Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2010] CSOH 115
P700/10	OPINION OF LORD MENZIES in the petition of CHESHIRE WEST AND CHESTER BOROUGH COUNCIL Petitioners; In the Administration of SPRINGFIELD RETAIL LIMITED for An order in terms of paragraph 74(3)(e) of Schedule B1 to the Insolvency Act 1986 ­­­­­­­­­­­­­­­­­________________

Petitioners: Ower; Maclay Murray & Spens LLP

Respondents: Wilson; MBM Commercial LLP

13 August 2010

Introduction

[1] The petitioners are the landlords of premises at 91/92 High Street, Worcester ("the premises"). Springfield Retail Limited ("the company") was the tenant of the premises. On 25 March 2008 the respondents were appointed as administrators of the company. The company remains in administration.

[2] The respondents traded the company's business from the premises until about 2 May 2008. On about 19 May 2008 an agreement was concluded between the respondents, Art Retail Limited ("ARL") and Moorswater Properties Limited ("MPL") in terms of which the respondents agreed to sell the business of the company to ARL. The contract for the sale of the business included a provision that the respondents would grant a licence to occupy the premises in favour of MPL (despite a provision in the lease that the tenant covenanted not to underlet, charge, part with or share possession or occupation of the premises). The draft licence provided that it was to run from 19 May 2008 until the earlier of (a)  the date upon which MPL took a formal assignation of the lease from the company, or (b)  the date which was six months from 19 May 2008.

[3] MPL took occupation of the premises on about 19 May 2008. By letter dated 23 May 2008 one of the respondents wrote to the petitioners' property agents stating inter alia:

"I am also pleased to report that I have now sold the assets and goodwill of the company to a third party, Art Retail Limited, thus enhancing the level of realisation for creditors. As part of the sale agreement, the purchaser has been given a licence to occupy the premises and they will be responsible for the ongoing rent from 19 May 2008. The purchaser is also seeking an assignation of the lease and I should be grateful if you could confirm your willingness to this. If you are not interested in assigning the lease please let me know by return in order that I can terminate the licence to occupy agreement."

By letter dated 2 June 2008 the petitioners' property agents replied stating inter alia:

"We note that the buyer of the above business wishes to take an assignment of the lease, is currently in occupation of the premises and will be responsible for the ongoing rent from 19 May 2008."

In order to enable them to progress the buyer's application to take an assignment of the lease from the company, the agents required further information and indicated that they would consider the buyer's application upon receipt of this. The letter concluded:

"Please note that no licence can be granted until all information requested has been supplied and we have had a reasonable opportunity to establish that it is satisfactory under the terms of the lease and (if appropriate) to have arranged for instructions for the grant of a licence to be fully implemented."

[4] None of the information requested by the petitioners' property agents was ever provided. MPL traded from the premises until April 2009. No assignation of the lease was agreed. No executed draft licence was ever received by the respondents. After 19 May 2008 no payments by way of rent or otherwise for the occupation of the premises were made to the petitioners, either by the respondents or by anyone else.

[5] By letter dated 20 November 2008 one of the respondents wrote to the petitioners' property agents stating inter alia that as no formal assignation/assignment has been effected, the Licence to Occupy terminated on the contractual termination date provided for in the sale agreement - 18 November 2008. The letter went on to say:

"The Joint Administrators have already paid to you the sum outstanding for the post appointment rent for the period from 27 March 2008 to closure of the above shop in full and final settlement. Any other sum outstanding in respect of rent prior to the date of appointment of the Joint Administrators will rank as an unsecured claim in the Administration of the Company. The Joint Administrators act as agents of the Company and are not personally adopting any of the contracts which may have been entered into by the Company, nor do they accept any personal liability in respect of them. Therefore, no payment for rent after 19 May 2008 will be paid by the Joint Administrators. Accordingly, we recommend that you take immediate steps to recover possession of your property from the licensee together with all sums due for payment from 19 May 2008."

[6] On 14 May 2009 the petitioners changed the locks at the premises, which had the effect, under English law, of terminating the lease. The petitioners have received no payment in terms of the lease for the period from 2 May 2008 until 1 April 2009. In the present petition they seek an order in terms of paragraph 74(3)(e) of Schedule B1 to the Insolvency Act 1986 for the respondents to be ordered to make payment to the petitioners of all sums due to the petitioners from 2 May 2008 until 1 April 2009 in terms of the lease, as an expense of the administration of the company.

[7] Paragraph 74 of Schedule B1 to the Insolvency Act 1986 provides, so far as material, as follows:

"(1)  A creditor or member of a company in administration may apply to the court claiming that -

(a)  the administrator is acting or has acted so as unfairly to harm the interests of the applicant (whether alone or in common with some or all other members or creditors)...

(3)  The Court may -

(a)  grant relief;

(b)  dismiss the application;

(c)  adjourn the hearing conditionally or unconditionally;

(d)  make an interim order;

(e)  make any other order it thinks appropriate.

(4)  In particular, an order under this paragraph may -

(b)  require the administrator to do or not do a specified thing..."

Submissions for the Respondents

[8] Counsel for the respondents invited me to dismiss the petition, and advanced five propositions in support of this motion:

(1)  the application, being made under paragraph 74 of Schedule B1 to the Insolvency Act 1986, is misconceived. It should properly have been brought under paragraph 43 of that Schedule, which provides a statutory moratorium on claims against a company in administration except with the consent of the administrator or the leave of the court. The administrators are not prepared to grant consent to the petitioners making a claim against the company, and the present application is an attempt to avoid the need to obtain the leave of the court, which would not ordinarily be granted in these circumstances.

(2)  Even if the respondents had been in occupation of the premises or made use of them for the purposes of the administration, the petitioners are not entitled to payment of rent as an expense in the administration as of right. The decision as to whether rent should be paid as if it were an expense of the administration is a matter for the discretion of the court.

(3)  The court should exercise that discretion in the respondents' favour.

(4)  In any event, the facts of this case do not entitle the petitioners to payment of rent; the lease does not fall within the Lundy Granite principle, because the administrators have not been in occupation of the property since 2 May 2008.

(5)  In terms of paragraph 74 of Schedule B1 to the Insolvency Act 1986, the petitioners must show that the respondents have acted in a way which is unfairly harmful to the petitioners' interests. The petitioners have not averred a relevant case that the respondents have done this.

By way of background, counsel explained that the respondents were appointed as administrators to the company on 25 March 2008, and traded from the premises until 2 May 2008. On 19 May 2008 they sold the business of the company (which traded from about 30 shop premises, including the premises in question) for a total of £150,000, half of which sum was referable to goodwill and half to stock and equipment. As part of the sale, the respondents granted the purchaser licences to operate the shops; the intention was that where the landlord was agreeable to this, the leases should be assigned to the purchaser. The purchaser's obligations under the licences were to be guaranteed by a personal guarantee to be granted by the individual who ultimately controlled the purchaser. It was a term of the licence that rent would be payable to the landlords, not to the respondents. Although the respondents sent licences and a personal guarantee for execution, no executed licence or personal guarantee was ever received in return. The effect of the order sought in the present petition, if granted in full, would result in the petitioners being paid more than two thirds of the entire purchase price paid for the company. This is not a matter which can properly be raised by an application under paragraph 74; it requires the discretion of the court and should be raised under paragraph 43.

[9] The question whether rent should be payable to landlords as if it were an expense of the administration is one for the discretion of the court in an administration procedure. Counsel accepted that there is a line of English authority in liquidation cases to the effect that where a liquidator has occupied premises for the purposes of the liquidation, rent will be payable as a liquidation expense In re Lundy Granite Company Ex parte Heavan (1871) LR 6 Ch. App 462; In re Oak Pits Colliery Co (1882) 21 Ch. D 322; In re Toshoku Finance UK Plc [2002] UKHL 6; [2002] 1 WLR 671. However, two important points should be borne in mind - first, in the present case the respondents have not been in actual occupation of the premises since 2 May 2008, the rent being payable directly by the licencees to the petitioners, and second, the courts have adopted a much more flexible approach in administrations than has been the case in liquidations. The English Court of Appeal gave careful consideration to the history of the "liquidation expenses" principle and the purpose and effect of administration in In re Atlantic Computer Systems Plc [1990] Ch 505. The Court of Appeal observed (at page 527) that:

"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."

[10] The observations of the Court of Appeal in Atlantic Computer Systems Plc were disapproved in part by the House of Lords in In re Toshoku Finance UK Plc, but only insofar as they related to liquidations. The ratio of the decision remained sound with regard to administrations. In that regard the Court of Appeal observed (at page 528) that

"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."

This reasoning remains unaffected by the decision of the House of Lords in Toshoku. The same reasoning has been applied by the Court of Appeal in administrations since Toshoku - for example, Innovate Logistics Limited (In Administration) v Sunberry Properties Limited [2008] EWCA Civ 1261, [2009] BCC 164, in which the court held that landlords did not have an absolute legal entitlement to be paid contractual rent and interest as an administration expense, and that on this point the court has a wide discretion exercisable according to the circumstances of the case. In that case the court declined to order the administrators to pay to the landlords the full contractual rent, but decided that they should pay to the landlords the monthly payments of the licence fee which was payable by the purchasers in that case to the administrators.

[11] In the present case, the petitioners could have terminated the lease immediately on receipt of the administrators' letter dated 23 May 2008 if they chose to do so, but they did not. Perhaps this was because the market rent at the time may have been below the rent under the lease, or because the petitioners did not wish to have an empty site; in either event, there has been some benefit to the petitioners. It was clear from the authorities referred to that the Lundy Granite principle was a matter for the discretion of the court when dealing with administrations, and in the present case that discretion should be exercised by refusing the petition.

[12] The observations of Lord Hoffmann at paragraph 38 of his speech in Toshoku relate only to liquidations, and not to administrations. Rent payable under a pre‑existing lease is not an expense of a liquidation or an administration, but may be ordered to be treated as if it was such. In liquidations, the Lundy Granite principle is now a hard and fast rule, but in administrations it is a matter for the discretion of the court. This proposition was consistent with the decision in Exeter City Council v Bairstow [2007] EWHC 400 (Ch); [2007] 4 All ER Ch.D. 437, in which it was held that non-domestic rates in respect of premises occupied by a company while it was in administration were payable as expenses of the administration. The flexible approach to the Lundy Granite principle when considering administration expenses was again adopted by the court in In re Lehman Brothers International (Europe) Limited (No.3) [2009] EWHC 2545 (Ch), particularly at paragraphs 100/101. The decision of Judge Purle Q.C. sitting as a High Court Judge in Goldacre (Offices) Limited v Nortel Networks UK Limited [2009] EWHC 3389 (Ch), [2010] 3 WLR 171, which was to the contrary effect, should not be followed. In that case the court accepted that if rental liability falls within the (English) Insolvency Rules, than it is payable as a matter of mandatory obligation, not as a matter of discretion, either on the part of the administrators or on the part of the court. That case was wrongly decided, on the basis that the ratio of Toshoku applied both to administrations and liquidations. The case was not in line with the other authorities in rejecting the proposition that the court had a discretion on this point in administrations. Such a discretion is central to the "rescue culture" which underlies administrations. Unless administrators can create temporary licences for the occupation of leased premises without fear of being held liable to the landlords for rent, the aims and purpose of an administration will be undermined. Counsel accepted that landlords have rights, and was not suggesting that these should not be protected by administrators; however, the scheme devised by Parliament depended on administrators being able to run the business for a period and then sell it. The best protection for landlords in this situation was the provision in the licence for termination if the landlord wished this to happen. Clause 2.3.1 of the licence in the present case (at page 38 of number 6/6 of process) preserved the right to terminate the licence if the landlord refused to grant consent to an assignment of the lease.

[13] The respondents did not retain the use of the premises for the purpose of the administration. The circumstances fell to be distinguished from those in Lundy Granite, because the administrators had parted with possession of the premises to the licensees; the landlords were aware of this having happened, and made no attempt to recover possession. Moreover, the respondents had not retained any right to receive rent from the licencees, who were to be responsible for paying rent directly to the petitioners. When the licence ultimately terminated on the termination date provided for in the sale agreement, namely 18 November 2008, the respondents wrote immediately by their letter dated 20 November 2008 (number 7/9 of process) to the petitioners' property managers, in the terms quoted at paragraph [5] above. In these circumstances the court should exercise its discretion in favour of the respondents, and refuse the petition. The respondents have performed their duties as administrators under the 1986 Act, in that they ensured the survival of the company for a limited period. They achieved a more favourable outcome for the creditors of the company than would have been achieved by means of a liquidation. They obtained a price of £150,000 for the business, one half of which was referable to goodwill. They found a potential new tenant for all thirty shops, which should have been a benefit to the landlords. They had tried to treat all creditors fairly; they stipulated in the licence that rents should be payable to the landlords, and there was a provision in each licence that the premises would be returned to any landlord that wished this.

[14] Finally, counsel submitted that the petitioners had failed to aver a relevant case in terms of paragraph 74 of Schedule B1 to the 1986 Act. They required to aver that they had suffered unfair harm, and that this had been caused by the actions of the respondents. As to the first of these elements, the factors relied on in the submission as to the exercise of the court's discretion were relevant. As to the second, if the petitioners have suffered harm, this has not been caused by the respondents' refusal to pay rent. The administrators allowed trading to continue without interruption by the mechanism of granting the licence; the petitioners did not avail themselves of the opportunity of a speedy assignation of the lease, or of regaining possession of the premises. With the benefit of hindsight it may be that the purchaser never intended to pay rent, but this does not reflect on the respondents' actings. In this regard counsel relied on a different decision in the Lehman Brothers administration, namely In re Lehman Brothers International (Europe) (In Administration) [2008] EWHC 2869 (Ch), which emphasised the need to show not only that the action of the administrator complained of is causative of harm to the applicant's interests, but also that the harm must be "unfair". In the present case, the administrators were fulfilling their obligations to the creditors as a whole and were attempting to be fair to all creditors. Their action in not making payment of rent for any part of the period referred to in the petition does not amount to unfair harm in the circumstances of this case.

Submissions for the Petitioners
[15] Counsel for the petitioners invited me to sustain the petitioners' second plea‑in-law and to grant the order sought. She maintained that the application was properly brought under paragraph 74 rather than paragraph 43 of Schedule B1 to the Insolvency Act 1986. The petitioners were not seeking to raise legal proceedings against the company, but were complaining about the respondents' actings which have been such as unfairly to harm the interests of the petitioners. The respondents have caused the petitioners' premises to be used by a third party for the benefit of the administration; they have created a situation in which the petitioners have no contractual relationship with the third party, yet the petitioners have been deprived of the rent to which they were entitled under the lease and in respect of which the respondents remain liable as tenants. The regime for payment of expenses in an administration (including rent for premises used for the benefit of the administration) is contained in the 1986 Act and the Scottish Rules made thereunder; any failure on the part of the respondents to recognise the petitioners' entitlement to rent constitutes unfair harm to the petitioners.

[16] The petitioners' application is strikingly similar to those in Goldacre and also Exeter City Council v Bairstow; in neither of these cases was it suggested that the application required to be made under paragraph 43 of Schedule B1. In Fashoff (UK) Limited v Linton [2008] EWHC 537 (Ch), [2008] BCC 542, which was an application under paragraph 43 of Schedule B1, the court expressly recognised (at paragraphs 74 and 95) that the court has ample powers to grant redress under paragraph 74 where a creditor claims that the administrator is acting in a way so as unfairly to harm the interests of the applicant. If the petitioners had sought to execute diligence against the assets of the company, or had sought to recover possession of the premises, there might have been merit in the respondents' argument that their application should have been made under paragraph 43; however, that is not what the petitioners seek. The petitioners claim that they have been unfairly harmed by the actions of the respondents, and they fall squarely within the provisions of paragraph 74. It was accepted on behalf of the petitioners (under reference to paragraph 28 of Goldacre) that even though rent should be treated as an administration expense, this was not necessarily determinative of the point of time at which the rent should be paid - the petitioners had no right to immediate payment, and their claim may not be capable of being satisfied in full. In all these circumstances this application was properly brought under paragraph 74.

[17] Turning to the merits of the application, counsel submitted that where a company in administration uses leasehold premises for the purposes of the administration, the rent payable under the lease ranks as an expense in the administration which is payable as a mandatory obligation, not as a matter of discretion, either on the part of the administrators or on the part of the court (Goldacre, paragraph 4). In the present case, the respondents had caused the petitioners' premises to be occupied by third parties for the purpose of the administration. The respondents' letter to the petitioners' property managers dated 23 May 2008 presented the matter as a fait accompli and stated that "the purchaser has been given a licence to occupy the premises". It has since become clear that the respondents allowed a third party to occupy the premises without having received either a duly executed licence agreement or any personal guarantee that rent would be payable. Moreover, the draft licence agreement had the result that payment of rent by the licensees could not be enforced by either the petitioners or the respondents, the petitioners having an interest but no title to sue the licensees and the respondents having a title but no interest. All of this was done without the knowledge or permission of the petitioners, and in order to secure a favourable purchase price for the company's business. This may have been for the purposes of the administration, but it amounted to the respondents acting so as unfairly to harm the interests of the petitioners. These circumstances fall squarely within the Lundy Granite principle, and the observations at paragraph 16 of Goldacre apply equally in the present circumstances. Although Goldacre concerned physical occupation of the premises by the administrators themselves, in the present case the respondents had caused a third party to continue to occupy the premises, for the purposes of the administration, and thereby deprived the petitioners of the use of their premises.

[18] In the period May to November 2008 the petitioners did what they could to check the suitability of the purchasers as assignees under the lease. They reasonably requested information to enable them to determine this issue, both from the respondents and from the purchasers, but received no response. The respondents never sought approval from the petitioners at any time for the grant of a licence to the purchasers, and the petitioners were denied any opportunity to negotiate, or even comment on, the terms of the unexecuted draft licence. The granting of this licence to occupy the premises was clearly a factor in persuading the purchasers to pay the purchase price for the business. Half of this price related to goodwill, so it was reasonable to assume that the price achieved by the respondents for the benefit of the creditors as a whole was substantially more than would have been achieved as a result of a liquidation. However, this was unfairly to the harm of the petitioners.

[19] The facts of the present case were distinguishable from those in In re Oak Pits Colliery Co because in that case the liquidator did not take possession of the Colliery premises or the coal underneath; however, the observations of Lindley LJ at page 330 applied in the present case. The respondents had elected to retain the premises for the purpose of advantageously disposing of the company's business.

[20] On the issue of whether there remains any discretion in the court as to whether this is an expense of the administration or not, counsel accepted that the Court of Appeal in Atlantic Computer Systems was clearly in favour of the court having a discretion in an administration (in contrast to the rigid principles applicable in liquidations). However, the observations in Atlantic Computer Systems were made in the context of a statutory framework which was subsequently radically changed by the Enterprise Act 2003, and changes to the rules which introduced Rule 2.67(1) to the (English) Insolvency Rules 1986. Goldacre correctly held that if rental liability falls within the rules, it is payable as a matter of mandatory obligation and not as a matter of discretion. This was consistent with Lord Hoffman's reasoning regarding liquidation expenses in Toshoku. Lord Hoffman was concerned with Rule 4.218. As David Richards J observed in Exeter City Council v Bairstow (at paragraph [54])

"...rule 2.67 was introduced by the Insolvency (Amendment) Rules 2003... which were made on 8 August 2003, well over a year after the decision of the House of Lords in In re Toshoku Finance. It is inconceivable that the rule-making authorities were unaware of the decision. In choosing substantially the same terms as rule 4.218, the intended result for administrations must have been the same as for liquidations. The same words should be given the same meaning."

[21] The observations of the Court of Appeal in Atlantic Computer Systems predate Toshoku, and predate the rules presently in force to regulate administrations, which were themselves changed following Toshoku. The language of Rule 2.67 was brought into line with the language of Rule 4.218, which was the subject of Lord Hoffman's decision in Toshoku. His remarks about the absence of discretion (at paragraphs 38 and 39 of his speech) are now applicable to administrations as well as to liquidations. It is not only in England that the rules as to administration expenses have been brought into line with liquidation expenses; in the Scottish Rules, Rule 4.67 deals with the order of priority of expenses of liquidations, and Rule 2.39B simply applies that rule to the expenses of administrations as it applies to a company in liquidation, subject to specified modifications. There is no scope for the application of any discretion on the part of the court as to whether or not a debt is an expense of the administration.

[22] Like the present case, Innovate Logistics involved the granting of a licence to occupy by administrators in "flagrant breach" of the lease. The court was concerned with the exercise of discretion in that case, but not at the initial stage of whether payment of rent was to be treated as an expense of the administration or not; as discussed in Toshoku, that was a fixed rule. The discretion fell to be exercised at a later stage, in deciding the extent of the remedy. At that stage the Court of Appeal held that the landlords did not have an absolute legal entitlement to be paid contractual rent and interest as an administration expense; on this point the court had a wide discretion exercisable according to the circumstances of the case. This was therefore entirely consistent with the decision in Goldacre, which was correctly decided. It follows that if an administrator causes a company in administration to occupy leasehold property for the purpose of the administration, then that occupation is subject to the full terms and conditions of the lease. The rent payable under the lease is payable as a matter of mandatory obligation, although it was accepted that the court has a discretion as to the extent of the remedy, and the order sought would not entitle the petitioners to do immediate diligence. What the petitioners were essentially seeking in the present petition was an order that the administrators should treat the petitioners' claim as an expense of the administration. Counsel suggested that the case should be put out By Order after the issuing of the court's opinion, to enable the petitioners to consider the wording of the crave. (Counsel for the respondents agreed to this course of action).

[23] Counsel's primary submission on the merits of the petition was therefore that Goldacre was correctly decided, and that the petitioners' claim falls to be treated as an expense of the administration as a matter of mandatory obligation. If this submission did not find favour with the court, counsel relied on her secondary submission, namely that if a flexible approach was to be taken and discretion exercised at an early stage, that discretion should be exercised in favour of the petitioners. Some of the factors touched on already are relevant in the exercise of that discretion. The respondents granted a licence to the purchasers without any consultation with the petitioners and in contravention of the provisions of the lease. They did so for the benefit of the creditors as a whole; none of the authorities suggest that a particular landlord ought to be disadvantaged by use of their premises by administrators for the benefit of the administration as a whole without payment of rent. The observations of the Court of Appeal in Atlantic Computer Systems (at page 522) were relevant:

"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."

[24] In the present case the premises were used in order to benefit the administration as a whole, and in the interest of fairness and justice the petitioners ought to receive payment of the rent as an expense of the administration. During the period ending on 20 November 2008 the purchaser of the company's business occupied the premises under the licence. Counsel accepted that matters were different after 20 November 2008, when the administrators made it clear that they did not intend to continue with the lease or to occupy the premises themselves. Counsel accepted that the order which the petitioners sought related only to the period ending on 20 November 2008, and thereafter the petitioners' only remedy was to rank as an ordinary creditor in the administration. Matters were quite different in the period from May to November 2008. Prudent administrators would not relinquish possession of the premises to a third party until they had in their hands a signed contract giving them title and interest to sue. No party had an enforceable right in terms of the licence granted by the respondents; the interests of the landlord ought not to be forgotten. A landlord should not be required to allow his assets to be enjoyed at no charge, simply to suit the administration as a whole. The occupation of the premises by the purchaser benefitted the administration as a whole, and the landlord ought to received payment of rent therefor.

[25] Insofar as the issue of personal bar is raised in the answers, the letter from the petitioners' property managers dated 2 June 2008 did no more than note what was stated by the respondents in their letter dated 28 May 2008. The petitioners were never given an opportunity to negotiate with the purchaser, and at no time did the petitioners represent to the respondents or their agents that they were content to allow the purchaser to occupy the premises. Thereafter the petitioners took reasonable steps to correspond with the respondents and the purchasers regarding the possibility of an assignation, but they received no response.

Reply for the Respondents

[26] Counsel submitted that the respondents had acted reasonably. They were told by their solicitors that "the deal was done" with regard to the purchase of the company's business, and it was on this basis that they allowed the licensees to take possession of the premises. There was provision in the licence for landlords to recover possession at any time, and the petitioners were advised of that fact. There was no evidence of any actions by the petitioners between the letter from their property managers dated 2 June 2008 (No.7/4 of process) and that dated 3 October 2008 (No.6/22 of process).

[27] An examination of the Insolvency Rules did not advance the petitioners' case. The rules define what the expenses of a liquidation (or an administration) will be, but it was clear from Toshoku that rent in terms of an existing lease is not an expense in an administration; it may be ordered to be paid as if it were an expense of administration, but this depends on the Lundy Granite principle. Whether a post administration liability is an expense of the administration or not is determined by the rules, but the position is otherwise in relation to pre-administration liabilities. These are not expenses of the administration, and it is not the rules that make them such. Instead, it is the application of the Lundy Granite principle, which has evolved into an inflexible rule in the case of liquidations (as recognised by Lord Hoffman in Toshoku), but in the case of administrations is a flexible principle, in the application of which the court has a discretion, as decided in Atlantic Computer Systems. The fact that a pre-liquidation liability is not an expense of the liquidation is apparent throughout Lord Hoffman's speech in Toshoku.

[28] It was correct that Goldacre was an application under paragraph 74, but that was a matter of concession in that case and was not argued. Parliament cannot have intended to grant a statutory moratorium on actions on the one hand (by paragraph 43) and remove it with the other hand (by paragraph 74).

[29] Throughout the period from May until November 2008 the petitioners knew that they had the power to terminate the licence at any time. The respondents should not be penalised for having presented the petitioners with continuing tenants and potential rent following the respondents' vacating the premises.

Discussion

[30] I deal first with the appropriateness of making this application under paragraph 74 of Schedule B1 to the 1986 Act, rather than paragraph 43. I do not consider that there is any merit in the argument that this application ought to have been made in terms of paragraph 43. This does not amount to a legal process or proceedings being instituted against the company or the property of the company. If the petitioners were seeking to irritate the lease or to exercise diligence against the property of the company, the respondents' argument would have some force. However, the petitioners are not doing that. Their complaint relates to the actings of the respondents after they were appointed as administrators. The respondents permitted a third party to occupy the premises in flagrant breach of the terms of the lease. They did so without having received any executed licence nor any executed guarantee of the licensees' obligations. They did so in such a way that neither they nor the petitioners were able to sue the occupiers of the premises for payment of rent during the course of the licence. They did so in order to sell the company's business at a price which no doubt appeared to be better than could have been realised under a liquidation, and so for the purpose of the administration and the creditors as a whole, but which is said to have been such as unfairly to harm the interests of the petitioners. This appears to me to fall fairly and squarely within the provisions of paragraph 74. It is not something about which Parliament was concerned with establishing a statutory moratorium on proceedings. I see nothing misconceived or inappropriate in the present application being made in terms of paragraph 74.

[31] I now turn to consider the question whether the court has a discretion in deciding whether rent for the premises between May and November 2008 is an expense of the administration, or whether this is a mandatory obligation to be determined by the rules. Although I am attracted by the flexible approach adopted by the Court of Appeal in Atlantic Computer Systems, which may well be in accordance with the original concept of a "rescue culture" underlying the introduction of the administration procedure, in light of the decision of the House of Lords in Toshoku and the changes to the rules I do not consider that the court has any discretion in deciding what is or is not an expense of the administration. This falls to be decided by applying the Lundy Granite principle, as explained in Toshoku. Counsel for the respondents pointed out that the observations of Lord Hoffmann at paragraph 38 of his speech in Toshoku relate only to liquidations, and not to administrations. There might have been some force in this argument were it not for the changes which were made to the rules following Toshoku, and which have the effect of making the provisions for expenses in administrations substantially the same as the provisions for expenses in liquidations. In England, the terms of Rule 2.67 are substantially the same as those of Rule 4.218, and in Scotland Rule 2.39B adopts the terms of Rule 4.67 mutatis mutandis. I agree with the reasoning of David Richards J in Exeter City Council v Bairstow (quoted at paragraph [20]) above). In light of this reasoning, the observations of Lord Hoffmann at paragraph 38 of Toshoku must apply to administrations. It follows that I agree with the decision of Judge Purle Q.C. sitting as a High Court Judge in Goldacre (at paragraph 4) that the matter is now to be considered exclusively by reference to the rules and that if the rental liability falls within the rules, then that is payable as a matter of mandatory obligation, not as a matter of discretion, either on the part of the administrator or on the part of the court.

[32] As counsel for the petitioners recognised, the fact that a debt counts as an expense of the administration does not entitle the petitioners to immediate payment. The order of priorities under Rule 2.39B may mean that if the petitioners are paid at once, the assets to satisfy prior expense claims may be insufficient. The question of remedy is entirely a matter of discretion. This is consistent with what was stated in Toshoku (at paragraph [39]) and also with Innovate Logistics. I am satisfied that the petitioners' claim for rent for the period from May to November 2008 falls to be treated as an expense of the administration.

[33] If I am wrong in the view expressed above that the court does not have a discretion when deciding whether or not rent falls to be treated as an expense of the administration, and if therefore I do have a discretion on this point, I should indicate how I would have exercised that discretion. I would have exercised that discretion in favour of the petitioners, and found that the respondents ought to treat the rent payable between May and November 2008 as an expense of the administration. The same result would accordingly be achieved, albeit by a different route. The factors to which I would have had regard are those already touched on several times in the course of this opinion. They are: the fact that the respondents permitted a third party to occupy the premises in flagrant breach of the terms of the lease; the fact that they did so without giving the petitioners any prior notice of their intention to do so, and no opportunity to consider the proposed draft licence; the fact that they allowed this occupation to take place without having received an executed licence or personal guarantee; the fact that even in terms of the unexecuted licence there was no mechanism for enforcement of payment of rent, either by the petitioners or by the respondents; and the failure to respond to the reasonable request for information by the petitioners' property managers to enable a decision to be made as to whether the purchaser was a suitable assignee of the tenants' interest in the lease. It appears to me that the respondents were so attracted by the prospect of selling the business of the company to the purchasers that they paid insufficient regard to the legitimate interests of the petitioners. All of these factors support the exercise of such discretion in favour of the petitioners.

[34] Counsel for the respondents suggested that the petitioners could have terminated the lease immediately on receipt of the administrators' letter dated 23 May 2008 if they chose to do so, but they did not. However, I do not think that the petitioners can be criticised for the actions which they took. They made reasonable requests for information as to the suitability of the purchaser to be an assignee of the tenants' interest in the lease, which were never answered. I do not find the argument that any discretion should be exercised in favour of the respondents to be persuasive.

[35] With regard to the fourth proposition advanced in support of the respondents' motion for dismissal of the petition, although the respondents did not trade the company's business from the premises themselves after 2 May 2008, they procured the occupation of the premises by a third party until 18 November 2008. This occupation was part of the agreement for the sale of the company's business by the respondents, and was for the purpose of the administration. I am satisfied that it falls within the Lundy Granite principle, as that has been developed. As counsel for the petitioners recognised, matters are different after 20 November 2008, when occupation by the third party appears to have ceased and the respondents indicated that they did not intend to occupy the premises themselves and were not personally adopting any of the company's contracts.

[36] I am satisfied that the petitioners have averred a relevant case in terms of paragraph 74 of Schedule B1 to the 1986 Act, namely that they have suffered unfair harm and that this has been caused by the actions of the respondents.

[37] For these reasons I refuse the respondents' motion to dismiss the petition. As agreed by parties, the matter will be put out By Order shortly after the issuing of this opinion, to enable parties to address me as to the precise terms of the order sought.