The Law Commission

 


PART X

TENANT INSOLVENCY

10.1     In this Part we consider the relationship between the law of insolvency and the scheme which we provisionally propose for termination of tenancies for tenant default. We accept the importance of ensuring that those proposals we make which impinge upon insolvency law must so far as is possible achieve consistency with the policy objectives of insolvency regulation. We acknowledge that this project, which is dealing with landlord and tenant law, must accept that it has limitations and that it cannot hope to reform insolvency law, even if that were thought to be desirable or necessary.
10.2     Insolvency law involves the balancing of various rights: those of the debtor, the creditor or creditors, unsecured and secured, and also third parties who may have interests in the debtor's property or who are otherwise affected by the circumstances. The landlord who has the right as a creditor to claim unpaid rent and to claim damages for other breaches of covenant may seek to terminate the tenancy and thereby recover an important asset belonging to the tenant. Other creditors may however oppose such action on the basis that it accords to the landlord unwarranted preference over their interests.
10.3     Current insolvency policy focuses on the importance of "rescue", that companies and individuals who are in financial difficulties should be given every opportunity to retain their solvent status and to revive their fortunes. At the same time there is a need to ensure that the interests of those who have been trading with the company or individual in question should be protected as far as possible. This policy objective is achieved by a complex set of provisions restricting the commencement or continuance of proceedings against those who are being subjected to the process of insolvency.

The statutory restrictions

10.4     The material insolvency provisions are to be found in the Insolvency Act 1986, as amended by the Insolvency Act 2000 and the Enterprise Act 2002. They can be summarised as follows.

Bankruptcy

10.5     Once a bankruptcy petition has been presented, the court may stay proceedings against the respondent or permit their continuance on terms.^[1] Once a bankruptcy order has been made, no creditor shall commence legal proceedings against the bankrupt except with the leave of the court (on such terms as the court may impose).^[2] A landlord who wishes to commence an action to forfeit the tenancy of a bankrupt tenant must therefore obtain leave. Somewhat incongruously, leave is not required where forfeiture is effected by peaceable re-entry.^[3] The same restrictions apply where an interim receiver is appointed, with effect from the date of the appointment until a bankruptcy order is made or the petition dismissed.^[4]

Compulsory liquidation

10.6     Where an order has been made winding up a company, or a provisional liquidator has been appointed, no action shall be proceeded with or commenced against the company or its property without leave of the court.^[5] There is no statutory restriction on forfeiture by peaceable re-entry, but it is possible that the landlord's action may be challenged by the liquidator.

Creditors' voluntary liquidation

10.7     The liquidator has power to apply to the court during a creditors' voluntary liquidation to stay or restrain the proceedings.^[6]

Administrative receiver

10.8     While there are few statutory restrictions applicable following the appointment of an administrative receiver, the effect of the Enterprise Act 2002 is to reduce dramatically the number of appointments which will be made.

Administration

10.9     Where a petition for an administration order has been presented in relation to a company, and until the order is made or the petition dismissed, no proceedings may be commenced or continued without leave.^[7] During that period, the landlord may not peaceably re-enter without leave of the court.^[8] Once an administration order has been made, similar restrictions apply, although it is possible for the administrator to waive them.^[9]

Individual voluntary arrangement (IVA)

10.10     On application by the debtor, his or her trustee or the official receiver, who intends to propose a voluntary arrangement, the court may make an interim order which operates to prohibit the commencement or continuation of proceedings without leave of the court.^[10]

Company voluntary arrangement (CVA)

10.11     Where a CVA has been made, directors of an eligible company^[11] may take steps to obtain a moratorium which will prohibit the commencement or continuance of proceedings or the exercise of peaceable re-entry without leave.^[12]

Concurrent proceedings

10.12     These complex provisions seek in general terms to restrict the circumstances in which legal proceedings can be brought against insolvent companies or individuals, and in which landlords can exercise the right of peaceable re-entry as a means of forfeiture. As we have explained above, we do not consider that it is appropriate in the current project to review these provisions.
10.13     At the same time, it is important that we appreciate the interaction of termination order proceedings and proceedings relating to the insolvency of the tenant. If the landlord applies to the court for a termination order against an insolvent tenant, there are likely to be two concurrent sets of proceedings. Depending on the nature of the tenant insolvency, the landlord may require leave of the court (or consent of the administrator) to bring, or to continue, the proceedings to terminate the tenancy.
10.14     It is common practice for tenancy agreements to contain an express term to the effect that the insolvency of the tenant (as defined by the agreement) shall entitle the landlord to re-enter and to forfeit the tenancy. However, the effect of the statutory restrictions outlined above is that only in very rare cases will the landlord succeed in forfeiting the tenancy and recovering possession. The restrictions are applicable not only in cases where the landlord's right to forfeit is triggered by the insolvency itself, but also in cases where it is activated by the insolvent tenant's breach of covenant (typically a failure to pay the rent).

Should "tenant insolvency" comprise "tenant default"?

10.15     There is one central question which we must answer in the context of the scheme which we are provisionally proposing. It is whether "tenant insolvency" should in itself comprise "tenant default" and thereby entitle the landlord to commence termination order proceedings.
10.16     The first possible approach is to provide that "tenant insolvency" should comprise "tenant default". This would be consistent with current practice, which, as we have said, is to make provision in the tenancy agreement entitling the landlord to forfeit the tenancy where the tenant has become insolvent. We can see that this is the approach with which many landlords may be comfortable, as it accords with the expectations which they have of their legal position. At the same time, the effect of the statutory restrictions outlined above is that the terms of the tenancy according such a right will be positively misleading in the vast majority of cases as the landlord will not in fact be able to enforce the rights which have been reserved. We consider that to make express provision to similar effect may therefore be undesirable in that it will give landlords a false impression of the rights which they enjoy in the event of their tenant becoming insolvent.
10.17     The second possible approach is the converse of the first: we should provide that "tenant insolvency" should not comprise "tenant default". "Tenant default" would therefore be restricted to breaches of covenant or obligation (including so-called "disguised breaches") by the tenant. In most cases, an insolvent tenant will in fact be in breach of covenant: insolvent tenants do not, as a rule, pay their rent. The advantage of this approach is that it is realistic. If the general effect of the insolvency legislation is to bar the landlord from taking proceedings against the tenant, then it serves little purpose (save to confuse the parties as to the true nature of their rights) to provide that the insolvency can in itself entitle the landlord to commence termination order proceedings. This is, provisionally, our preferred option, on which we seek the views of consultees.

Unilateral recovery of possession

10.18     We do not consider that the exercise by the landlord of self-help as a means of recovering possession from a tenant who is being subjected to the processes of insolvency should ever be permitted. The insolvency proceedings are likely to be frustrated by attempts by the landlord to secure what may be one of the major assets of the insolvency. The potential for conflict between the landlord and other creditors of the tenant is considerable, and there is no obvious reason why the landlord should be accorded preferential treatment. While recent legislation appears to have recognised this,^[13] it has not been of universal application, and it remains the case that peaceable re-entry can be exercised in order to forfeit the tenancy of a bankrupt tenant. As Woodfall notes:

This anomaly is curious and provides landlords of insolvent tenants with a powerful weapon and a benefit which is unlikely to have been intended by the draftsman of the Act.^[14]

10.19     It seems to us that this anomaly can be remedied quite simply. We provisionally propose that landlords should not be entitled to exercise their right to recover possession unilaterally where the tenant is insolvent. They should be required, if they wish to terminate in such circumstances, to make application to the court. This provisional proposal would have the effect of overruling Razzaq v Pala.^[15]

Definition of tenant insolvency

10.20     No attempt has so far been made to offer a definition of "tenant insolvency" for the purposes of the provisional proposals contained in this Part. It is an extremely difficult issue. In the 1994 Bill, clause 47 defined "insolvency event" as an event "in relation to the tenant or any surety for the tenant's performance of his obligations under the tenancy" of one of the following descriptions:

(1) in relation to an individual, bankruptcy and the appointment of an interim receiver;

(2) in relation to a company, compulsory liquidation, a creditors' voluntary liquidation, the appointment of an administrative receiver and the making of an administration order;

(3) in relation to an individual or a company, the approval of a voluntary arrangement under the Insolvency Act 1986.

10.21     In their recent Report on Irritancy in Leases of Land, the Scottish Law Commission considered the possibility of this kind of approach, providing a list of insolvency events, but felt that it had two disadvantages.^[16] First, it could result in omissions. Secondly, it would not reflect any future developments in insolvency law. As a result, they chose to define an insolvency event as any event which results in the appointment of an insolvency practitioner.
10.22     We are aware that insolvency legislation is not uncommon, and that there would be considerable advantages of allowing for flexibility in the definition which we adopt. We would welcome the views of consultees with experience of tenant insolvency as to the most appropriate means of definition. Ultimately, the matter will be for Parliamentary Counsel in drafting the relevant Bill.

summary of provisional proposals in this part

tenant default

(1) Tenant insolvency shall not in itself comprise tenant default entitling the landlord to commence termination order proceedings.

unilateral recovery of possession

(2) The landlord may not unilaterally recover possession where the tenant is insolvent.

definition

(3) The views of consultees on the appropriate definition of "tenant insolvency" are invited.

Note 1    Insolvency Act 1986, s 285(2).    [Back]

Note 2    Ibid, s 285(3).    [Back]

Note 3    Razzaq v Pala [1997] 1 WLR 1336. See below at para 10.18.    [Back]

Note 4    Insolvency Act 1986, s 286(6).    [Back]

Note 5    Ibid, s 130(2). Note the importance of the doctrine of relation back: ibid., s 129(2).    [Back]

Note 6    Ibid, s 112.    [Back]

Note 7    Insolvency Act 1986, s 10(1).    [Back]

Note 8    Ibid, s 10(1)(aa), added by Insolvency Act 2000, s 9, with effect from 2 April 2001. This provision statutorily overrules the decision in Re Lomax Leisure Ltd [2000] Ch 502.    [Back]

Note 9    Ibid, s 11. See also Enterprise Act 2002, s 248, Sched 16, adding Sched B1 to Insolvency Act 1986.    [Back]

Note 10    Ibid, s 252. It does not however debar the landlord from exercising peaceable re-entry: Re A Debtor (No 13A IO and 14A IO of 1994) [1995] 1 WLR 1127. The court has powers to stay proceedings where application for an interim order is pending: Insolvency Act 1986, s 254.    [Back]

Note 11    As defined by the Insolvency Act 1986, Sch A1, para 3.    [Back]

Note 12    Insolvency Act 1986, Sched A1, para 12(1), added by Enterprise Act 2002, sched 17, para 37. These provisions came into force on 1 January 2003.    [Back]

Note 13    See para 10.9 above.    [Back]

Note 14    Woodfall on Landlord and Tenant, para 17.151. (The reference is to the Insolvency Act 1986.)    [Back]

Note 15    See para 10.5 above.    [Back]

Note 16    Scot Law Com No 191, para 3.45.    [Back]