant context:

"But in some cases between the landlord and the company, if the company for its own purposes, and with a view to the realisation of the property to better advantage, remains in possession of the estate, which the lessor is therefore not able to obtain possession of, common sense and ordinary justice require the Court to see that the landlord receives the full value of the property. He must have the same rights as any other creditor, and if the company choose to keep the estates for their own purposes, they ought to pay the full value to the landlord, as they ought to pay any other person for anything else, and the Court ought to take care that he receives it."

15. Likewise Lord Justice Lindley in In re Oak Pits Colliery Company (1882) 21 Ch.D. 322 at 330:

"If the liquidator has retained possession for the purpose of the winding-up, or if he has used the property for carrying on the company's business, or has kept the property in order to sell it or to do the best he can with it the landlord will be allowed to distrain for rent which has become due since the winding-up

... When the liquidator retains the property for the purpose of advantageously disposing of it, or when he continues to use it, the rent of it ought to be regarded as a debt contracted for the purpose of winding-up the company, and ought to be paid in full like any other debt or expense properly incurred by the liquidator for the same purpose, and in such a case it appears to us that the rent for the whole period during which the property is so retained or used ought to be paid in full without reference to the amount which could be realised by a distress."

16. The same approach is applicable in respect of interest accruing due on a debt secured by a mortgage on property retained by a liquidator for the purposes of the winding-up: see In re Brown, Bayley & Dixon (1881) 17 Ch.D. 649, where a mortgagee had power to distrain in respect of unpaid interest. But in practice courts have been less ready to apply this principle in favour of mortgagees: see In re Lancashire Cotton Spinning Company (1887) 35 Ch.D. 656 and In re Hiqqinshaw Mills and Spinning Company [1896] 2 Ch 544.
17. It is important to keep in mind that this principle, relating to outgoings on property retained by a liquidator for the purposes of the winding-up, is no more than a principle applied by the court when exercising its discretion in a winding-up. The principle, which it will be convenient to call the "liquidation expenses" principle, is a statement of how, in general, the court will exercise its discretion in a common-form set of circumstances. The liquidator himself has power, in a suitable case, to pay the relevant outgoings. But the court retains an overriding discretion, to give leave under section 130(2) or to give directions to a liquidator that the relevant outgoings shall be paid by him as an expense of the liquidation. Lord Justice Baggallay drew attention to this in In re National Arms and Ammunition Company (supra), at page 477:

"... under section 87 the Court has power to allow the distress to be levied in proper cases. The same principles must guide the discretion of the Court, whether the application is in the shape of an application for leave to distrain, or of an application for payment." (emphasis added).

18. Likewise Sir John Pennycuick V-C in In re Downer Enterprises Ltd. [1974] 1 W.L.R. 1460. There a liquidator retained a lease with a view to selling it as soon as practicable. One of the issues before the Vice-chancellor was whether the lessor would have been entitled to have the arrears of rent accruing since the commencement of the liquidation paid in full as an expense of the liquidation. The Vice-Chancellor said (at page 1465):

"It is on those facts that I have to consider the issue of law ... which may be stated in these terms: Was Prudential entitled, as against the company, to be paid rent in full after the commencement of the winding up; or, perhaps more accurately: Would the court in the exercise of its discretion and applying certain established principles, have so directed? ... Strictly the court has a discretion as to whether to allow arrears to be paid in full in such circumstances, but that is a judicial discretion which the court exercises upon well established principles."

The use of property by an administrative receiver.

19. The second preliminary matter concerns the expenses incurred by a company in the conduct of its business when under the management of an administrative receiver. Typically, when lending money to a company, a bank will take as security a charge over all or most of the assets of the company, present and future, the charge being a fixed charge on land and certain other assets, and a floating charge over the remaining assets. The deed authorises the bank to appoint a receiver and manager of the company's undertaking, with power to carry on the company's business. Such a receiver is referred to in the 1986 Act as an "administrative receiver".
20. Normally the deed creating the floating charge and authorising his appointment provides that an administrative receiver shall be the agent of the company. Now the 1986 Act, in section 44(1), provides that this shall always be so, unless and until the company goes into liquidation. For many years the position regarding a receiver appointed as agent of the company was that in general he was not personally liable for contracts entered into by him for and on behalf of the company. He was no more personally liable than was a director who entered into a contract for and on behalf of his company. This position was changed by section 87(2) of the Companies Act 1947. The position now, with regard to administrative receivers, is set out in section 44(1) and (2) of the 1986 Act. Under that section an administrative receiver is personally liable on (a) any contract entered into by him in the carrying out of his functions, except in so far as the contract otherwise provides, and (b) on any contract of employment "adopted" by him in the carrying out of those functions. In the latter regard the administrative receiver has, in effect, a period of 14 days' grace after his appointment. Head (b) represents a statutory overruling of the effect of the decision in Nicoll v. Cutts [1985] 1 B.B.C. 427. In cases where he is personally liable an administrative receiver is entitled to an indemnity out of the assets of the company (section 44(1)(c)). But even today an administrative receiver is not, in general, personally liable, and hence the statutory indemnity out of the assets of the company does not arise, in respect of contracts adopted by him in the course of managing the company's business, other than contracts of employment. With that one special exception, personal liability is confined, in general, to new contracts made by him. Thus he is not personally liable for the rent payable under an existing lease, or for the hire charges payable under an existing hire purchase agreement. This is not a surprising conclusion. It does not offend against basic conceptions of justice or fairness. The rent and hire charges were a liability undertaken by the company at the inception of the lease or hire purchase agreement. The land or goods are being used by the company even when an administrative receiver is in office. It is to the company that, along with other creditors, the lessor and the owner of the goods must look for payment.
21. Nor is a lessor or owner of goods in such a case entitled to be paid his rent or hire instalments as an "expense" of the administrative receivership, even though the administrative receiver has retained and used the land or goods for the purpose of the receivership. The reason is not far to seek. The appointment of an administrative receiver does not trigger a statutory prohibition on the lessor or owner of goods such as that found in section 130 in the case of a winding-up order. If the rent or hire is not paid by the administrative receiver the lessor or owner of the goods is at liberty, as much after the appointment of the administrative receiver as before, to exercise the rights and remedies available to him under his lease or hire purchase agreement. Faced with the prospect of proceedings, an administrative receiver may choose to pay the rent or hire charges in order to retain the land or goods. But if he decides not to do so, the lessor or owner of goods has his remedies. There is no occasion, assuming that there is jurisdiction, for the court to intervene and order the administrative receiver to pay these outgoings.

Part 2 of the 1986 Act.

22. Against that background and with those principles in mind, we turn to consider the position of administrators appointed under the 1986 Act. Part 2 of this Act represents a major reform in the law relating to companies which are insolvent or likely to become so. The statute enables the court to appoint an administrator to manage the affairs, business and property of a company with a view to achieving one or other of the statutory objectives set out in section 8(3). This reform was introduced by the Insolvency Act 1985 following proposals on insolvency law and practice made in June 1982 by a committee under the chairmanship of Sir Kenneth Cork. The committee considered that the power, contained in any well-drawn floating charge, to appoint a receiver and manager of the property and undertaking of a company had been of outstanding public benefit. A significant number of companies had been forced into liquidation, and potentially viable businesses capable of being rescued had been closed down, for want of such a floating charge. The committee proposed that statutory provision should be made enabling an administrator to be appointed in appropriate circumstances, with all the powers normally conferred upon a receiver and manager appointed under a floating charge.
23. The statutory scheme, as enacted, makes clear that an administrator is intended as a statutory alternative to an administrative receiver. An administrator is intended to fill the lacuna perceived to exist in the case of insolvent companies where either there is no floating charge or the holder of a floating charge does not appoint an administrative receiver.
24. Thus section 9(3) provides that if an administrative receiver has been appointed, the court cannot make an administration order, unless the person on whose behalf the administrative receiver was appointed consents or unless the security by virtue of which the administrative receiver was appointed is impeachable. When an administration order is made any administrative receiver vacates office, and while an administration order is in force no administrative receiver may be appointed (section 11). Further, there are some similarities between administrators and administrative receivers. For instance, an administrator's powers expressly include the same wide powers as those conferred by the Act on administrative receivers (sections 14(1)(a) and 42, and the first schedule).
25. The statute addresses the question of expenses incurred by an administrator, but only in the context of what is the position when a person ceases to hold office. Section 19(4) provides that the remuneration of an administrator and "any expenses properly incurred by him" shall be charged on and paid out of any property of the company in his custody or under his control when he ceases to be administrator in priority to any security to which section 15(1) applies. Section 15(1) applies to any security which, as created, was a floating charge. Section 19(5) provides:

"Any sums payable in respect of debts or liabilities incurred, while he was administrator, under contracts entered into or contracts of employment adopted by him or a predecessor of his in the carrying out of his or the predecessor's functions shall be charged on and paid out of any such property as is mentioned in subsection (4) in priority to any charge arising under that subsection.

For this purpose, the administrator is not to be taken to have adopted a contract of employment by reason of anything done or omitted to be done within 14 days after his appointment."

26. There is a striking resemblance between the debts and liabilities to which this subsection applies in the case of an administrator, and the debts and liabilities in respect of which an administrative receiver is personally liable pursuant to section 44. Section 19(5) does not impose personal liability on the administrator. In that respect he is in a better position than an administrative receiver, even though his status resembles that of an administrative receiver in that in exercising his powers he is deemed to act as the company's agent (section 14(5)). But in section 19(5) Parliament addressed, although in a somewhat oblique fashion, the position regarding debts and liabilities arising under contracts entered into or adopted by an administrator in the carrying out of his functions. The answer supplied by Parliament was that, as in the case of administrative receivers, no special provision was made for debts and liabilities incurred during an administration under a contract adopted by the administrator, save in the one case of contracts of employment. This answer is important, having in mind that one of the primary functions of an administrator is that frequently, if not normally, he will continue to carry on the company's business and, hence, will continue to use the land and goods currently being used by the company for the purposes of its business. Indeed, it is of the essence of his appointment that an administrator should do these very things in cases when the purpose sought to be achieved by the administration order is purpose (a) in section 8(3), viz., the survival of the company, and the whole or any part of its undertaking, as a going concern.
27. If the relevant statutory provisions had ended there we would have seen no reason to doubt that Parliament must have intended, as Mr. Heslop submitted, that the position regarding outgoings on property used by the company during an administration should be similar to that obtaining in an administrative receivership. But that would be to ignore a crucial part of the statutory structure. Parliament considered that an administrator should be buttressed with a support which an administrative receiver does not have. That support encroaches upon the property rights of others. Section 11(3) provides:

"During the period for which an administration order is in force:

(a) no resolution may be passed or order made for the winding-up of the company;

(b) no administrative receiver of the company may be appointed;

(c) no other steps may be taken to enforce any security over the company's property, or to repossess goods in the company's possession under any hire-purchase agreement, except with the consent of the administrator or the leave of the court and subject (where the court gives leave) to such terms as the court may impose; and

(d) no other proceedings and no execution or other legal process may be commenced or continued, and no distress may be levied, against the company or its property except with the consent of the administrator or the leave of the court and subject (where the court gives leave) to such terms as aforesaid."

28. Thus the making of an administration order triggers the like prohibition on proceedings being brought or continued against the company as the prohibition which exists, and has long existed, when a winding-up order is made. The owners of property, and of charges over property, are disabled from exercising their proprietary rights unless the administrator consents or the court gives leave.
29. We regard this feature as of cardinal importance, distinguishing an administration from an administrative receivership in a respect vital to the matter now under consideration. This feature, coupled with the further feature that the court has power to give directions to the administrator on the conduct of the administration, leads inexorably to the conclusion that much of the reasoning which caused the courts to adopt what we have referred to as the "liquidation expenses" principle in the case of liquidations is also applicable in administrations but subject, in our view, to a very important qualification. In liquidations the principles on which the court will exercise its discretion have hardened into a set practice, both in relation to "possession" cases and in the application of the "liquidation expenses" principle. In "possession" cases leave is granted as of course. And in the circumstances in which the "liquidation expenses" principle is applicable, entitlement to have the outgoings paid as an expense of the liquidation seems to have become more or less automatic. In our view there is no place for comparable hard-and-fast principles in the case of administrations. The reason for this difference is that the objectives of winding-up orders and administration orders are different and, hence, the approach that should be adopted by the court when exercising its discretion under the two regimes is different. In the case of winding-up the company has reached the end of its life. The basic object of the winding-up process, in the case of an insolvent company, is to achieve an equal distribution of the company's assets among the unsecured creditors. A secured creditor will not, as such, participate in the ensuing distribution. If he seeks leave to obtain possession of his own property, leave should be granted. And if another's land or goods (and we can see no relevant difference between them, for this purpose) are detained by the liquidator against the owner's wishes and used for the purposes of the winding-up, it is obviously only fair that in respect of the period of detention the owner should be paid his rent or hire charges in full as expenses of the liquidation.
30. In contrast, an administration is intended to be only an interim and temporary regime. There is to be a breathing-space while the company, under new management in the person of the administrator, seeks to achieve one or more of the purposes set out in section 8(3). There is a moratorium on the enforcement of debts and rights, proprietary and otherwise, against the company, so as to give the administrator time to formulate proposals and lay them before the creditors, and then implement any proposals approved by the creditors. In some cases winding up will follow, in others it will not. Whether those whose land or goods are being used by the company during this interim period should be given leave to enforce their proprietary rights forthwith or should be paid ahead of everyone else must depend on all the circumstances, which will vary widely from one case to the next. We do not think that Parliament intended, for example, that if a company's factory or offices are leasehold, and the administrator continues to carry on the business on those premises, the court as a matter of course would always give leave to re-enter, or to distrain in respect of rent accruing from the date of the administration order, or make a direction for payment of the rent in full as an expense of the administration. Likewise in respect of vehicles or machinery which are in the company's possession under hire purchase agreements and which are being used by a company in the course of carrying on its business. Parliament must have intended, for instance, that, in appropriate circumstances, and for a strictly limited period, such a lessor or owner of goods might not be given leave if giving leave would cause disruption and loss out of all proportion to the loss which the lessor or the owner of goods would suffer if leave were refused. Indeed, Parliament must have intended that when exercising its discretion the court should have due regard to the property rights of those concerned. But Parliament must also have intended that the court should have regard to all the other circumstances, such as the consequences which the grant or refusal of leave would have, the financial position of the company, the period for which the administration order is expected to remain in force, the end result sought to be achieved, and the prospects of that result being achieved.
31. If this flexible approach is right, there is no room in administrations for the application of a rigid principle that, if land or goods in the company's possession under an existing lease or hire purchase agreement are used for the purposes of an administration, the continuing rent or hire charges will rank automatically as expenses of the administration and as such be payable by the administrator ahead (so it would seem) of the pre-administration creditors. Nor, even, for a principle that leave to take proceedings will be granted as of course. Such rigid principles would be inconsistent with the flexibility Parliament must have intended should apply by giving the court a wide discretion.
32. This conclusion is consistent with section 19(5). If a administrator adopts an existing contract of employment, the liabilities arising under that contract are automatically payable as provided in that subsection. As to other existing contracts "adopted" by an administrator, creditors have no automatic preference or priority.
33. We recognise that if a lessor or owner of goods is not to have any such automatic priority, this will be a powerful factor in favour of leave being granted to him to enforce his proprietary rights. So be it. At a later stage we shall turn to consider the principles guiding the exercise of the discretion to grant or withhold leave.
34. We also recognise that, if a lessor or owner of goods is not to have any such automatic priority, it might seem, at first sight, that the financial interests of lessors and owners of goods will dictate that, as soon as they learn of a administration order, they should make an application to the court for leave to take proceedings. We do not think that this conclusion follows. An administrator can give his consent under the section. Further, an administrator undoubtedly has power, in an appropriate case, to pay rent and hire charges in respect of land and goods used by him for the purposes of the administration. This is so both as to arrears and as to amounts continuing to fall due. Under the Act he has power to make any payment which is necessary or incidental to" the performance of his functions (paragraph 13 of schedule 1). When deciding whether or not to give his consent or to exercise this power, an administrator will need to consider whether the case is one in which, if an application were made to the court by the lessor or owner of goods, the court would be likely to give leave, or to give leave unless some or all of the rent or hire charges were paid by the administrator. If it is such a case, and if the lessor or owner of the goods is seeking possession, the administrator should consider whether, having regard to those features and all the other circumstances of the case, he ought to give consent or ought to pay some or all of the rent or hire charges of the land or goods if he wishes to continue to use them.
35. An administrator is an officer of the court. He can be expected to make his decision speedily, so far as he can do so. He may be able at least to make an interim decision, such as agreeing to pay the current rents for the time being. The administrator should also make his decision responsibly. His power to give or withhold consent was not intended to be used as a bargaining counter in a negotiation in which the administrator has regard only to the interests of the unsecured creditors. When he refuses consent it would be helpful if, unless the reason is self-evident, he were to state succinctly why he has refused and also why he is not prepared to pay the rental arrears or at least the current rentals. A similar approach should be adopted by the administrator when secured creditors seek his consent to enforce their security. It should not be necessary, therefore, for the Companies Court to be swamped with applications under section 11, or for administrations to be subjected regularly to the expense and disruption of such applications. Should it become necessary for a lessor or owner of goods or the owner of a security to make an application to the court, the court has ample powers, by making orders as to costs and giving directions to the administrator, either as its own officer or as envisaged by section 17, to ensure that the applicant is not prejudiced by an unreasonable decision of an administrator.
36. We must note two other points. It was argued that, unless lessors of land and owners of goods let on hire purchase terms which are used by an administrator in the course of his administration are entitled of right to be paid the continuing rent and hire charges as an expense of the administration, the result would amount to expropriation by statute without compensation. An intention to take away the property of a subject without a right to compensation is not to be imputed to Parliament unless that intention is expressed in unequivocal terms: see Lord Atkinson in Central Control Board (Liquor Traffic) v. Cannon Brewery Co. Ltd. [1919] A.C. 744, 752. We do not think this line of argument assists. To the extent that the prohibition in section 11 precludes an owner of land or goods from exercising his proprietary rights, section 11 does have an expropriatory effect. But that is provided for in unequivocal terms. The safety valve which Parliament has built into the system is the owner's ability to make an application to the court. Built into section 11 itself is provision for an application to the court for leave, in the absence of agreement by the administrator. Further, Parliament provided that the administrator should manage the affairs, business and property of the company, at any time before proposals have been approved by the creditors under section 24, "in accordance with any directions given by the court" (section 17). Still further, there is the long-stop safeguard provided by section 27. On the hearing of a petition under that section the court has wide powers, including power to discharge the administration order and make consequential provision. Given these discretionary safeguards, we can see no justification for reading into the statutory provisions an implication that the owner of land or goods was intended to have some other remedy to compensate for any loss he suffers by reason of the section 11 prohibition.
37. The second point we must note briefly is a contention by Norwich and AIB to the effect that, even if they are not entitled of right to be paid the sums due under the head leases from the date of the administration order as expenses of the administration, they became so entitled after the lapse of a reasonable period of time within which the administrators could make up their minds whether they wished to continue to retain the head leases. We do not agree. At bottom this contention is the same as the principal argument advanced, save that it incorporates "thinking time". But the essential difficulty remains. This modified contention, as much as the primary contention, is inconsistent with the court having been given a wide discretion, in exercise of which, in appropriate circumstances, the court may refuse leave under section 11 even though the administrator is continuing to use land or goods belonging to another without payment in full of the current rent and hire charges.
38. For these reasons we cannot accept that Norwich and AIB have an absolute entitlement to be paid, as an administration expense, the rent and other outgoings payable under the head-leases. On this we have to part company with the judge.

"Goods in the company's possession"

39. The next question which arises concerns the proper meaning of the expression "goods in the company's possession" in section 11(3)(c). This paragraph prohibits steps being taken "to re-possess goods in the company's possession under any hire purchase agreement", except with consent or leave. By section 10(4), reference to hire purchase agreements include conditional sale agreements, chattel leasing agreements and retention of title agreements.
40. The computer equipment in this case is for the most part on the premises of end users, to whom it has been sub-let by the company. Can it still be said to be in the possession of the company for the purposes of section 11(3)(c)? The judge thought not. That is certainly a very arguable view, although it produces the curious result that the funders can take steps to re-possess the equipment without consent or leave, but consent or leave is needed for AIB to enforce its security over the income arising under the sub-leases of the same equipment. Plainly for some purposes the equipment is in the possession of the end users. If it matters, which is open to question, the parties contemplated and provided that this would happen. For example, the master hire purchase agreement between AIB and the company provided by clause 7.01 that the goods should be "located at the site", meaning the address of the end user; and by clause 9.01, that the company should not "part with possession of any of the goods", except that the company should be entitled do sub-lease them. A typical sub-lease by the company contains a covenant (in clause 9) that the sub-lessee "shall peaceably and quietly hold possess and use" the goods. By clause 12(iii) upon termination the company "shall immediately be entitled to the possession" of them.
41. In Towers and Co. Ltd. v. Gray [1961] 2 Q.B. 351, 361, Lord Parker C.J. said:

"The term 'possession' is always giving rise to trouble. As Earl Jowitt said in United States of America and Republic of France v. Dollfus Mieq et Cie SA and Bank of England:

'The person having the right to immediate possession is, however, frequently referred to in English law as being the 'possessor' - in truth the English law has never worked out a completely logical and exhaustive definition of possession'.

For my part I approach this case on the basis that the meaning of 'possession' depends upon the context in which it is used ... In some contexts, no doubt, a bailment for reward subject to a lien, and where perhaps some period of notice has to be given before the goods can be removed, could be of such a nature that the only possession that there could be said to be would be possession in the bailee. In other cases it may well be that the nature of the bailment is such that the owner of the goods who has parted with the physical possession of them can truly be said still to be in possession."

42. That in itself does not provide a solution to this point, since it contemplated that either the bailor or the bailee may have possession for a given purpose - but not both. However, it does contemplate that for some purposes a bailor, and therefore a sub-bailor, may still have possession despite the bailment. In our judgment the answer emerges once one considers the purpose of section 11(3)(c). The paragraph is dealing with goods which, as between the company and its supplier, are in the possession of the company under a hire purchase agreement. Those goods are to be protected from repossession unless there is either consent or leave. It is immaterial whether they remain on the company's premises, or are entrusted by the company to others for repair, or are sub-let by the company as part of its trade to others. We do not see that such a construction does any violence to the language of the paragraph, or is more purposive than is warranted by the current approach of the English courts to statutes which are neither fiscal nor penal, even though it is said that a breach of the paragraph is a contempt of court.
43. In the present case the computer equipment, as between the funders and the company, remains in the possession of the company. Accordingly it is in the company's possession for the purposes of section 11(3)(c), so that it cannot be repossessed save with consent or leave.
44. Mr. Crystal gave an example of goods bailed by the owner to X, by X to Y, and by Y to Z; X then goes into administration; and Y, for quite different reasons such as that he has not received a hire payment, wishes to re-possess from Z. Mr. Crystal submitted that, if the construction which the administrators contend for is correct, Y would need either consent or leave. It is hard to see how the administrator of X would have any reason to refuse consent; but we do not think that it would be needed. Paragraph (c) is dealing with steps to re-possess by a person who has let goods on hire purchase to the company, and possibly by somebody with a higher right than that person. The paragraph does not deal with a repossession which would not affect the company's enjoyment of the goods or the profit flowing to the company from them.

Fixed or floating charges.

45. In some instances the company assigned the benefit of sub-leases to funders. Nothing turns on this so far as Norwich is concerned. Norwich did not seek to rely on any such assignments in this case, although it has reserved the right to do so on another occasion. As to AIB, there were such assignments, by way of charge, in respect of every sub-lease, and these were duly registered under the Companies Act. In respect of these charges the administrators advanced a contention that the charges were floating charges and not fixed charges, and that leave to enforce them should not be given at this stage, because that would enable AIB to defeat a potential charge under section 19(4) and (5). It is convenient to consider this issue next.
46. The deed of assignment dated 9th June 1988 and made between the company and AIB contains provisions which are typical on the material point. The recitals to the deed identified, by reference to schedules, certain hire purchase agreements, or head leases, as we have called them, and also the matching sub-leases. The operative clause in the deed provided:

"In consideration of [AIB] having agreed to enter into the [headleases] and as security for all the moneys, obligations and liability (if any) due by the [company] under or by virtue of the [headleases] the [company] as beneficial owner HEREBY ASSIGNS to [AIB] by way of security all the benefit of the terms of each of the sub-leases and all rentals, claims, rights, demands and other moneys or claims for moneys whatsoever under each of the sub-leases which the [company] has or may at any time in the future have or be entitled to under or by virtue of the sub-leases (hereinafter referred to as 'the Assigned Benefits') so that the Assigned Benefits in respect of each sub-lease shall be and are assigned to [AIB] to secure the obligations of the [company] under the [headlease] corresponding thereto in accordance with Recital (C) above."

47. We were reminded of the well known descriptions of a floating security given in the Yorkshire Woolcombers case. There the property charged was "all book and other debts now owing to the association, and also all ... the book and other debts which may at any time during the continuation of this security become owing to the association": see In re Yorkshire Woolcombers Association Limited [1902] 2 Ch. 284, 286. Lord Justice Romer said (at page 295):

"I certainly do not intend to attempt to give an exact definition of the term 'floating charge,' nor am I prepared to say that there will not be a floating charge within the meaning of the Act, which does not contain all the three characteristics that I am about to mention, but I certainly think that if a charge has the three characteristics that I am about to mention it is a floating charge. (1) If it is a charge on a class of assets of a company present and future; (2) if that class is one which, in the ordinary course of the business of the company, would be changing from time to time; and (3) if you find that by the charge it is contemplated that, until some future step is taken by or on behalf of those interested in the charge, the company may carry on its business in the ordinary way as far as concerns the particular class of assets I am dealing with."

48. In the House of Lords (Illingworth v. Houldsworth [1904] AC 355, 357) the Earl of Halsbury L.C. referred to the charge in that case and stated what he considered to be the essential characteristic of a floating security:

"In the first place you have that which in a sense I suppose must be an element in the definition of a floating security, that it is something which is to float, not to be put into immediate operation, but such that the company is to be allowed to carry on its business. It contemplates not only that it should carry with it the book debts which were then existing, but it contemplates also the possibility of those book debts being extinguished by payment to the company, and that other book debts should come in and take the place of those that had disappeared. That ... seems to me to be an essential characteristic of what is properly called a floating security."

49. Lord Macnaghten (at page 358) also emphasised the ambulatory nature of a floating charge:

"I should have thought there was not much difficulty in defining what a floating charge is in contrast to what is called a specific charge. A specific charge, I think, is one that without more fastens on ascertained and definite property or property capable of being ascertained and defined; a floating charge, on the other hand, is ambulatory and shifting in its nature, hovering over and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp."

50. In the light of these observations we cannot accept Mr. Heslop's submissions. The notable feature of the present case is that the charges were not ambulatory. The property assigned by the company was confined to rights to which the company was entitled under specific, existing contracts. The assignments consisted of the company's rights "under or by virtue of" sub-leases each of which was already in existence at the time of the assignments and each of which was specifically identified in the relevant deeds of assignment. In each case the payments due to the company under a specific sub-lease were charged as security for the payments due by the company under the head-lease relating to the same equipment. The company's right to receive future instalments from end users in due course pursuant to the terms of these sub-leases was as much a present asset of the company, within Lord Justice Romer's reference to "present and future" assets of a company, as a right to receive payment of a sum which was immediately due. Lord Justice Romer's reference to future assets was a reference to assets of which, when the charge was created, the company was not the owner. That was the position in that case. That is not the position in this case.
51. We have in mind that in practice sums payable by the end users under these sub-leases were paid to the company and utilised by it in the ordinary course of business. In so far as this is relevant, it may well be that this was what the parties intended should happen. The company was to be at liberty to receive and use the instalments until AIB chose to intervene. We are unpersuaded that this results in these charges, on existing and defined property, become floating charges. A mortgage of land does not become a floating charge by reason of the mortgagor being permitted to remain in possession and enjoy the fruits of the property charged for the time being. This is so even if the land is leasehold and the term is very short, and as such the asset charged is of a wasting character. So here: the mere fact that for the time being the company could continue to receive and use the instalments does suffice to negative the fixed character of the charge. This apart, we have seen nothing to lend any support to the administrators' contention. In particular, we have seen nothing to suggest that after the assignment the company was to be at liberty to deal with its rights under the sub-leases without the consent of AIB.

The applications under section 11.

52. We turn next to the applications for leave to terminate the head leases and to take steps to re-possess the equipment and, in the case of AIB, to enforce its security. The following are the factors of importance in this case on these applications.

(1) The head leases and the sub-leases.

53. First, the funders' property. A typical hire purchase agreement between the company and a funder runs for seven years. The rent is payable quarterly in advance, and the amount varies in accordance with fluctuations in interest rates in the financial market. At current rates of interest, the amount due to Norwich under the relevant head leases between the date of the administration order and 1996 is about £24 million. AIB's exposure, in respect only of capital, is about £6 million.
54. Broadly the provisions of the sub-leases match the provisions of the corresponding head lease, with two exceptions. First, as to the amount of the rent. In a typical case, although the rent payable by the company under the head leases fluctuates, the rent payable by end users to the company under the sub-leases is of a fixed amount. Thus the company was vulnerable to upward movements in interest rates. Most of the relevant sub-leases were entered into by the company in 1986 and 1987, when interest rates were much lower than at present. In some instances the present shortfall, between the rate of interest receivable by the company from end users and the rate of interest payable by the company to the funders, is as much as 10 per cent. The administrators estimate that, over the life of the head leases and sub-leases, the overall deficit for the company will be of the order of £20 million. The deficit for the 3-month period from the date of the administration order to 18th July was about £1.7 million.
55. The second respect in which the head leases and sub-leases do not correspond is that, either from the outset or by reason of subsequent variation, the sub-leases generally contain a "flex" option. Two-thirds of them also contain a "walk" option. A "flex" option entitles an end user to upgrade his equipment, generally after three years, and enter into a further sub-lease on certain terms. The company undertook to settle all charges remaining to be paid to the funder under the original head lease. A "walk" option entitles an end user to return his equipment before the end of the sub-lease term, usually after five years. Here also the result of the exercise of the option is that the company is liable to pay the future rental payments under the head lease.
56. By reason of the non-payment of the rental instalments under the head leases, if for no other reason, Norwich and AIB are now entitled, in accordance with the terms of their head leases, to determine the head leases.
57. There is a measure of dispute between the parties on how quickly the sub-leased computer equipment becomes obsolescent.
58. Clearly, however, one would expect that if the computers had to be repossessed and sold, they would not, in general, fetch anything approaching their original value. Undoubtedly the best hope for Norwich and AIB is to tap into the stream of income whose source is the end users, and to do so either by seeking to take over the benefit of the existing sub-leases or by negotiating a new and better deal with the end users.

(2) The company's financial position.

59. At the time of the hearing of the appeal, no statement of affairs had been produced by the directors of the company. The most up-to-date information on the company's financial position is contained in the administrators' statement circulated to the creditors on 24th June along with the notice convening the creditors' meeting. The financial affairs of the company and of the Atlantic group as a whole are complex. Uncertainty and obscurity abound. In relation to the head leases and sub-leases the administrators have been hampered by the state of the records and system of information storage and retrieval operated by the company. For present purposes the position can be sufficiently summarised as follows. The administrators do not expect that the assets of the company will yield anything remotely approaching their book value. Inter-company debts, for instance, have a book value of nearly £110 million, but they are unlikely to yield more than a few pence in the pound. The company's principal asset comprises the sub-leases: this type of transaction forms the core of the company's business. The book value of the sub-leases is £96 million. In addition, "own book" leases have a book value of £10 million. "Own book" leases, which form only a small part of the company's business, are transactions where the company itself funded the acquisition

of the computers and is itself the owner of the equipment let to end users. Against these assets are to be set liabilities, estimated at about £130 million, arising under the head leases. In addition, there are or will be liabilities arising under the flex and walk options in the sub-leases. Accrued liabilities under this head are estimated at about £12 million, and contingent liabilities at the massive sum of £250 million. Other debts, in respect of tax, trade creditors and inter-company creditors, are estimated at £60 million.

(3) The administrators' proposals.

60. Third, the way ahead. The administrators are not looking for new business. As to realisations, there is no question of the company's interest in the head leases and sub-leases being sold en bloc. Most sub-leases have been tailored to meet the specific circumstances of particular end users. The result is a complex portfolio of head leases and sub-leases which have to be dealt with on an individual basis. The administrators have stated their general objectives as:

"... extracting value from leases where it exists and of minimising actual and contingent claims in all cases by agreement between the parties."

61. In their statement of 24th June the administrators continued:

"The insolvency of [the company] leaves users and funders with a problem. The contracts with [the company] gave the users the ability to extricate themselves before the end of the lease term in accordance with their computer requirements. The intention is, through negotiations, to allow the user to regain control of his future computer requirements whilst minimising claims on [the company]. In addition we are in discussions with third parties, who are attracted by [the company's] customer base, with a view to -introducing them in exchange for value to [the company], into this management process."

62. The reference to the company's customer base is to the fact that the end users include many "blue chip" companies.
63. Attaining these objectives is not expected to be a speedy process. The administrators consider that significant realisations could take "some considerable time".
64. A meeting of the company's creditors, convened to consider the administrators' proposals in accordance with section 23, was held on 11th July. By a majority the creditors approved the proposals with some modifications. The main proposals as approved were:

"2. To administer [the company's] lease portfolio to the benefit of all the company's creditors, or potential creditors, in so far as this is possible.

3(a) To seek, in co-operation with funders and users of equipment, an approach which allows [the company] to withdraw from its contractual arrangements with funders and lessees as soon as possible on mutually agreeable terms and in particular:-

(1) to make an immediate joint approach with funders to lessees to direct lessees henceforth to make all payments due under sub-leases direct to funders; ... and

(2) if payments are not resumed within a reasonable time, or if it becomes apparent that compromises cannot be reached, the administrators shall be entitled to give any consents requested by the funders to exercise their rights under their relevant lease or hire-purchase agreements and associated security documents.

(b) To manage individual situations on leases and customer relationships to realise value for the creditors as a whole with the agreement of interested parties.

(c) To introduce third parties to take over leases and, where possible, any associated liabilities.

(d) To formulate arrangements whereby agreement is reached with lessees and funders so that they reduce their claims against [the company] and/or pay a consideration to allow the leases to continue without the involvement of [the company]."

65. Further proposals were: to pursue the company's interest in other group companies; to maximise tax benefits; to report to the creditors' committee within three months; to assess the impact of the outcome of this appeal and to formulate any revised proposals which may become necessary; and in due course to apply for a discharge on the basis that the company is wound up.
66. In addition, we were informed by a letter from the administrators' solicitors, written after the creditors' meeting and after we had reserved judgment, that the administrators now intend to pay forthwith to the funders all amounts received by the company since 18th April under sub-leases which correspond to head leases with the respective funders. The payments will be made with accrued interest. Where the funder does not have a registered security over the sub-lease payments, the funders will not receive any amount which relates to a period for which the relevant funder has already received payment from the company.

(4) The effect on the administration if leave were given

67. If leave were given to terminate the head leases and re-possess the equipment, the administrators would be in a much weaker position in negotiations with the end users and the funders in those cases where the funders took advantage of such leave. If leave were given to Norwich and AIB, other funders similarly placed would be entitled to expect that they, too, would be given leave. We have no evidence about the views of other funders on these matters. The likely result, if other funders sought to pursue the same course as Norwich and AIB, would be the wholesale collapse of the administrators' basic proposals. Each of the numerous funders, of whom there are about 50, would take his own steps against the end users, of whom there are nearly 1,000. The flex and walk liabilities could be expected to crystallise into claims against the company. The administrators' hopes of substantially reducing these claims would disappear. Any goodwill remaining in the customer base would evaporate. Likewise if leave were given to AIB to enforce its security over the sub-leases: in those cases the administrators would be squeezed out.

(5) The effect on Norwich and AIB if leave were refused

68. If leave to terminate the head leases and to re-possess were not given, the effect on Norwich and AIB would be that they would be likely to suffer significant loss. The sums involved are substantial. The underlying property is a wasting asset. Given the company's insolvent state and the contingent liabilities under the flex and walk options, there may be difficulty in persuading end users to resume payments in full under the sub-leases at once, while negotiations proceed. Even if such payments were resumed and duly handed over to the funders, there would still be a significant shortfall compared with the rents due to the funders under the head leases.
69. Mr. Heslop did not accept that Norwich and AIB would suffer loss if leave were refused. He submitted that Norwich and AIB cannot reasonably expect to receive more than the amount of the sub-rentals, and they will receive that under the proposals. Norwich and AIB knew that the equipment was being sub-let, so they cannot oust the end users from their possession of the equipment. Nor, indeed, can they even intercept the stream of income from the end users to the company, because they are not parties to the sub-leases. AIB, as assignee of the benefit of the sub-leases, can enforce its security, but qua owners AIB and Norwich can achieve nothing by terminating the head leases. We are wholly unpersuaded that this is a complete analysis. We are satisfied that if Norwich and AIB were given leave to pursue whatever remedies are lawfully available to them as owners of the equipment, they would be in an appreciably stronger position, both against the end users and against the company, than they are at present.

(6) The prospects of a successful outcome in the administration if leave were refused.

70. If leave were refused, we would expect that over a protracted period the administrators would be able to negotiate deals with end users which would reduce their claims against the company. After all, the company is insolvent. It would make sense for end users to re-negotiate their deals. As to the funders, it may well be that there would be a better prospect of obtaining their consent to a proposed deal if leave were refused than if it were given, but that would be because in the former case the funders would find themselves disabled in the negotiations from relying on their proprietary rights. The essential question in this case is whether that would be right.

(7) The conduct of the parties.

71. From the very outset of the administration AIB sought the administrators' consent to the realisation of its security. Consent to terminate the head leases was sought by AIB in a letter of 4th May. Norwich Union made a request to the same effect by a letter of 10th May. There is no question here of either applicant having disentitled itself to relief, by acquiescence or election or anything of that nature. Nor is there any question of either Norwich or AIB having been misled by the administrators, or anything of that sort, or of the administrators having dragged their feet in the conduct of the administration.

(8) Conclusions

72. In this case it is for us sitting in the Court of Appeal to exercise our own discretion. In so far as the question of granting leave arose at all before the judge in view of his decision that the equipment was not in the company's possession, the judge approached the question on the erroneous footing that Norwich and AIB were entitled to be paid the rent due under the head leases as an expense of the administration.
73. Taking into account all the matters mentioned above, we are in no doubt that this is a case in which we should exercise our discretion under section 11 to grant leave to take steps to terminate the head leases and to re-possess the goods and, in the case of AIB, to enforce its security. The administration is a prelude to winding up the company. In short, the administrators propose to negotiate benefits for the unsecured creditors, who to a substantial extent are the end users and funders themselves, by reducing the amount of the claims of the end users and funders. End users will be asked to release their claims under the flex and walk options. They may be asked to pay more, direct to the funders. Funders will be asked to release their claims against the company under the head leases. The unsatisfactory feature of these proposals is that the contemplated negotiations will take place at the expense of the funders, in that the funders will be asked to agree to modify their existing proprietary rights in a negotiation in which they will not be able to rely on those rights. Their bargaining strength will be reduced to the prospect that, if agreement is not reached after an indefinite period, the administrators may give their consent under section 11. Or, presumably, Norwich and AIB could embark on a fresh application to the court. This cannot be an acceptable basis on which to conduct an administration. Norwich and AIB should not be compelled to leave their property in such an administration against their will. The prohibitions in section 11(3) (c) and (d) were not intended to be a means of strengthening an administrator's position if he should seek to negotiate a modification of the existing proprietary rights of the owner of the land or goods in question.
74. This is not a case in which it is practicable to refuse leave on condition that the administrators pay all the current outgoings under the head leases. The rents from the sub-leases, even assuming the flow can be re-started promptly, are insufficient for this purpose.
75. We have in mind that, although it is now over three months since the administration order was made, the parties have been locked in litigation for two of those months. Throughout this period the future of the administration has been clouded in uncertainty. We have considered whether, this being so, it would be right to stay the grant of leave for a while to enable the administrators to consider the way ahead in the light of the outcome of this appeal and, may be, to submit revised proposals to the creditors. We have decided not to grant such a stay. We see no reason to think that granting a stay would serve a useful purpose. No suggestion was advanced to us of any other particular proposals the administrators would wish to consider further if we were minded to grant leave.

Further directions.

76. There remains the question of what should be done with the sums already collected by the administrators in respect of sub-leases of equipment belonging to Norwich and AIB respectively. Sensibly and properly, on their appointment the administrators took steps to gather in payments falling due under the sub-leases. The administrators were under a statutory duty to take into their custody or under their control all the property to which the company was or appeared to be entitled (section 17). Equally sensibly and properly, the administrators placed the money received into earmarked, interest-bearing bank accounts. But what should now happen to that money? Suffice to say, we agree with the administrators' recent decision that the money should be paid to Norwich and AIB with the interest accrued thereon. Had they not so decided, we would have so directed, for reasons which it is not necessary now to elaborate.
77. On this only one point remains outstanding. Some of the payments received by the administrators from sub-leases were in respect of periods of time covered, in whole or in part, by payments made in advance to funders under the corresponding headlease. Contrary to the view of the administrators, we do not think that this makes any significant difference, so long as the funders do not receive more than their up-to-date entitlement under the corresponding head lease. We shall therefore direct the administrators to pay to Norwich and AIB all sums received by the administrators since their appointment in respect of equipment owned by Norwich and AIB, together with the interest accrued thereon, but subject to the ceiling that the sums paid over shall not exceed the amount of the arrears accrued due under the respective head leases at the time when the administrators make the payments to Norwich and AIB. These payments by the administrators shall be on account of the sums due from the company under the relevant head leases, and they shall count as expenses properly incurred by the administrators.
78. Should we go beyond this and, in the exercise of our discretion, make an order that all the rental and other outgoings which have accrued on the head leases since the administration order shall be paid by the administrators as an expense of the administration? We think not. We consider that the justice of the case is best met by giving leave, and making a direction as just mentioned regarding the money actually received by the administrators. In this way the administrators will account to Norwich and AIB for the benefits received from the continuation of the head leases during the administration. Without prejudice to what may happen hereafter in this administration, we do not consider that we should make any further order at this stage.
79. In the light of the above we do not think that any question arises on Mr. Crystal's further application, which was for leave to bring proceedings against the company for some form of restitutionary relief in respect of the money received by the administrators from the end users. In any event, we would have refused such leave, without prejudice to his clients' right to re-apply when the nature of this claim and its legal basis have been formulated at least to an extent which will make it possible for assess whether the claim is even arguable.

Norwich's section 27 petition

80. Thus far we have been concerned with applications by Norwich and AIB seeking various declarations and orders and also leave under section 11. Norwich also presented a petition under section 27, on the ground that the administrators' conduct in collecting the rents from the end users but refusing to pay them to the funders was unfairly prejudicial to creditors including Norwich. By this petition Norwich seeks, in short, an order that all the rent and other outgoings arising under the Norwich head leases, whether they accrued before or after the date of the administration order, should rank as expenses of the administration. We have already stated that we shall not make such an order. Since we are giving leave under section 11, there is no case for the further order sought in the section 27 petition, viz., an order discharging the administration order.

Leave applications: the general approach

81. There is one final matter to which we now turn. In the course of argument we were invited to give guidance on the principles to be applied on applications for the grant of leave under section 11. It is an invitation to which we are reluctant to accede, for several reasons: first, Parliament has left at large the discretion given to the court, and it is not for us to cut down that discretion or, as it was put in argument, to confine it within a straitjacket. However much we emphasise that any observations are only guidelines, there is a danger that they may be treated as something more. Secondly, section 11(3) (c) and (d) applies to a very wide range of steps and proceedings, and the circumstances in which leave is sought will vary almost infinitely. Thirdly, it is the judges who sit in the Companies Court who have practical experience of the difficulties arising in the working out of this new jurisdiction, not the members of this court.
82. However, we have already drawn attention to the important role of the administrator in this field. He should respond speedily and responsibly to applications for consent under section 11. Parliament envisaged that in the first place section 11 matters should be dealt with by him. It is to be hoped, in the interests of all concerned, that applications to the court will become the exception rather than the rule. But we recognise that for this to be so, authorised insolvency practitioners and their legal advisers need more guidance than is available at present on what, in general, is the approach of the court on leave applications. We feel bound, therefore, to make some general observations regarding cases where leave is sought to exercise existing proprietary rights, including security rights, against a company in administration:

(1) It is in every case for the person who seeks leave to make out a case for him to be given leave.

(2) The prohibition in section 11(3) (c) and (d) is intended to assist the company, under the management of the administrator, to achieve the purpose for which the administration order was made. If granting leave to a lessor of land or the hirer of goods (a "lessor") to exercise his proprietary rights and re-possess his land or goods is unlikely to impede the achievement of that purpose, leave should normally be given.

(3) In other cases when a lessor seeks possession the court has to carry out a balancing exercise, balancing the legitimate interests of the lessor and the legitimate interests of the other creditors of the company (see Peter Gibson J. in Royal Trust Bank v. Buchler [1989] B.C.L.C. 130, 135).

83. The metaphor employed here, for want of a better, is that of scales and weights. Lord Wilberforce adverted to the limitations of this metaphor in Scientific Research Council v. Nasse [1980] AC 1028, 1067. It must be kept in mind that the exercise under section 11 is not a mechanical one; each case calls for an exercise in judicial judgment, in which the court seeks to give effect to the purpose of the statutory provisions, having regard to the parties' interests and all the circumstances of the case. As already noted, the purpose of the prohibition is to enable or assist the company to achieve the object for which the administration order was made. The purpose of the power to give leave is to enable the court to relax the prohibition where it would be inequitable for the prohibition to apply.

(4) In carrying out the balancing exercise great importance, or weight, is normally to be given to the proprietary interests of the lessor. Sir Nicolas Browne-Wilkinson V-C observed in Bristol Airport plc v. Powdrill [1990] 2 W.L.R. 1362, 1379 that, so far as possible, the administration procedure should not be used to prejudice those who were secured creditors when the administration order was made in lieu of a winding up order. The same is true regarding the proprietary interests of a lessor. The underlying principle here is that an administration for the benefit of unsecured creditors should not be conducted at the expense of those who have proprietary rights which they are seeking to exercise, save to the extent that this may be unavoidable and even then this will usually be acceptable only to a strictly limited extent.

(5) Thus it will normally be a sufficient ground for the grant of leave if significant loss would be caused to the lessor by a refusal. For this purpose loss comprises any kind of financial loss, direct or indirect, including loss by reason of delay, and may extend to loss which is not financial. But if substantially greater loss would be caused to others by the grant of leave, or loss which is out of all proportion to the benefit which leave would confer on the lessor, that may outweigh the loss to the lessor caused by a refusal.

84. Our formulation was criticised in the course of the argument, and we certainly do not claim for it the status of a rule in those terms. At present we say only that it appears to us the nearest we can get to a formulation of what Parliament had in mind.

(6) In assessing these respective losses the court will have regard to matters such as: the financial position of the company, its ability to pay the rental arrears and the continuing rentals, the administrator's proposals, the period for which the administration order has already been in force and is expected to remain in force, the effect on the administration if leave were given, the effect on the applicant if leave were refused, the end result sought to be achieved by the administration, the prospects of that result being achieved, and the history of the administration so far.

(7) In considering these matters it will often be necessary to assess how probable the suggested consequences are. Thus if loss to the applicant is virtually certain if leave is refused, and loss to others a remote possibility if leave is granted, that will be a powerful factor in favour of granting leave.

(8) This is not an exhaustive list. For example, the conduct of the parties may also be a material consideration in a particular case, as it was in the Bristol Airport case. There leave was refused on the ground that the applicants had accepted benefits under the administration, and had only sought to enforce their security at a later stage: indeed, they had only acquired their security as a result of the operations of the administrators. It behoves a lessor to make his position clear to the administrator at the outset of the administration and, if it should become necessary, to apply to the court promptly.

(9) The above considerations may be relevant not only to the decision whether leave should be granted or refused, but also to a decision to impose terms if leave is granted.

(10) The above considerations will also apply to a decision on whether the impose terms as a condition for refusing leave. Section 11(3) (c) and (d) makes no provision for terms being imposed if leave is refused, but the court has power to achieve that result. It may do so directly, by giving directions to the administrator: for instance, under section 17, or in response to an application by the administrator under section 14(3), or in exercise of its control over an administrator as an officer of the court. Or it may do so indirectly, by ordering that the applicant shall have leave unless the administrator is prepared to take this or that step in the conduct of the administration.

85. Cases where leave is refused but terms are imposed can be expected to arise frequently. For example, the permanent loss to a lessor flowing from his inability to recover his property will normally be small if the administrator is required to pay the current rent. In most cases this should be possible, since if the administration order has been rightly made the business should generally be sufficiently viable to hold down current outgoings. Such a term may therefore be a normal term to impose.

(11) The above observations are directed at a case such as the present where a lessor of land or the owner of goods is seeking to re-possess his land or goods because of non-payment of rentals. A broadly similar approach will be applicable on many applications to enforce a security: for instance, an application by a mortgagee for possession of land. On such applications an important consideration will often be whether the applicant is fully secured. If he is, delay in enforcement is likely to be less prejudicial than in cases where his security is insufficient.

(12) In some cases there will be a dispute over the existence, validity or nature of the security which the applicant is seeking leave to enforce. It is not for the court on the leave application to seek to adjudicate upon that issue, unless (as in the present case, on the fixed or floating charge point) the issue raises a short point of law which it is convenient to determine without further ado. Otherwise the court needs to be satisfied only that the applicant has a seriously arguable case.

(Order: Appeal allowed; funders to have their costs paid by administrators save for costs of second hearing in respect of which there will be no order; administrators to have one-third of their costs of the appeal paid by the funders; application for leave to appeal to the House of Lords refused)