Court of Appeal Judgment Template - INSOL · Neutral Citation Number: [2014] EWCA Civ 180 Case No:...

Neutral Citation Number: [2014] EWCA Civ 180Case No: A2/2013/2005

IN THE COURT OF APPEAL (CIVIL DIVISION)ON APPEAL FROM THE HIGH COURT,CHANCERY DIVISION, COMPANIES DIVISIONMr Nicholas Lavender QC (sitting as a Deputy Judge of the High Court)20122443,2558,2559,2560

Royal Courts of JusticeStrand, London, WC2A 2LL

Date: 24 February 2014Before :

LORD JUSTICE PATTENLORD JUSTICE LEWISON

andLADY JUSTICE SHARP

- - - - - - - - - - - - - - - - - - - - -Between :

(1) PILLAR DENTON LIMITED(2) HIGHCROSS (NO.1) LIMITED(3) HIGHCROSS (NO.2) LIMITED

(4) CSC (ELDON SQUARE) LIMITED(5) CSC LAKESIDE LIMITED

(6) RAVENSCROFT PROPERTIES LIMITED

V

(1) MICHAEL JOHN ANDREW JERVIS(4) STUART DAVID MADDISON

(3) GAME RETAIL LIMITED

Appellants

Respondents

- - - - - - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - - - - - -

Mr Antony Zacaroli QC & Ms Hannah Thornley (instructed by Berwin Leighton Paisner LLP) for theAppellants

Mr Daniel Bayfield (instructed by Linklaters LLP) for the 1st and 2nd RespondentsMr John McGhee QC & Ms Catherine Addy (instructed by Macfarlanes LLP) for the 3rd

RespondentHearing dates : 12 and 13 February 2014

- - - - - - - - - - - - - - - - - - - - -Judgment

Judgment Approved by the court for handing down. Pillar Denton Ltd & Ors v Jervis & Ors

Lord Justice Lewison:

The issue

1. The issue on this appeal is the treatment of rent payable under a lease held by acorporate tenant that enters administration. When is the rent no more than a provabledebt; and when does it rank as an expense of the administration?

Background

2. The question arises in the context of the administration of the Game group ofcompanies. One of the companies in the group (“GSGL”) was the tenant of manyhundreds of leasehold retail properties from which the group traded. In relation tomost of those properties rent was payable quarterly in advance on the usual quarterdays (25 March, 24 June, 29 September and 25 December). On 25 March 2012approximately £10 million in rent became due under the various leases. It was notpaid. The group entered administration on the following day. Some stores were closeddown immediately; but trading continued in other stores which were included in aswift sale of the business and assets of the group to Game Retail Ltd, which was notpart of the group. We were told that approximately £3 million of the March rentremains outstanding in respect of those stores.

3. At the heart of the appeal is the question whether part of an instalment of rent payablein advance can be treated as an expense in the context of insolvency. Two decisions atfirst instance have decided that it cannot. In Goldacre (Offices) Ltd v Nortel NetworksUK Ltd [2009] EWHC 3389 (Ch); [2011] Ch 455 HH Judge Purle QC decided that ifa quarter’s rent (payable in advance) fell due during a period in which administratorswere retaining the property for the purposes of the administration, the whole of thequarter’s rent was payable as an administration expense even if the administratorswere to give up occupation later in the same quarter. The corollary of that decision isLeisure (Norwich) II Ltd v Luminar Lava Ignite Ltd [2012] EWHC 951 (Ch); [2013] 3WLR 1132. In that case HH Judge Pelling QC decided that where a quarter’s rentpayable in advance fell due before entry into administration none of it was payable asan administration expense even if the administrators retained possession for thepurposes of the administration. The rent is simply provable as a debt in theadministration. Sensibly, the judge in our case (Mr Nicholas Lavender QC) simplyfollowed those two decisions without sustained argument, and granted permission toappeal.

4. The landlords’ appeal was presented by Mr Antony Zacaroli QC and Ms HannahThornley. The response of Game Retail Ltd was presented by Mr John McGhee QCand Ms Catherine Addy. The administrators, represented by Mr Daniel Bayfield, havetaken a neutral stance.


5. One consequence of these two decisions is that it has become more common forcompanies to enter administration on the day immediately following a quarter day,thus avoiding liability to pay the rent in full even if they retain possession of theirleasehold property. From the perspective of the landlords the position is exacerbatedby a swift sale of the business to a new company that can, in effect, trade for the firstthree months rent free. Unsurprisingly, landlords are discontented with the legalposition. Hence this appeal. It is common ground that if the landlords succeed inestablishing that part of an instalment of rent payable in advance is capable of beingtreated as an administration expense, then the principle must work in both directions.In other words, if rent payable in advance falls due during the period when theadministrators retain possession, it too must be apportioned if they subsequently goout of possession during the quarter. That is the subject of a contingent cross-appeal.This would, I think, be the sensible result. As Vaughan Williams J put it in Re NewOriental Bank Corporation (No 2) [1895] 1 Ch 753, 757:

“if a company which is in liquidation remains in beneficialoccupation of a lease – that is to say, if it occupies the demisedpremises, or takes the rent, and thus obtains the benefit of thelease – the Court ought to do its very best to make the companypay the rent in full, and not merely a dividend.”

6. The real question is whether in the light of a substantial body of case-law that result isopen to us. In my judgment it is; and for the reasons that follow I would allow boththe appeal and the cross-appeal.

Common ground

7. It is common ground that at common law rent (whether payable in advance or inarrear) is not apportionable in respect of time; and it is also common ground that rentpayable in advance is not apportionable under the Apportionment Act 1870. The latterproposition is the result of the decision of this court in Ellis v Rowbotham [1900] 1QB 470, although the landlords may wish to challenge its correctness if this case goesfurther. The application of the common law, as modified by the Apportionment Act1870, is clear. For example as Mr McGhee QC rightly submits, in the absence of animplied term to the contrary, a tenant under a lease containing a conditional breakclause must pay the whole of a quarter’s rent payable in advance that falls due beforethe break date even if the period covered by that payment extends beyond the breakdate: PCE Investors Ltd v Cancer Research UK [2012] EWHC 884 (Ch); [2012] 2 P& CR 5. By the same token if a landlord forfeits for non-payment of rent he is entitledto recover as rent the whole of a quarter’s rent payable in advance which fell duebefore the date of the forfeiture even if the forfeiture date is in the middle of thequarter covered by that payment: Canas Property Co v KL Television Services [1970]2 QB 433.

8. It is also common ground that whether rent is payable as an administration expense isnot a question of an exercise of the court’s discretion. Either it counts as an expense,or it does not. If rent falls within the principle known variously as the “salvageprinciple,” “the liquidation expenses principle” or “the Lundy Granite principle” it is


an administration expense. If not, not. The origins and development of the principle,which I shall call the “salvage principle”, were explained by Lord Hoffmann in ReToshoku Finance Ltd [2002] UKHL 6; [2012] 1 WLR 671. However, since the pointat issue in that case was a different one, it is necessary to go over some of that ground.

The landlords’ argument

9. The essential point for the landlords is that whether rent payable in advance isapportionable at common law or under the Apportionment Act 1870 is irrelevant. Thelandlords do not seek to divide the rent in any way. What is in play is not the commonlaw or the Apportionment Act, but the salvage principle. And that principle does notrest on any principle of the common law, but on the intervention of equity. Over theyears that principle has been consistently applied, and operates as a gloss on thecorrect construction of the statutory rules of priority of debts both in liquidation andadministration.

The contrary argument

10. The contrary argument is that the application of the salvage principle is cruciallydependent on the date at which liability for rent accrues due. The only basis on whicha liability can be apportioned is on a basis which applies generally across the law.There is no special rule applicable to cases of insolvency; and there is no equitablepower to apportion. The cases consistently demonstrate that apportionment can applyonly to cases of rent or other periodical payments payable in arrear. It cannot apply toinstalments of rent payable in advance, the whole of which accrue due on the rent day.There is no unfairness about this. It is simply a consequence of modern landlords’choice to reserve rent payable in advance.

Provable debts and administration expenses

11. The basic definition of “debt” is found in rule 13.12 of the Insolvency Rules 1986.Rule 13.12 (1) says that it includes (a) any debt or liability to which the company wassubject on the date when the company went into liquidation (or enteredadministration) and (b) any debt or liability to which the company may becomesubject after that date by reason of any obligation incurred before that date. It does notmatter whether the debt or liability is present or future, certain or contingent or fixedor liquidated: rule 13.12 (2). Rule 13.12 (5) applies these provisions toadministrations.

12. On the face of it liability to pay rent as it accrues due under a lease taken by thecompany before its entry into administration (or liquidation) is a liability to which itbecomes subject as a result of an obligation incurred before the relevant date.Accordingly, it falls within the definition of “debt”. The general rule is that all debtsare provable: Insolvency Rules 1986 rule 12.3.


13. However, special provision is made for rent and other periodical payments. Rule 2.87provides:

“(1) In the case of rent and other payments of a periodicalnature, the creditor may prove for any amounts due and unpaidup to the date when the company entered administration or, ifthe administration was immediately preceded by a winding up,up to the date that the company went into liquidation.

(2) Where at any date any payment was accruing due, thecreditor may prove for so much as would have fallen due at thatdate, if accruing from day to day.”

14. A similar rule applies to winding up: Insolvency Rules 1986 rule 4.92.

15. It is clear, therefore, that in the case of rent payable in advance the landlord is entitledto prove for any rent that had accrued due before the date when the company wentinto liquidation (or entered administration). A creditor may also prove for a debt ofwhich payment was not yet due at the date of the entry into administration. But if he ispaid a dividend before the due date then the amount of the dividend is adjusted:Insolvency Rules rule 2.89. The equivalent rule for liquidation is rule 4. 94. If thelease remains on foot it is thus common ground that the landlord is also entitled toprove for instalments of rent as they fall due: Metropolis Estates Co Ltd v Wilde[1940] 2 KB 536; Christopher Moran Holdings Ltd v Bairstow [2000] 2 AC 172, 187.

16. The expenses of an administration are dealt with in rule 2.67. Rule 2.67 (1) (a) dealswith “expenses properly incurred by the administrator in performing his functions inthe administration of the company”. Rule 2.67 (1) (f) deals with “any necessarydisbursements by the administrator in the course of the administration”. This rule ismodelled on rule 4.218 (which applies to expenses of a liquidation) and it is commonground that they are to be interpreted in the same way. In Toshoku Lord Hoffmannsaid at [38] that:

“The court will of course interpret rule 4.218 to include debtswhich, under the Lundy Granite Co principle, are deemed to beexpenses of the liquidation. Ordinarily this means that debtssuch as rents under a lease will be treated as coming withinparagraph (a), but the principle may possibly enlarge the scopeof other paragraphs as well. But the application of that principledoes not involve an exercise of discretion any more than theapplication of any other legal principle to the particular facts ofthe case.”

17. Thus the salvage principle will apply to the interpretation of rule 2.67. Mr McGheeaccepted that this was so in this court, but may wish to challenge that proposition ifthis case goes further.


18. It is also common ground that the salvage principle and the right to prove for a debtare not mutually exclusive. Thus the mere fact that a debt is a provable debt does notmean that the salvage principle cannot apply.

Landlord’s remedies for non-payment of rent

19. Part of Mr McGhee’s argument depended on comparing the landlord’s remedies fornon-payment of rent outside the context of insolvency with the curtailment of thoseremedies by the Insolvency Act 1986 and the Insolvency Rules. It is thereforenecessary to set them out briefly.

20. Where the rent is unpaid on the due date the landlord may of course sue for it. He isentitled to sue anyone who has contracted to pay that rent (such as an original tenantor an assignee who has entered into a covenant to pay contained in a licence toassign), subject to the effect of the Landlord and Tenant (Covenants) Act 1995. He isalso entitled to sue any person with whom he has privity of estate at the relevant time.If the rent is payable in advance the relevant time is the rent day. However, if the rentis payable in arrear, and the tenant in possession on the rent day had only hadpossession for part of the period covered by the rent, then the landlord may only suethe tenant in possession for an apportioned part of the rent. The outgoing tenant willremain liable for the remainder: Parry v Robinson-Wyllie Ltd (1987) 54 P & CR 187.One of the cases on which Mr McGhee relied (The Swansea Bank Ltd v Thomas(1879) LR 4 Ex D 94) is simply an illustration of this principle.

21. Mr McGhee submitted that the same principle applied to distress. He said that alandlord was not entitled to distrain for more rent than was owed by the tenant inpossession. He supported that proposition with the decision of Mr John Crowley QC,sitting as a deputy judge of the High Court, in Wharfland Ltd v South London Co-Operative Building Co Ltd [1995] 2 EGLR 21. Mr Crowley held that a landlord wasnot entitled to distrain for rent on the goods of an assignee of a lease to the extent thatthe arrears of rent in question had accrued before the date of the assignment. Hisdecision appears to me to depend on equiparating liability to pay rent andvulnerability to distress. In my judgment, with all respect to Mr Crowley, hisjudgment does not really engage with the nature of distress. The traditional commonlaw view about rent was that it was a thing that issued out of the land. It was partly forthat reason that in Clun’s Case (1604) 10 Co Rep 128a the court held that rent was notapportionable in point of time. As the court put it:

“the rent reserved is to be raised out of the profits of the land,and is not due until the profits are taken by the lessee.”

22. It is for that reason that the landlord is, in principle, entitled to distrain on any goodsthat he finds on the land, whether they are the goods of the tenant or not. There are, ofcourse, exceptions to this general rule some of which are creations of the common lawand some of which owe their origin to statutory intervention.


23. Although at common law rent was not apportionable in respect of time, it wasapportionable in respect of estate. Clun’s Case itself recognised that by referring to acase in which the tenant had been evicted from part of the land. But that was not theonly case in which rent was apportionable in respect of estate. Thus if the tenantassigned part of the property comprised in a tenancy, the assignee only had privity ofestate with the landlord as respects that part; and thus was only liable for anapportioned part of the rent. The cases are reviewed in Smith v Jafton Properties Ltd[2011] EWCA Civ 1251; [2012] Ch 519.

24. The landlord’s right to distrain is founded on the principle that the rent reserved by hisdemise issues out of the land and he distrains by taking possession, in the nature of apledge, of goods and chattels found upon such land: British Mutoscope and BiographCo Ltd v Homer [1901] 1 Ch 671, 674. Even where there has been an assignment ofpart of the land (with the result that the tenant of each part is only liable for anapportioned part of the rent) the landlord is entitled to enter any part of the demisedproperty and distrain for the whole rent: Whitham v Bullock [1939] 2 KB 81; Smith vJafton Properties Ltd at [28] (v). He is entitled to do this, even though the tenant ofeach apportioned part of the lease only has privity of estate as regards that part of theleased property that he holds. Accordingly vulnerability to distress is not dependenton identity between the rent in arrear and privity of estate.

25. Thus the premise underlying Mr Crowley’s decision is, in my judgment, ill-founded.But quite apart from that we are not dealing with a case in which there has been achange of tenant. The company has remained the tenant throughout the relevantperiod. What has changed is that instead of being able to pay its debts as they fell due,it ceased to be able to do so. Even if we were dealing with a (hypothetical) change oftenant, it is not a change to which the landlord has consented. Thus part of thereasoning on which Mr Crowley based his decision (namely that the landlord in thatcase had consented to the assignment) does not apply to our case.

26. The final point to make about distress is that the ancient common law right wassimply a right to enter the demised property, and to seize and impound goods. Thusthe distress was complete once the goods were impounded. At common law there wasno right to sell the goods impounded, but that right was conferred on landlords bystatute as long ago as 1689. However, the fact that the distress was complete onimpounding helps the modern reader to understand some of the nineteenth centurycases about distress.

27. In addition to the remedies of action and distress the landlord will also be entitled toforfeit the lease for non-payment of rent. This remedy arises from the mere fact thatrent is unpaid. It does not depend on the personal liability of the tenant in possessionto pay the arrears. If the landlord does forfeit then in the usual case the tenant inpossession will be entitled to relief against forfeiture if he pays the whole of the rentin arrear (whether it is his personal liability or not).


28. The point that the court made in Clun’s Case, namely that rent is not due until profitsare taken by the tenant, also explains why in the absence of express wording rent ispayable in arrear. During the nineteenth century this was the normal way in whichrent was paid. It is not until relatively modern times that the norm changed. Nowadaysrent is generally made payable in advance. The fact that in the nineteenth century rentwas normally payable in arrear must be constantly borne in mind when consideringthe statements of principle formulated in the nineteenth century cases. The essentialpoint is that where rent was payable in arrear the tenant had already enjoyed the fullbenefit of occupation for the relevant period by the time that the rent fell due. Therewas no question of a continuing supply by the landlord in return for that payment ofrent. In that respect a landlord under a lease reserving rent payable in arrear was in nodifferent position to any other creditor who had supplied a company with goods orservices but who had not been paid when the company became insolvent.

29. As we have seen at common law rent was not apportionable in respect of time, butwas apportionable in respect of estate. Successive Acts of Parliament allowed rent tobe apportioned in respect of time in some circumstances; but ultimately theApportionment Act 1870 allowed all rent payable in arrear to be apportioned inrespect of time. What does that mean? What it means is that if, for example, the leasecomes to an end between rent days the tenant is only liable for an apportioned part ofthe rent. No one is liable for the remainder. If, on the other hand, the lease is assignedbetween rent days the outgoing tenant is liable for the rent down to the date of theassignment, and the incoming tenant is liable for the rent thereafter. A trueapportionment thus either creates liability for part of the rent or transfers liability fromone person to another.

Landlord’s remedies in cases of insolvency

30. The landlord’s rights to remedies against a company in administration are curtailed byparagraph 43 of Schedule B1 to the Insolvency Act 1986. The relevant parts of thatparagraph provide:

“(4) A landlord may not exercise a right of forfeiture bypeaceable re-entry in relation to premises let to the companyexcept—

(a) with the consent of the administrator, or

(b) with the permission of the court.

…

(6) No legal process (including legal proceedings, execution,distress and diligence) may be instituted or continued againstthe company or property of the company except—

(a) with the consent of the administrator, or

(b) with the permission of the court.


…

(7) Where the court gives permission for a transaction underthis paragraph it may impose a condition on or a requirement inconnection with the transaction.”

31. Remedies against companies in liquidation are also curtailed by the Insolvency Act1986, although the precise scope of the sections in question is still to some extentuncertain. Section 126 applies between the presentation of a winding up petition andthe making of a winding up order. During that window an application may be made tothe court to stay “any action or proceeding against the company”. It is a matter ofsome debate whether a distress or peaceable re-entry falls within that section. Thecourt’s power is to stay the action or proceeding “on such terms as it thinks fit”.Section 128 (1) provides:

“Where a company registered in England and Wales is beingwound up by the court, any attachment, sequestration, distressor execution put in force against the estate or effects of thecompany after the commencement of the winding up is void.”

32. This apparently unqualified prohibition is, however, capable of being overridden bythe grant of permission by the court either under section 126 or under section 130 (2)which provides:

“When a winding-up order has been made or a provisionalliquidator has been appointed, no action or proceeding shall beproceeded with or commenced against the company or itsproperty, except by leave of the court and subject to such termsas the court may impose.”

The salvage principle

33. The origins of the salvage principle can be traced back to Re Exhall Coal Mining CoLtd (1864) 4 De GJ & S 377. In that case a winding up order was made against thecompany on 6 February 1864. However, earlier on the same day, but after thepresentation of the petition, the landlord put in a distress for rent on goods then on theland. The Court of Appeal in Chancery, affirming the Master of the Rolls, allowed thedistress to proceed. In order for the landlord to have been entitled to distrain at all, therent must have fallen due. So this must have been a case in which the landlord wasallowed to distrain for rent which had accrued due before the date of the petition. Itappears that the lease was held, not by the company itself, but by trustees for thecompany; but that fact played no part in the reasoning of the two Lords Justices.

34. Lord Hoffmann observed in Toshoku at [20]

“Thus was created a discretion to allow a creditor to use aprocess of execution to recover in full a debt for which hewould otherwise have had to prove in the liquidation. In


subsequent years a body of precedent on the exercise of thediscretion developed.”

35. It is clear from this passage that Lord Hoffmann did not regard the existence of aprovable debt as incompatible with the salvage principle. Likewise in Nortel GmbH[2013] UKSC 52; [2013] 3 WLR 504 at [57] Lord Neuberger, referring to the salvageprinciple, said that “a liability which would otherwise be a provable debt can be, onspecial facts, an expense of the administration or liquidation.”

36. In Re Lundy Granite Co ex p Heavan (1870-71) LR 6 Ch App 462 the landlord waspermitted to distrain for rent which had accrued due after the winding up. Theprinciple underlying the decision was formulated by James LJ as follows:

“But in some cases between the landlord and the company, ifthe company for its own purposes, and with a view to therealization of the property to better advantage, remains inpossession of the estate, which the lessor is therefore not able toobtain possession of, common sense and ordinary justicerequire the Court to see that the landlord receives the full valueof the property. He must have the same rights as any othercreditor, and if the company choose to keep the estates for theirown purposes, they ought to pay the full value to the landlord,as they ought to pay any other person for anything else, and theCourt ought to take care that he receives it.”

37. It is this case which gave one of its names to the principle; and must in my judgmentbe taken to be an authoritative exposition of what it entails. The principle thusformulated was evidently approved by the House of Lords in Toshoku. LordHoffmann commented at [24]:

“Although these principles were evolved in relation to astatutory discretion to allow a process of execution to proceed,it was obvious to everyone that there could be no practicaldifference between allowing a landlord to levy a distress forrent falling due after the winding up and directing the liquidatorthat he should be paid in full.”

38. In Re Oak Pits Colliery Co (1882) 21 Ch D 322 Lindley LJ rationalised theunderlying principle as follows:

“When the liquidator retains the property for the purpose ofadvantageously disposing of it, or when he continues to use it,the rent of it ought to be regarded as a debt contracted for thepurpose of winding up the company, and ought to be paid infull like any other debt or expense properly incurred by theliquidator for the same purpose, and in such a case it appears tous that the rent for the whole period during which the property


is so retained or used ought to be paid in full without referenceto the amount which could be realised by a distress.”

39. In Toshoku Lord Hoffmann commented at [27]:

“My Lords, it is important to notice Lindley LJ was not sayingthat the liability to pay rent had been incurred as an expense ofthe winding up. It plainly had not. The liability had beenincurred by the company before the winding up for the wholeterm of the lease. Lindley LJ was saying that it would be justand equitable, in the circumstances to which he refers, to treatthe rent liability as if it were an expense of the winding up andto accord it the same priority. The conditions under which apre-liquidation creditor would be allowed to be paid in fullwere cautiously stated. Lindley LJ said (at p 329) that thelandlord "must show why he should have such an advantageover the other creditors". It was not sufficient that the liquidatorretained possession for the benefit of the estate if it was also forthe benefit of the landlord. Not offering to surrender or simplydoing nothing was not regarded as retaining possession for thebenefit of the estate.”

40. If I may venture a comment of my own, although Lindley LJ had distinguishedbetween the two categories of case according to when the rent fell due, the underlyingprinciple was not formulated in the same way. He did not say that the rent should bepaid in respect of those rent days that fell during the period of retention for the benefitof the winding up. Rather he said that the rent should be payable in full “for the wholeperiod during which the property is so retained or used”. I will call this period theperiod of beneficial retention. It is by no means clear, therefore, that Lindley LJ wasapplying a strict accruals basis of liability. In addition Lindley LJ added that theprinciple was to be applied without reference to the amount that could have beenrealised by a distress. Clearly by 1881 the salvage principle had outgrown its originsin the law of distress.

41. Lord Hoffmann observed at [29]:

“The principle … is thus one which permits, on equitablegrounds, the concept of a liability incurred as an expense of theliquidation to be expanded to include liabilities incurred beforethe liquidation in respect of property afterwards retained by theliquidator for the benefit of the insolvent estate. Although itwas originally based upon a statutory discretion to allow adistress or execution against the company's assets, the courtsquickly recognised that its effect could be to promote a creditorfrom merely having a claim in the liquidation to having a priorright to payment in full. As in the case of other equitabledoctrines, the discretion hardened into principle. By the end of


the 19th century, the scope of the Lundy Granite Co principlewas well settled.”

42. This passage does, in my judgment, regard the principle as one that is founded onequitable grounds, and not on the common law or statute. That the principle isfounded on equity is emphasised by Lord Hoffmann’s later observation at [30] that:

“Expenses incurred after the liquidation date need no furtherequitable reason why they should be paid.”

43. In connection with this principle Lord Hoffmann referred to three modern cases whichhe regarded as having applied it. The first was Re ABC Coupler and Engineering Co(No.3) [1970] 1 WLR 702. The company had a 21 year lease of a factory at a rentpayable quarterly in advance on the usual quarter days. A winding up order againstthe company was made on 7 June 1962. There was plant and machinery in theproperty, which the liquidator took steps to realise in July 1962. The sale took place inthe autumn and the lease was surrendered on 19 November. It will be apparent thatunder the terms of the lease a quarter’s rent fell due on 24 June (before July) andanother quarter’s rent fell due on 29 September (which would have covered the periodending on 24 December). If liability depended on the date when the rent fell due, thenno part of the June rent should have been payable in full, and the whole of theSeptember rent should have been payable in full. But that is not what Plowman J did.Having referred to the relevant cases, he said:

“In my judgment the inference is irresistible that from the timewhen the official receiver had been given leave to sell thecompany's assets and had taken advice as to the best method ofdoing so, his tactics were directed to carrying out that adviceand that he retained the lease for the purpose of carrying it outand for the benefit of the liquidation. In those circumstances“common sense and ordinary justice” (to quote James L.J. at 6Ch. App. 466) seem to me to require that from the end of Julyuntil November 19 the applicants should be entitled to be paidtheir rent in full unless the retention of the lease can, on thefacts, fairly be regarded as having been for the joint benefit ofthe applicants and the company.”

44. That is the order that he made. Thus the period for which the rent was payable in fullwas not defined by reference to rental periods, but to the factual question: for whatperiod did the liquidator retain the property for the benefit of the winding up? Thiswas not a decision, therefore, that was based on the accrual of rent, and it was referredto without disapproval in Toshoku as an illustration of the salvage principle. It wasalso cited by Lord Neuberger in Re Nortel GmbH at [57] as an illustration of theprinciple. It is, however, fair to say that the point was expressly conceded, but sincecounsel who made the concession was Mr John Arnold QC I think that Mr Zacarolialso has a fair point when he says that the concession represented the understanding ofthe profession at the time.


45. Lord Hoffmann also referred to Re Downer Enterprises Ltd [1974] 1 WLR 1460 asanother illustration of the principle. The company was the assignee of a lease. Therent appears to have been payable in advance on the usual quarter days. The companywent into liquidation in November 1971. At some time before April 1972 theliquidator instructed agents to market the lease and it was assigned to a purchaser inJanuary 1973. Rent had been accruing due since the liquidation. Pennycuick V-C said:

“Given those facts, it seems to me that from the date when hegave instructions to find a purchaser — that is some date in theearly spring of 1972 — the liquidator must be treated as havingremained in possession of this property with a view to therealisation of the property to the best available advantage, or, inother words, he must be treated as having kept the property inorder to sell it or do the best he could with it. It is immaterial, Ithink, in considering the purpose for which the liquidatorretained the property that, having regard to the amount of therent and the amount which he expected to realise upon a sale ofthe property, it might have been more advantageous to him andto his trust estate to have realised it at an earlier date.

Given those facts, it seems to me that, applying well establishedprinciples, I must hold that Prudential, if it had not been put infunds by Granada, or Schick through Granada, would havebeen entitled to be paid, as an expense of the liquidation, rentfor approximately one year. That would cover the four quarterdays at the end of March, June, September and December1972.”

46. It is noticeable that although the period of beneficial retention ended in January 1973the liquidator was directed to pay the whole of the rent that fell due on the December1972 quarter day. However, as Mr Zacaroli pointed out Pennycuick J was carrying outa fairly rough and ready exercise. His conclusion was that the landlord was entitled tobe paid rent in full for “approximately” one year. Whether the extent of the paymentought to be determined by reference to the date at which the rent actually fell due orby reference to the period of beneficial retention was not argued or discussed.

47. The last of the cases to which Lord Hoffmann referred on this topic was Re HHRealisations Ltd (1975) 31 P & CR 249. The company held a 99 year lease whichcontained a geared rent review clause taking effect as from 1 October 1974. On 6March 1974 it went into liquidation. The liquidators negotiated the sale of the leasebut they rescinded the agreement. On 5 March 1975 they applied to the court for leaveto disclaim the lease. The landlords were served with the application on 17 March1975. On 25 April 1975 the registrar gave leave to disclaim. On 8 May the companyformally disclaimed the lease. Templeman J held that the landlords were entitled to bepaid the rent in full down to 17 March when the landlords received notice of theapplication to disclaim. By then it must have been clear to them that the liquidatorswere not retaining the lease for the benefit of the winding up. He said:


“In my judgment, if it is fair and reasonable that the landlordsshould not be entitled to rent in full while the liquidator ismaking up his mind and before he determines to retain theproperty, it must necessarily follow that it is equally fair thatthe landlords should not be entitled to rent in full from the datethey receive notice of the fact that the liquidator has determinedto disclaim.”

48. He concluded:

“… that in accordance with the authorities the only periodduring which it is equitable for the landlords to claim rent infull, as opposed, to proving for a dividend, is the period duringwhich the property was actually being retained by theliquidators for the benefit of the creditors in general. In thepresent case that period began when the voluntary liquidationstarted, and it ended on March 17, 1975, when the landlordsreceived notice from the liquidators of the ex parte summonsasking for leave to disclaim.”

49. There are three points to make about this. First, Templeman J justified his decision byreference to what was “equitable”. Second, although the report does not reveal whatthe rent days were, it seems unlikely that 17 March was one of them. Third, it is notclear whether Templeman J was contemplating an apportionment of rent, or paymentin full of those instalments of rent that fell due during the period of beneficialretention.

50. Since these three cases do not present an entirely consistent picture, it is necessary togo back over some of the earlier cases.

The earlier cases

51. In Re Exhall Coal Mining Co Ltd we have seen that the landlord was permitted tocontinue with a sale of goods distrained for rent that had accrued due before thecommencement of the winding up. However, we do not know whether the rent waspayable in advance or in arrear. If it was payable in arrear (which is probable), thenthe tenant would have had the full benefit of the period of occupation for which therent was payable before the onset of insolvency. It is also relevant to note that sincethe rent had become due before the date of the winding up it was clearly a provabledebt. But the fact that it was a provable debt did not preclude the landlord fromretaining the benefit of the distress and proceeding with the sale.

52. In Re Progress Assurance Co (1870) LR 9 Eq 370 the Progress Assurance Co retainedpossession of offices following the making of a winding up order on 22 June 1869. InSeptember of that year the landlord issued a distress for the amount of the rent thendue. Lord Romilly MR said that the distress could not be allowed to stand. He said:


“In all the cases in which an execution or distress had beenallowed, it has issued before the date of the winding-up order.The only exception to the operation of the section when distressis issued after the winding up order is where the company hasretained, not merely formal, but actual possession of theproperty for the purpose of carrying on the business of theliquidation…”

53. Thus the general principle (in which a landlord was allowed to proceed with thedistress) concerned cases in which the rent had already accrued due before the date ofthe winding up order. In such cases it is obvious that the landlord could have provedfor the rent in the winding up, but was nevertheless allowed to proceed with thedistress. One of the features that was of importance was whether the distress had beenlevied before the onset of insolvency. If it had, then the landlord was prima facieentitled to continue to enforce his rights at common law, and the question thenbecame whether there was some equitable principle upon which he should be stopped.The exercise of the court’s discretion in that kind of case was not, therefore,dependent on the date at which the rent had accrued, but when the landlord put intrain the enforcement of his rights. This point emerges most clearly from Venner’sElectrical Cooking and Heating Appliances Ltd v Thorpe [1915] 2 Ch 404. That was acase of rent payable annually in advance on 25 March. The rent due on 25 March1915 was not paid. On 2 July 1915 the landlord levied a distress, and on 5 July thetenant company went into liquidation. The landlord had impounded the goods but hadnot yet sold them; and the question was whether the sale could proceed. Because thelandlord had impounded the goods, the distress was complete. This court held thatsince the rent was payable in advance it was not apportionable. Thus at common lawthe landlord was entitled to the whole of the rent that became due before thecommencement of the winding up; and he had already distrained for it. The argumentwas that it was not equitable for the landlord to sweep up the company’s assets to theprejudice of its other creditors. The court went on to hold that the landlord wasentitled to enforce his common law rights. Lord Cozens-Hardy MR said:

“…here the landlord is exercising his legal rights, and I think itis indisputable that no equitable ground has ever been made outfor restraining the landlord from levying the distress, unlessthere have been some circumstances outside the levying, suchas fraud, or unfair dealing, which would entitle the tenant to aninjunction. Apart from that, it does not appear to me to beinequitable that the landlord should exercise his right of distresseven though there be a subsequent winding up of thecompany.”

54. Since the whole of the rent had accrued due before the commencement of the windingup, the salvage principle was not in play; and the facts of the case do not revealwhether the property had been retained for the benefit of the winding up. This casesimply deals with the question of restraining the consequences of a remedy that hadalready been put into force. It certainly does not support the proposition that alandlord who is owed rent payable in advance that accrued due before the date of thewinding up is restricted to a right to prove in the liquidation.


55. In Re Lundy Granite Co the company had agreed to take an assignment of a lease ofLundy Island and took possession, although the assignment had not been completed.So the original tenant was still the lessee. A winding up order was made on 19November 1868. The liquidator continued to pay the rent up to 24 June 1869 butapparently on behalf of the original tenant. The landlord had not recognised thecompany as his tenant. The landlord then distrained on goods of the company for therent due on 25 December 1870. Although the company was not the tenant the Court ofAppeal in Chancery began by considering what the position would have been if thecompany had been the tenant. It was in that context that James LJ formulated theprinciple approved in Toshoku (see [36] above). Mellish LJ agreed. The only novelpoint was whether the same principle applied in a case where the landlord was not thecompany’s creditor; and the court held that it did.

56. Re Traders’ North Staffordshire Carrying Company (1874) LR 19 Eq 60 concerneddistress for arrears of toll payable by a canal company to a railway company. Thenature of a toll suggests that it was payable in respect of past rather than futureservices. The distress took place three days after the passing of a resolution to wind upthe canal company. Three weeks later a winding up order was made, but the goodshad not yet been sold. Sir George Jessel MR, who tried the case, was clearly unhappyat the reasoning both in Re Exhall Coal Mining Co Ltd and in Lundy Granite, and“explained” them on the narrow basis that they were only concerned with cases inwhich the landlord sought to distrain against the goods of a person who was not histenant (and therefore not his debtor) and against whom he had no right to prove.Since, in the case before him, the railway company had a right to prove in theliquidation of the canal company the distress was void. As far as Re Exhall CoalMining Co Ltd is concerned I cannot see that Sir George’s “explanation” formed anypart of the court’s reasoning. Moreover, I do not consider that this explanation of thecases can stand in the light of Toshoku. In that case having referred to the origins ofthe principle in Re Exhall Coal Mining Co Ltd Lord Hoffmann said at [20]:

“Thus was created a discretion to allow a creditor to use aprocess of execution to recover in full a debt for which hewould otherwise have had to prove in the liquidation.”

57. It is quite plain from this explanation that as far as Lord Hoffmann was concerned thelandlord was a creditor of the company, otherwise he would not have been able toprove in the liquidation. In Re Lundy Granite, as we have seen, the court began byconsidering what the position would have been if the company had been the tenant;and only then went on to consider whether the same principle applied where it wasnot. Equally, in discussing Lundy Granite itself although Lord Hoffmannacknowledged that one reason for allowing the distress to proceed was that thecompany was not the landlord’s tenant, he regarded the second reason (quoted at [36]above) as the more important one, thus disagreeing with Sir George Jessel’sexplanation of the principle.

58. Re Coal Consumers Association (1876) 4 Ch D 625 concerned the lease of a collierypart of which was a dead rent (i.e. a rent payable whether the colliery was worked ornot) and part of which was a surface rent. The dead rent had accrued to 30 June 1876,


but a winding up order had been made on 11 February 1876, so the amount claimedby the landlord was made up of rent accrued partly before and partly after the windingup. Malins V-C said:

“Now a distinction seems to have been drawn in the casesbetween the position of a landlord where he could and where hecould not come in and prove in the winding-up of the company.And this distinction is applied as between rent due at the date ofthe winding-up and that which has accrued since. It appearsvery clear that when the official liquidator remains inpossession after the winding-up has commenced for theconvenience of the liquidation of the company, the landlordought to have some means of recovering the rent. I think alandlord might, under such circumstances, fairly say to theofficial liquidator that he must either pay a rent or go out ofpossession. It seems, therefore, to have been held that wherethe rent accrued after the winding-up, it must be assumed tohave been for the convenience of the liquidation, and that, asagainst the official liquidator, the landlord had all the ordinaryrights of a landlord against his tenant.”

59. Again it is not possible to tell from the report whether the rent was payable in advanceor in arrear. But the last sentence of the quoted extract makes better sense if the rentwas payable in arrear. However, the simple distinction that Malins V-C drew betweenprovable debts and non-provable debts does not appear to me to have been justifiable.As we have seen, in Exhall Coal Mining Co Ltd the rent had already accrued duebefore the winding up order and must have been a provable debt. The principle statedby Lord Romilly MR also makes it clear that distress was allowed in relation to rentthat had already accrued due before the date of the winding up. What was important inboth cases was not the date at which the rent accrued due, but the date at which thedistress was levied. Moreover, rent that fell due after the date of the winding up wouldalso have been provable as and when each instalment of rent fell due.

60. Re North Yorkshire Iron Company (1878) 7 Ch D 661 was another case in which renthad accrued partly before and partly after the winding up. Again one cannot tell fromthe report whether the rent was payable in advance or in arrear. Nor can one tell fromthe report the days on which rent was payable. Hall V-C said that leave to distrainwould not be given for rent that had accrued due before the winding up; and that thecreditor must prove for that rent in the winding up. Since that point had beenexpressly conceded on the authority of Traders’ North Staffordshire CarryingCompany and Coal Consumers Association, that statement is unsurprising. But hefound on the facts that the property had been retained by the liquidator for theconvenience of the winding up and allowed the landlord to distrain for rent that hadaccrued due since the date of the winding up. What he in fact did was to order aninquiry to ascertain the amount due for rent at the commencement of the winding upand the amount that had since accrued due. If all that was needed was to count the rentdays that had occurred since the date of the winding up that would appear to havebeen a relatively simple exercise. But if some form of fact finding exercise wasneeded then the order for an inquiry is more understandable.


61. In Thomas v Patent Lionite Co (1881) 17 Ch D 250 a landlord distrained for rent duefrom a company before it went into liquidation. The report does not say that the rentwas payable in advance. However, the distress was not begun until after the passing ofthe resolution for winding up. Sir George Jessel MR, reversing Malins V-C, said thatthe court “has a judicial discretion to allow a landlord to distrain, and ought to do sowhere the landlord is not a creditor of the company and cannot prove for his rent. But,as a general rule, if he can prove the Court will not allow him to distrain”. Brett LJagreed. We have already seen that Sir George Jessel MR took a very narrow view ofthe decision in Exhall Coal Mining Co Ltd and Lundy Granite (which he repeated inargument in Thomas v Patent Lionite Co). Moreover, since he framed his decision asa “general rule” he must have allowed for the possibility of exceptions. Cotton LJseems to have based his judgment on the fact that the landlord had not yet sold thegoods before the winding up intervened, although it appears on the facts that thelandlord had already impounded them.

62. In Re South Kensington Co-Operative Stores (1881) 17 Ch D 161 the company held alease under which rent appears to have been due on the usual quarter days. The reportdoes not reveal whether it was payable in advance or in arrear, although the order thatFry J made shows that it was in fact payable in arrear. The rent was paid up to 24 June1880, but nothing was paid thereafter. A winding up petition was presented on 27November 1880. The liquidator was appointed on 10 December. The company hadcontinued in occupation of the property. The landlord accepted that he should prove inthe liquidation for the rent due on 29 September; and the issue was how the rentfalling due on 25 December should be treated. One point that was argued by bothsides was whether the Apportionment Act 1870 applied. The grounds on which it wasargued that it should not apply do not appear from the report of counsel’s argument,but there was no argument based on an allegation that the rent was payable inadvance. Fry J picked up the fact that in Re North Yorkshire Iron Company Hall V-Chad ordered an inquiry into what rent had accrued due since the winding up. He said:

“The next inquiry is this, whether the rent which I ought toallow to be proved for, and the rent which I ought to allow tobe paid in full or distrained for, are to be divided by the quarterdays when the rent became due or by a reference to thecommencement of the winding up. The order of the Vice-Chancellor Hall, which I have already referred to, directed theinquiry what rent was due at the commencement of thewinding-up. Now, if that be the true inquiry, it appears to meplain that I must, to use the common expression, apportion therent between the periods before and after the 27th ofNovember, 1880, and, in my judgment, I ought so to do,because the Apportionment Act of 1870 has declared that allrent shall be considered as accruing from day to day, and shallbe apportionable in respect of time accordingly. It declared thatrents should be apportionable like interest on money lent. Now,how did the law stand before this Act was passed? Plainly inthis way, that rent neither accrued due, nor was payable excepton the day on which it was reserved; whereas interest or moneylent accrued due de die in diem, although it might be payable at


certain specified days. The effect of the section is to declarethat rent, like interest, accrues due from day to day, and that thepayments of rent, like the payments of interest, when they areperiodical, shall be apportioned in respect of the time at whichthe rent, like the interest, accrued due.

Now, if that is the true construction of the Act, it follows thatthe rent which had accrued due up to the 27th of November,1880, was a debt provable against the company under theliquidation, and that the rent which accrued after was not so.

In my judgment the rent which accrued due is that which oughtto be proved for. The rent which cannot be proved for is thatwhich ought to be paid in full.”

63. The fact that Fry J directed that the rent payable on 25 December should beapportioned as at 27 November is a clear indication that the rent was payable inarrear. Had it been payable in advance it would have covered the period from 25December 1880 to 25 March 1881. It is, I think, clear that Fry J did apportion the rentbecause of the Apportionment Act, and not in reliance on any other principle.However it is by no means clear why Fry J thought that the rent that he ordered to bepaid in full was not a provable debt.

64. Fry J returned to the question of distress in insolvency in Re Brown Bayley & Dixon(1881) 18 Ch D 649. That case concerned distress for interest due under a mortgage,which necessarily must have been payable in arrear because of the nature of interest;and which, even at common law, accrues from day to day. He identified twoprinciples that pointed in different directions. The first was that as far as possible theindependent rights of independent persons ought to be respected. The second was thatthe creditors of a company ought to be treated equally and that, so far as possible, thecourt should not give any preference or priority between the various creditors. He heldthat the proper reconciliation of these principles was that the line was to be drawn atthe date of the commencement of the winding up. All claims of creditors before thatdate should be dealt with on the principle of equality; but with regard to rights afterthat the company should be in no better position because it had become insolvent. Headded:

“That appears to me to be consistent with the current ofdecision which has drawn the line with regard to the exercise ofthe power of distress in respect of rent accrued before and rentaccrued after the winding-up. The practice certainly has grownup of allowing the lessor to distrain or to be paid in full inrespect of rent after the winding-up; but with respect to rentbefore the winding-up, to allow him only his right to competewith the other creditors by proving in the winding-up.”

65. The reasoning does not engage with the salvage principle; but is in my judgment ageneral proposition about equality as between creditors. As such I cannot disagree.


66. Re Oak Pits Colliery Co (1882) 21 Ch D 322 is perhaps the most influential of thecases that have considered the salvage principle. In that case the company took a 25year lease in 1858. In 1879 the landlord and the company agreed a surrender of thatlease and the grant of a new lease. The company then brought plant and machineryonto the land. In January 1880 a petition was presented to wind up the company, andan order was made and a liquidator was appointed in the usual way. The liquidator didnot take possession of the land but took no steps to surrender. The plant andmachinery remained on the land for about a year and a half until it was sold.Negotiations for the sale of the plant and machinery had taken place in May 1880, butthey came to nothing. In May 1881 the company’s mortgagee tried to sell the plantand machinery, but again without success. In that same month the liquidatoradvertised the plant and machinery for sale. On 30 May the landlord took out asummons for leave to distrain on the plant and machinery or to have the proceeds ofsale paid to him. On the 3 June, 1881, the sale took place, and the plant and fixtures inquestion were sold for £179. Kay J held that the landlord was entitled to the full rentdue since the winding up, but the Court of Appeal overruled him. Lindley LJ gave thejudgment of the court. He held that Kay J had, quite simply, been wrong on the factsand that the liquidator had never taken possession of the land in question. It might besaid that that was the ratio decidendi of the case, and that the rest was obiter. ButLindley LJ went on to discuss the law. He encapsulated his view of the then state ofthe law which I must set out in full.

“First, as to rent in arrear at the commencement of the winding-up. 1. If the landlord is a legal creditor of the company inrespect of rent in arrear at the commencement of its winding-up, he is not allowed to distrain for the arrears of rent but mustprove his debt like any other creditor: In re Traders NorthStaffordshire Carrying Company, where the distress was fortolls in arrear; In re Coal Consumers Association, where theliquidator retained possession, but not for any purpose ofliquidation; Thomas v Patent Lionite Company, a case ofvoluntary winding-up followed by a compulsory order. 2.Moreover, in cases of this kind the circumstance that theliquidator has retained possession and carried on the company'sworks, has been held not to entitle a landlord or mortgagee(with a power of distress as and for rent) to distrain for rent inarrear in the winding-up: In re North Yorkshire Iron Company;In re Brown, Bayley & Dixon; In re South Kensington Co-operative Stores. 3. If, however, the landlord is not a legalcreditor of the company by reason of the company not being histenant, he is permitted to distrain even for rent in arrear at thecommencement of the winding-up: In re Exhall Coal MiningCompany. 4. And in such a case he will be allowed to distrainalthough the liquidator offers to allow the arrears to be provedas a debt in the winding-up: In re Regent United Service Stores.

Secondly as to rent accruing after the commencement of thewinding-up. 1. If the liquidator has retained possession for thepurposes of the winding-up, or if he has used the property for


carrying on the company's business, or has kept the property inorder to sell it or to do the best he can with it, the landlord willbe allowed to distrain for rent which has become due since thewinding-up: In re Lundy Granite Company; In re NorthYorkshire Iron Company; In re Silkstone and Dodworth Coaland Iron Company; In re South Kensington Co-operativeStores, and see In re Brown, Bayley & Dixon, per Fry J. 2. Butif he has kept possession by arrangement with the landlord andfor his benefit as well as for the benefit of the company, andthere is no agreement with the liquidator that he shall pay rent,the landlord is not allowed to distrain: In re ProgressAssurance Company; In re Bridgewater EngineeringCompany.”

67. The cases to which Lindley LJ referred in dealing with the case of rent that hadaccrued due before the date of the winding up did not, as far as I can tell, include anycase in which the rent in question was payable in advance so as to cover occupationfor a period that post-dated the date of the winding-up. This first group of cases wasnot, therefore, dealing with a payment that straddled the onset of insolvency. In thosecases the supply covered by the rent payment had already taken place and theinsolvent tenant was receiving no further benefit from that payment of rent. The firstof the cited cases in this group (Traders North Staffordshire Carrying Company) is, Ithink, of doubtful authority in formulating the principle. The second (Coal ConsumersAssociation) also failed to appreciate the true effect of the decision in Exhall CoalMining Co Ltd. The third (Thomas v Patent Lionite Company) is at best only authorityfor a general rule, to which there may be exceptions. In dealing with the cases thatconcerned rent falling due after the date of the winding up, Lindley LJ expresslyapproved both North Yorkshire Iron Company and South Kensington Co-operativeStores in both of which, as we have seen, the rent was apportioned. It seems veryunlikely, therefore, that Lindley LJ intended to differentiate rigidly between rent thataccrued due before the date of the winding up and rent that accrued afterwards merelyby reference to the rent days themselves. It seems equally unlikely that he intendedthat if a rent day happened to fall within the period during which the property wasretained for the benefit of the winding up the whole of that rent should be payable infull, irrespective of when the property ceased to be so retained. Moreover, as I havesaid, when he came to rationalise the principle he said that the rent should be payablein full “for the whole period” of beneficial retention. Since he also expressly approvedLundy Granite it is also unlikely that he intended to lay down any different principleto that formulated by James LJ.

68. In Shackell & Co v Chorlton & Sons [1895] 1 Ch 378 the company occupied aleasehold shop under a lease at a rent payable on the usual quarter days “two quarters’rent to be always due and payable in advance if required.” The rent was paid up to 29September 1894. The winding up commenced on 20 December 1894. The rent due on25 December was not paid, and on 28 December the landlords demanded paymentboth of the rent due on 25 December (which was payable in arrear) and also twoquarters’ rent in advance up to 24 June 1895. On 1 January 1895 the company soughtan injunction restraining a distress. The liquidator was retaining possession of thepremises for the benefit of the winding up. Kekwich J held that the rent due on 25


December should be apportioned, so that the landlord had to prove for the rent due upto 20 December, but was entitled to be paid in full for the period between 20December and 25 December. So far as the rent payable in advance was concerned hesaid:

“The notion is that, if the liquidator uses the property for thepurposes of winding-up, it is just the same as where any costsare incurred in advertising the property for sale; it is part of theexpenses incurred, and which ought to be paid in full.

What expenses has the liquidator incurred? Has he incurred thewhole of this half-year's rent? He certainly has not yet. He hasonly incurred up to the present time whatever is incident to hisactual possession: but how can I now, on this 11th of January,say that he has incurred this expense as on the 24th of June,1895? I cannot now say how long he will require to occupy theproperty: that is a matter in which he has to exercise hisdiscretion, with the assistance of the Court, if an order of theCourt is required. I cannot see how I can bring this within theprinciple; and having found the principle laid down for me, Ithink I must follow it, though under somewhat novelcircumstances. One thing is perfectly clear, namely, that themere fact of the rent being due and payable does not make itleviable by distress, and I have to consider whether there isanything else which makes it leviable - anything to assist thelandlord. It seems to me that there is not.”

69. Thus Kekewich J in effect adopted a “wait and see” approach. He did not hold that thewhole of the rent that accrued due during a period when the liquidator retainedpossession had to be paid in full. How much would be payable in full would dependon the length of the period of beneficial occupation. It is also notable that there wasno discussion of apportionment or of the Apportionment Act 1870. There is no reasonto suppose that Kekewich J misunderstood the scope of the Apportionment Act. Thedecision did not, in my judgment, depend on apportionment at all. It depended on thejudge’s application of the principle that he formulated at the beginning of the quotedextract.

70. This, then, was the state of the law as at the end of the nineteenth century. The salvageprinciple was applied both to rent payable in arrear and to rent payable in advance.We have seen from the modern cases to which Lord Hoffmann referred in Toshokuthat the law continued to be applied in this way for the next century.

71. The interplay between the salvage principle and apportionment arose in Re AtlanticComputer Systems plc (No 2) [1990] BCC 454. The company’s business was leasingcomputers. It went into administration and the administrators proposed to continue tocollect rents due to the company. The question was how the company’s liabilities tohead lessors and hirers should be dealt with. Some of the relevant payments werepayable in advance and some in arrear. The administrators argued that all payments


should be apportioned, relying on Shackell & Co v Chorlton & Sons, Re ABC Coupler& Engineering Co Ltd (No. 3) and Re H H Realisations Ltd. The head lessors arguedthat payments in advance were not apportionable, by reference to Ellis v Rowbotham.Ferris J held that the payments should be apportioned. He said:

“That was, however, a case where the tenant was seeking to useapportionment to limit his liability for the consequences of hisown default. Moreover, and perhaps more significantly, it wasnot a case which involved a supervening liquidation,receivership or administration. In my judgment the decisiondoes not apply to the present circumstances and I ought toapply the decisions relied on by [the administrators].

I shall therefore direct that any liability owed to Norwich Unionor Allied Irish in respect of periodical payments which are to bedischarged as administration expenses, is to be treated asaccruing on a day to day basis. I do not propose to make anydirection which purports to govern the cases of payments due toother funders, but what I have said in relation to NorwichUnion and Allied Irish will presumably act as a guide.”

The rating cases

72. Mr McGhee placed some reliance on rating cases to which I should refer. Re NationalArms and Ammunition Co (1885) 28 Ch D 474 was a case about rates. The companywas wound up on 20 December 1882. It had almost ceased to carry on business beforethat date, but continued to complete several pending supply contracts and kept somefinished articles on the premises with a view to sale. The rate was made in March1883, for the calendar year 1883. This court held that the liquidator was bound to paythe rates, but the reasoning is not uniform. Baggallay LJ based his judgment on theapplication of the salvage principle, applying both Lundy Granite and Re Oak PitsColliery. Bowen LJ based his judgment on the simple proposition that since thecompany was in rateable occupation it was liable to pay the rates, and that the liabilityfor rates was incurred after the date of the winding up. Fry LJ based his judgment onthe proposition that liability for rates was a liability incurred after the date of thewinding up. It is now tolerably clear that the reasoning of Bowen LJ is the correctanalysis: Toshoku at [32] and Nortel at [103].

73. In Re Blazer Fire Lighter Ltd [1895] 1 Ch 402 the court was again concerned withliability for rates. The local vestry had made rates for the half year ending on 29September 1894, payable in two instalments on 2 April and 2 July 1894. Plainly thesewere instalments payable in advance. The company had gone into liquidation on 2March 1894. A caretaker was installed in the property which was ultimately sold on 6September 1894. The vestry had been restrained from distraining for rates madesubsequent to that date and the question was whether the injunction should bedischarged. Vaughan Williams J held that the order should be discharged and that thevestry was entitled to be paid the rates in full. The argument was about whether thecompany was in rateable occupation. It was not argued that the rates should be


apportioned so as to relieve the company from liability to pay in full after 6September. The judge said:

“It is admitted that the rate, in so far as it constituted a debt,was incurred after the liquidation and not before it, andtherefore this is not a case in which it can be said that thosewho claim to be paid ought to come in and prove pari passuwith creditors whose debts were incurred before the winding-up. If the vestry are creditors, they have become so since thecommencement of the liquidation. And I cannot see why a debtin respect of rates should not be paid just as much as rent oranything else in respect of that which the liquidator acquires oruses after the liquidation has commenced.

If he takes new premises, he has to pay the rent in full. If hekeeps up the old ones, he has also to pay. But whichever coursehe takes he has to pay the rates. Under the circumstances thetest applied by Lord Justice Bowen is much the plainest andsimplest. Here it is said that the liquidator occupied in abeneficial way within the meaning of the words in the ratingstatutes, and it cannot be disputed that he did.”

74. Thus he applied the reasoning of Bowen LJ, which had turned out to be the correctexplanation for liability for rates. In my judgment, therefore, the rating cases do notbear on the problem in our case. As Lord Neuberger also pointed out in Nortel at[103] this is consistent with the fact that, at least in the modern law, liability for ratesarises from day to day (although the position was different in the nineteenth century).

75. Mr McGhee also showed us the decision of HH Judge Weekes QC in Re NoltonBusiness Centres Ltd [1996] BCC 500. However, I found it very hard to see whatexactly that case decided and why. Since it is at best no more than an analogy, I donot think it is necessary to discuss it further.

What is the salvage principle?

76. In Toshoku Lord Hoffmann explained how the principle worked at [27]:

“My Lords, it is important to notice Lindley LJ was not sayingthat the liability to pay rent had been incurred as an expense ofthe winding up. It plainly had not. The liability had beenincurred by the company before the winding up for the wholeterm of the lease. Lindley LJ was saying that it would be justand equitable, in the circumstances to which he refers, to treatthe rent liability as if it were an expense of the winding up andto accord it the same priority. The conditions under which apre-liquidation creditor would be allowed to be paid in fullwere cautiously stated. Lindley LJ said … that the landlord"must shew why he should have such an advantage over the


other creditors". It was not sufficient that the liquidator retainedpossession for the benefit of the estate if it was also for thebenefit of the landlord. Not offering to surrender or simplydoing nothing was not regarded as retaining possession for thebenefit of the estate.”

77. I accept that whether the salvage principle applies is not a matter of discretion. AsLord Hoffmann explained in Toshoku it is a principle that informs the interpretationof the rules which contain the complete list of what could rank as expenses of therelevant insolvency process: see [16] above. Thus in order to rank as an expense aliability must fall within the rules as interpreted in the light of the salvage principle.But it does not follow from that that the principle, once understood, is incapable ofbeing applied to factual situations that did not confront our Victorian forebears.Although the salvage principle owes its origins to applications relating to distress forrent, it has long outgrown those origins. I agree with Mr Zacaroli that the rationale is ajudge-made deeming provision under which the office holder is deemed to haveincurred the liability in the course of the winding up or administration. The foundationof the principle is the application of equity. Lord Hoffmann makes this clear not onlyin the passage just cited (“it would be just and equitable, in the circumstances towhich he refers, to treat the rent liability as if it were an expense of the winding upand to accord it the same priority”), but in other passages as well. Thus at [29] hesaid:

“The principle evolved from the … cases is thus one whichpermits, on equitable grounds, the concept of a liabilityincurred as an expense of the liquidation to be expanded toinclude liabilities incurred before the liquidation in respect ofproperty afterwards retained by the liquidator for the benefit ofthe insolvent estate.” (Emphasis added)

78. He contrasted this with liabilities incurred after the date of the winding up which need“no further equitable reason why they should be paid.”

79. Mr McGhee accepted that some form of deeming was necessary, but said that whatwas deemed to have happened was an assignment to the insolvent company (orpossibly the office holder) at the beginning of the period of beneficial retention and are-assignment back to the company at its termination. There is no trace of such aconcept in any of the cases. It presupposes a highly artificial series of transactions (thenotion of an assignment by a company to itself makes no real sense) to no purposeother than to bring by a side wind the technical common law rules about liability forrent. Even Lindley LJ, on whom Mr McGhee heavily relied, did not speak of anassignment but of a “debt contracted for the purposes of winding up the company”.

80. I do not see why the fact that rent payable in advance is not apportionable under theApportionment Act 1870 leads inevitably to the conclusion that the salvage principledoes not apply. As I have said a true apportionment either relieves the tenant frompart of the liability for rent, or transfers liability from one tenant to another. But in


cases to which the salvage principle applies, there has been no termination of the leaseand no change of tenant. The whole of the instalment of rent that falls due is aprovable debt, so the tenant remains liable to pay it. Whether that liability is satisfiedby a dividend or by a payment in full is not a question of apportionment. Theapplication of the salvage principle neither creates nor transfers any liability. What itdoes is to treat part of a single liability as an insolvency expense, by requiring that itbe paid in full.

81. Having posed the question in terms that encompassed debts whenever they accruedLord Hoffmann continued by approving the rationalisation in Oak Pits Colliery,namely that the rationalisation was that the property was being retained for the benefitof the winding up. But he also approved the principle as formulated by James LJ inLundy Granite that:

“if the company for its own purposes, and with a view to therealisation of the property to better advantage, remains inpossession of the estate, which the lessor is therefore not able toobtain possession of, common sense and ordinary justicerequire the court to see that the landlord receives the full valueof the property.”

82. In the first place this formulation of the principle has at least equal status with LindleyLJ’s rationalisation of it. Second it is not expressed in terms of when rent falls due orwhen rent accrues. It is framed by reference to the period during which the companyuses the landlord’s property to its own advantage. It is in those circumstances thatcommon sense and ordinary justice require the court to see that the landlord is paid.What he is to be paid is again not described by reference to the days on which rentfalls due for payment. What he is to receive is the “full value” of the property. Wherethe property is held under the terms of a lease the full value will be taken to be therate of rent reserved by the lease. I cannot see why common sense or ordinary justiceshould be defeated by the happenstance that a rent day occurs immediately before thedate of entry into administration if the rent falling due on that day covers a periodduring which the administrator retains possession of the property or the benefit of theadministration. As Ferris J said in Re Atlantic Computer Systems plc (No 2) all that isnecessary is to treat the rent as accruing from day to day.

83. It may not be a maxim of equity, but in simple terms: you can’t have the penny andthe bun. Equally, I cannot see that common sense or ordinary justice requires alandlord to be paid rent in full for a period after the office holder has vacated thepremises, leaving the landlord free to re-let them.

The most recent cases

84. The two most recent cases, and the trigger for this appeal are the decision of HHJudge Purle QC in Goldacre (Offices) Ltd v Nortel Networks UK Ltd and the decisionof HH Judge Pelling QC in Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd.


85. Goldacre was a case that was argued and decided in a single day. The company wasthe tenant of property held under a lease that had been made before its entry intoadministration. The detailed facts are not readily discernable from the report; but thefollowing appear to be the most material. First the rent was payable in advance,probably on the usual quarter days. Second, following the company’s entry intoadministration the administrators retained possession of part of the property for thebenefit of the administration. Third, parts of the property were sub-let to others. Thelandlords had served notices under the Law of Distress (Amendment) Act 1908. Thattransferred to the landlord the company’s right to receive rent from the sub-tenants. Ineffect, therefore, the landlord was recovering part of the rent in full. Fourth, the caseconcerned instalments of rent that fell due in the period during which theadministrators retained possession for the benefit of the administration. The judgeheld that he had no discretion to exercise. Either the rent was payable as an expense ofthe administration or it was not. Neither side on this appeal suggests that this part ofhis judgment was wrong. He next held that in principle rent was an administrationexpense because of the salvage principle. Again, neither side disputes the correctnessof that. The third question, which is of relevance to our appeal, concerns the extent towhich rent is payable as a result of applying the salvage principle. The administratorsargued that the payments “should be tailored to the use [of the premises] that they aremaking.” The judge rejected that argument. He held that rent payable in advance wasnot apportionable under the Apportionment Act 1870:

“… from which it follows, as Mr Jourdan submits and I accept,that the quarter’s rent becomes payable in full from that date asone of the costs and expenses of the administration and wouldnot fall to be apportioned should the administrators vacate thepremises during that quarter.”

86. It followed from this conclusion that Shackell & Co v Chorlton & Sons was no longergood law; and ABC Coupler Engineering Co was of doubtful authority because thepoint had not been argued in that case. Thus the judge held that the whole of the rentthat fell due on a rent day within the period of beneficial retention became payable asan expense of the administration.

87. For the reasons I have given I do not consider that the fact that the rent was notapportionable under the Apportionment Act necessarily ousts the salvage principle.So I disagree with Judge Purle that the one follows from the other.

88. The judge in part justified his conclusion by reference to the “adoption” of contractsas explained by the House of Lords in Powdrill v Watson [1995] 2 AC 394. However,that case concerned a very different point. In so far as the House of Lords consideredthe salvage principle it did so only by analogy (which it rejected). But what LordBrowne-Wilkinson said was that:

“Although the authorities show that debts incurred before theliquidation do not obtain priority, they indicate that even on thesalvage principle all liabilities under a contract incurred afterthe time of adoption of the contract by a liquidator are entitled


to priority. … The salvage principle in liquidation indicates thatif a liquidator adopts a contract for the purpose of the morebeneficial conduct of a liquidation, all such liabilities undersuch contract after the date of adoption are entitled to priority.”

89. That was the principle that Judge Purle applied in holding that the full quarter’s rentwas payable as an expense of the administration. However, the formulation of theprinciple in this way is inconsistent with the decision in Re HH Realisations. In thatcase the liquidators retained possession of the property for the purposes of thewinding up. But Templeman J held that the rent was only payable in full until suchtime as the liquidators gave notice to the landlords of their intention to disclaim eventhough they retained possession for nearly two months longer. If the principle appliedby Judge Purle was correct then the rent ought to have been payable in full for thoseadditional two months. But it was not; and as we have seen, that decision wasexpressly approved in Toshoku at [28]. It is also inconsistent with the cases in whichrent was payable in arrear in which the landlord was allowed to recover only part ofthe rent that fell due on a rent day that fell within the period of beneficial occupation.Moreover, contrary to the way in which Lord Browne-Wilkinson expressed theprinciple, liability to pay rent under a lease is not a liability incurred after the onset ofinsolvency. It is, as we have seen from Toshoku at [27], a liability incurred when thelease was originally granted. In my judgment, therefore, the “adoption principle”(however it might apply in other factual situations) does not apply to periodicalpayments such as rent.

90. Luminar was the corollary of the decision in Goldacre. In that case companiesoperating nightclubs held leases under which rent was payable quarterly in advance.Rent was due in June and September 2011; and in October 2011 the companiesentered administration. The administrators intended to continue to trade until 1January 2012 (i.e. until after the December quarter day). In fact they continued inpossession until shortly after the March quarter day, and a few days later gave thelandlords permission to forfeit the leases. They accepted that the rent due on theMarch quarter day was payable in full and presumably also accepted that the rent dueon the December quarter day was also payable in full. The issue concerned the rentthat fell due on the September quarter day. HH Judge Pelling QC summarised therespective arguments as follows at [10]:

“The landlord's case is that where a landlord seeks to forfeit alease after an administration or liquidation has commenced andpermission is refused, all the rent that is unpaid becomespayable irrespective of when it accrued due, if and to the extentit applies to a period of occupation by the administrators orliquidators concerned. The administrators submit that this is aheretical approach and the only rent that can become payable asan expense of the administration is rent falling due after (a) theadministration has commenced and (b) the administrators haveelected to retain the relevant property for the purposes of theadministration or liquidation. They accept that theApportionment Act 1870 is of no application to sums payablein advance and in consequence they accept that the whole of


the sum due for the March quarter is payable as anadministration expense even though permission to forfeit wasgiven only a few days after the March quarter day.”

91. It is plain, therefore, that the administrators (represented as it happens by Mr ZacaroliQC) did not argue for an apportionment of rent payable in advance where the rent dayfell during a period of beneficial possession. Nor, it seems, did the landlords argue forapportionment of rent payable on a rent day that fell due before the date of entry intoadministration. The case was thus all or nothing on both sides.

92. The judge considered the decision of the House of Lords in Toshoku and said at [17]:

“The principles to be derived from Lord Hoffman's speech areas follows:

(a) Rent that has accrued due down to the date relevant forproof is provable, as is rent due in the future - see IRs rr.12.3(1)and 13.12(1);

(b) Debts including future debts that are provable are paid paripassu with all other debts in the same class - usually those dueto unsecured creditors;

(c) Liquidation expenses are incurred after liquidation hascommenced and are normally not provable;

(d) Exceptionally, a liquidator or administrator who retainsproperty by refusing permission to forfeit for the purpose of theliquidation or the administration concerned will become liableto pay rent which becomes payable in priority to all othercreditors as a liquidation or administration expense.

On a proper reading of Lord Hoffman's analysis, it does notsupport the proposition that the exception referred to in (d)above extends to debts that have already become due at the dateof the commencement of the liquidation or administrationconcerned. This is apparent from a consideration of theauthorities referred to by Lord Hoffman as establishing theprinciple that he is summarising.”

93. Having considered a number of the authorities the judge concluded at [26]:

“In summary, therefore, in my judgment the position is asfollows:

(a) Where rent is payable in advance and falls due for paymentprior to the commencement of the liquidation or administration,then it is provable but not payable as a liquidation oradministration expense even though the liquidator or


administrator retains the property for the purposes of theliquidation or administration for the whole or part of the periodfor which the payment in advance was payable;

(b) Where rent payable in advance becomes due during a periodwhen the liquidator or administrator is retaining the propertyfor the purposes of the liquidation or administration, then thewhole sum is payable as a liquidation or administration expenseeven though the liquidator or administrator gives permission toforfeit or vacates before expiry of the period for which thepayment in advance is due; and

(c) Where rent is payable in arrears and accrues due during aperiod when the administrator or liquidator is retaining propertyfor the purposes of the liquidation or administration, theliquidator or administrator will be liable to pay as anadministration or liquidation expense at least the rent thataccrues from day to day for so long as he or she retainspossession of the premises for the purposes of the liquidation oradministration. Whether the office holder will be liable to paythat part of the rent that has accrued in arrears that is referableto a period prior to the commencement of the administration orliquidation depends upon whether Silkstone is to be followed.That issue does not arise in this case.

In those circumstances and for those reasons I conclude that thelandlords are not entitled to payment of the, or any part of the,rent that accrued due prior to the commencement of theadministration.”

94. Judge Purle was not shown the decision of Ferris J in Re Atlantic Computer Systemsplc (No 2). It was referred to in skeleton arguments before Judge Pelling, but notconsidered in his judgment.

Interplay between proof and salvage

95. It seems to me that the nub of the judge’s reasoning in Luminar is his decision that:

“On a proper reading of Lord Hoffman's analysis, it does notsupport the proposition that the exception referred to in (d)above extends to debts that have already become due at the dateof the commencement of the liquidation or administrationconcerned.”

96. Everything else flows from that. Was he right? I think not. First, it is plain from hisexplanation of Exhall Coal Mining Co that as far as Lord Hoffmann was concernedthe right to prove for a pre-liquidation debt and the salvage principle were not


mutually exclusive. I think that this is borne out by Lord Hoffmann’s later discussionof the rationale for the salvage principle which he introduced at [25] as follows:

“Thus debts arising out of pre-liquidation contracts such asleases, whether they accrue before or after the liquidation, canand prima facie should be proved in the liquidation. In thisrespect they are crucially different from normal liquidationexpenses, which are incurred after the liquidation date andcannot be proved for. In the Lundy Granite Co … the court wastherefore exercising the discretion conferred by section 87 ofthe 1862 Act to decide that, contrary to the normal pari passurule, a creditor who had a debt which was capable of proof atthe date of liquidation should be paid in priority to othercreditors. What was the justification for the exercise of such adiscretion?” (Emphasis added)

97. This passage does not distinguish between debts accruing before liquidation and debtsaccruing afterwards. Both are capable of justifying the exercise of the discretion, ifthey fall within the salvage principle. Lord Hoffman reinforced this at [27] (referringto a “pre-liquidation creditor”) and [31] (referring to “pre-liquidation debts”), in bothcases as examples of the application of the salvage principle.

98. I do not therefore agree with Judge Pelling’s interpretation of Toshoku.

99. In addition the stark division between rent that falls due before the date of entry intoliquidation or administration and rent that falls due after that date does not correspondwith the rule that the salvage principle does not take effect until the office holderactually retains beneficial possession of the property for the benefit of the insolvency.As ABC Coupler & Engineering Co demonstrates that period may not begin untilsome time after the date of entry into liquidation or administration. This aspect of thatcase was plainly approved in Toshoku at [28]. And it may end before the date whenthe office holder actually gives up possession as in HH Realisations (also approved inToshoku at [28]).

Consequences

100. The result of Goldacre and Luminar has left the law in a very unsatisfactory state. Ifrent is payable in arrear then the office holder must pay the rent as an expense of theliquidation or administration (as the case may be) for any period during which heretains possession of the property for the benefit of the insolvency process. Ifappropriate that liability will be apportioned so as to reflect, as precisely as possible,the true extent of the benefit. If, by contrast, the rent is payable in advance no suchapportionment is possible. In some cases this will result in the office holder payingmore than the true benefit (as in Goldacre). In other cases it will result in his payingless (as in Luminar).


Result

101. The true extent of the principle, in my judgment, is that the office holder must makepayments at the rate of the rent for the duration of any period during which he retainspossession of the demised property for the benefit of the winding up or administration(as the case may be). The rent will be treated as accruing from day to day. Thosepayments are payable as expenses of the winding up or administration. The durationof the period is a question of fact and is not determined merely by reference to whichrent days occur before, during or after that period. This, in my judgment, is the waythat James LJ formulated the underlying principle in Lundy Granite itself.

102. In my judgment Judge Pelling lost sight of the fact that the salvage principle isfounded in equity and not on the common law. How the common law would view aninstalment of rent payable in advance is not determinative of how equity would treatit. In my judgment Shackell & Co v Chorlton & Sons and Re Atlantic ComputerSystems plc (No 2) encapsulate the right approach. I would therefore overrule Leisure(Norwich) II Ltd v Luminar Lava Ignite Ltd and allow the appeal. As noted, inShackell & Co v Chorlton & Sons Kekewich J adopted a “wait and see” approach toadvance payments falling due during a period of beneficial retention. That, too, in myjudgment, represents the correct application of the salvage principle. In my judgmentJudge Purle was also wrong to apply the “adoption principle”. I would therefore alsooverrule Goldacre (Offices) Ltd v Nortel Networks UK Ltd and allow the cross-appeal.

Lady Justice Sharp:

103. I agree.

Lord Justice Patten:

104. I also agree.

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