Somerfield Stores Ltd v Spring (Sutton Coldfield) Ltd [2009] EWHC 2384 (Ch)

[2009] EWHC 2384 (Ch)Case No 9BM30247
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue BIRMINGHAM DISTRICT REGISTRY
Priory Courts
33 Bull Street
Venue BirminghamDate 12 th June 2009
Before
HIS HONOUR JUDGE PURLE, QC(sitting as a Judge of the High Court)
B E T W E E N:
Between
SOMERFIELD STORES LIMITEDClaimantSPRING (SUTTON COLDFIELD) LIMITEDDefendant
Transcript prepared from the official record by Cater Walsh Transcription Ltd, 1 st Floor, Paddington House, New Road, Kidderminster, DY10 1AL. (DX 16318 Kidderminster 1)Tel: 01562 60921/510118 Fax: 01562 743235 Email: info@caterwalsh.co.uk
Mr MARK WONNACOTT instructed by Hill Dickinson appeared for Claimant.Ms LISA BARGE of Eversheds LLP appeared for Defendant.
JUDGMENT12 June 2009JUDGMENTJUDGE PURLE:
[1]This is an application pursuant to the Insolvency Act 1986, Schedule B1, for permission to continue proceedings under the Landlord and Tenant Act 1954 (“the 1954 Act”) brought by the claimant as tenant against the defendant (which is now in administration) for a new tenancy. Paragraph 43.6 of Schedule B1 provides:
"No legal process … may be instituted or continued against the company or property of the company except – (a) with the consent of the administrator, or (b) with the permission of the court."
The administrators have not consented. The permission of the court is accordingly sought.[2]The claimant seeking that permission is Somerfield Stores Limited and the defendant is Spring (Sutton Coldfield) Limited, a landlord which went into administration in February of this year, pursuant, so I am told, to an order of the court made in London. The claimant is the tenant of a supermarket in Sutton Coldfield. The lease has expired. The claimant is applying for a new lease pursuant to Part II of the 1954 Act. The defendant, prior to the commencement of the administration, opposed the claim on the grounds that it intended to redevelop the property. This is a recognised ground of opposition under section 30(1)(f) of the 1954 Act. The application in form is the claimant's application to continue its claim for a new lease. The defendant counterclaims for possession.[3]It is said by Mr Wonnacott, who appears for the claimant, that in substance the application is whether the defendant should be granted an indefinite adjournment to its own claim to be entitled to possession. His reasoning is as follows: the tenancy as a business tenancy continues automatically under the 1954 Act, and the claimant is entitled to a new tenancy unless the defendant can establish an intention to redevelop. The only remaining issue, if the defendant cannot establish that intention, is as to the terms of the new tenancy, in particular, its length and the amount of rent payable. Therefore, Mr Wonnacott says, the onus is on the defendant to prove its case, which is unaffected by the fact that it is now in administration. It either can or it cannot. If it can prove its case, there will be no new tenancy. If there is no chance of redevelopment, then the claimant will get a new long lease, which is what it seeks. If the evidence comes out somewhere in between those two extremes and establishes that there is some prospect in the future of the property being redeveloped, then the court may take that prospect into account when deciding the terms. The new tenancy might, as Mr Wonnacott acknowledges, be for a shorter term, or a longer term with a break clause. However that may turn out, Mr Wonnacott says, the 1954 Act proceedings are on foot and, although they are his client’s proceedings, if the landlord does not wish to or cannot prove its case, it should abandon its defence and counterclaim rather than shelter behind paragraph 43.6 of Schedule B1.[4]He also points out that since 2004, it has been open to a landlord, under section 29(2) of the 1954 Act as amended, to apply to the court (rather than await the tenant’s application) to terminate the continuation tenancy, so long as it can prove its ground of opposition. If the application fails, the tenant becomes entitled to a new tenancy under subsection (4). It is thus a mere matter of chance, says Mr Wonnacott, whether these are the claimant's proceedings or the defendant's proceedings and I should look at the substance. Looking at the substance, he says, the 1954 Act proceedings are the defendant’s, which the administrators do not need the permission of the court to continue, and which they should either get on with, or abandon. The administrators should not be able to take advantage of the chance that the 1954 Act proceedings happen to be the claimant’s, when the burden of the crucial issue of an intention to redevelop is on the defendant.[5]I agree with Mr Wonnacott that the crucial issue on the 1954 Act application is whether or not the defendant intends to redevelop. Moreover, whatever the position may have been in the past before the administration, the position today seems quite clear that the defendant does not intend to redevelop because it is not in a position to do so by virtue of the administration. That is not to say that eventual redevelopment is not under consideration as a possibility. It remains a possibility provided that planning permission is obtained, a number of pre-lets are secured and a developer is found to take the property off the defendant's hands or a joint venture is put into place between the defendant and a developer, or between the bank and a developer, or between a combination of those parties. The administrators want time to endeavour to put a viable scheme together, but do not assert (because they cannot) that there is as things stand an actual intention to redevelop.[6]I mention the bank because although there is here an administration, the evidence is to the strong effect that the only creditor who will receive anything from any ultimate realisation of the property this case relates to is the bank, which has a fixed charge securing indebtedness well in excess of the property’s value, even as a redevelopment site. It is thought that the present value of the property (ignoring redevelopment) may be in the region of £4 million.[7]What the defendant wishes to do is to defer the 1954 Act proceedings until such time as it can put a scheme of redevelopment together. I was told by Ms Barge, the Solicitor Advocate for the defendant, as is confirmed by the evidence, that some time will be needed to do all that. It is by no means clear that the administrators, or the bank, will succeed in this endeavour. What one appears to be looking at is a minimum of six months but more realistically at least twelve months. There is no doubt that should that endeavour succeed, there would be a very dramatic increase in value. An uplift of more than £2 million is mentioned in evidence. Nevertheless, the position even then will still be that the only real beneficiary will be the bank.[8]I say that not to be dismissive of the bank's interests but because I have in mind the objective of the administration as set out in Schedule B1. Under paragraph 3(1) of that Schedule, it is provided that:
"The administrator of a company must perform his function with the objective of:- (a) rescuing the company as a going concern, or (b) achieving a better result for the company's creditors as a whole than would be likely if the company were wound up (without first being in administration), or (c) realising property in order to make a distribution to one or more secured or preferential creditors."
It is clear from the remainder of paragraph 3 that (a) is paramount where that can be achieved (that is to say, the rescue of the company as a going concern) and that (c), the realisation of property in order to make a distribution to secured or preferential creditors. is an objective to which the administrator must have regard if, but only if, he thinks that it is not reasonably practicable to achieve either of the objectives specified in (a) and (b) and the interests of the creditors of the company as a whole are not harmed unnecessarily: subparagraph (4). It is thus clear that a distinction is drawn between the interests of the company's creditors as a whole, and the interests of secured creditors looked at separately.[9]In the present case the administration is for practical purposes being carried out, at least so far as regards this property, for the benefit of the bank as secured creditor. It is not suggested that the defendant can be rescued as a going concern. Other unsecured creditors will not be affected by whether or not the 1954 Act proceedings are heard in the near future or in eighteen months or two years time. Nor is any realisation of the property to make a distribution to the bank prevented by the 1954 Act proceedings, though the Bank’s position might be improved by delaying those proceedings. Indirectly, the position of other creditors may in theory also be improved by a delay, as the greater the realisation for the bank, the smaller will be the unsecured shortfall which the bank will be able to prove for as an unsecured creditor. That is however more theoretical than real, as the administrators in this case do not expect any distribution to be made to preferential or unsecured creditors.[10]It is not said that the proceedings should not be heard, only that they should not be heard now. The hope evidently is that in the intervening period, it will become so plain that the property will be redeveloped, that the claimant will drop its claim for a new tenancy.[11]Mr Wonnacott also referred me to section 67 of the 1954 Act. That section provides as follows:
“67 Provisions as to mortgagees in possession Anything authorised or required by the provisions of this Act, other than subsection . . . (3) of section forty, to be done at any time by, to or with the landlord, or a landlord of a specified description, shall, if at that time the interest of the landlord in question is subject to a mortgage and the mortgagee is in possession or a receiver appointed by the mortgagee or by the court is in receipt of the rents and profits, be deemed to be authorised or required to be done by, to or with the mortgagee instead of that landlord.”
What that means, in effect, is that had a Receiver been appointed in this case, which would have been the normal course prior to the passing of the Insolvency Act 1986, then the bank would simply stand in the shoes of the company and the 1954 Act proceedings would have proceeded with the bank substituted as the defendant in place of the landlord. Permission to proceed with those proceedings would not have been necessary. In those circumstances, if the bank had applied for a substantial adjournment of twelve months or more to get itself into a position where it could set up a defence under Ground (f) which it did not have, that application would have received short shrift, just as it would have done in the case of a landlord which was not insolvent but simply wanted more time to put a package together. It is a result of the change of legislative policy from receivership to administration which has now resulted in section 67 having no direct effect. I agree with Mr Wonnacott though that the analogy of section 67 is a factor to bear in mind. Although there is no suggestion that the bank has, for some tactical reason, adopted this route (the appointment was a court appointment) it should not, prima facie, be in an improved position because of the administration unless the interests of the creditors as a whole so require.[12]In my judgment, I have to have in mind the structure of the objective set out in paragraph (3) when considering the exercise of my discretion as to whether or not to allow the 1954 Act proceedings to continue. I have noted that the realisation of property in order to make a distribution to one or more secured or preferential creditors receives express mention. What does not emerge from that subparagraph is that it is a legitimate aim to improve the position of a secured creditor over someone such as the claimant who is seeking a new tenancy. It is clearly not the objective of paragraph (3)(c) to enable secured creditors to advance their position at the expense of the creditors as a whole because Rule 3(4) says so. Nor in my judgment is it the purpose of that subparagraph to put secured and preferential creditors in a better position than they would find themselves in if there were no administration. The purpose of subparagraph (c) is simply to allow distributions to be made, and realisations of property for that purpose. The rights of third parties, whether creditors or not, should not be prejudiced unless truly necessary to achieve the administration objective.[13]The claimant is not a creditor but, in my judgment, the claimant has, as things stand, a right to a new tenancy which is the equivalent of a proprietary right. The claimant also has a right to have its application heard without undue delay. That is the right of all applicants before the court in respect of whatever relief is sought. That can be cut down where it is necessary to achieve the objective of administration, but improving the position of a secured creditor over the interests of a third party who has a right to a new tenancy is not, on the face of it, within the administration objective.[14]I was naturally referred to the decision of the Court of Appeal in Atlantic Computer Systems[1992] Ch, 505, and, in particular, the judgment of Nicholls LJ (as he then was). The relevant passage is set out in the helpful skeleton argument that has been put before me by Ms Barge for the administrators. The relevant part emphasizes:
"The court has to carry out a balancing exercise, balancing the legitimate interests of", in that case, "the lessor and the legitimate interests of the other creditors of the company."
[15]That case was a case where the purchase of computer equipment sub-let to end users was funded by hire-purchase or leasing arrangements. The funders applied for various directions including leave to obtain possession. On the particular facts, leave was given. In reaching that conclusion, the court laid down general guidance, including this:
"In carrying out the balancing exercise … the administration procedure should not be used to prejudice those who were secured creditors when the administration order was made in lieu of a winding up-order … The underlying principle here is that an administration for the benefit of unsecured creditors should not be conducted at the expense of those who have proprietary rights which they are seeking to exercise, save to the extent that this may be unavoidable and even then this would usually be acceptable only to a strictly limited extent."
That is not directly applicable because we are not here concerned with someone who is a secured creditor seeking to exercise proprietary rights. I will nonetheless approach the matter on the basis (which I think would be correct if the creditors as a whole were affected by my decision) that I have to strike a balancing exercise between the rights of the administrators to conduct an orderly administration in accordance with the administration objective and the right of the applicant to have its application heard, and to be granted the lease to which as things stand it is entitled. As I have said, that entitlement is the equivalent of a proprietary right.[16]In my judgment, this is not a case where I should refuse the applicant the permission it seeks. On the contrary, it seems to me a clear case where I should grant such permission. The 1954 Act application has to be heard sooner or later. As Mr Wonnacott points out, section 31(2) of the 1954 Act, the terms of which I shall not endeavour to summarise, appears to presuppose (perhaps somewhat optimistically) that a 1954 Act application should be heard within twelve months. In addition, paragraph 4 of Schedule B1 requires an administrator to perform his functions as quickly and efficiently as is reasonably practicable, and administrations are only valid in the first instance for a period of 12 months, though there is power for that period to be extended. Moreover, the administrators are for understandable reasons seeking to ensure that the proceedings are not heard until a ground of objection which the defendant does not presently have emerges. As, however, the onus is on the defendant to demonstrate that there is an intention to redevelop before Ground (f) can be invoked, it seems to me wrong to withhold permission to continue the proceedings in circumstances where, as things stand, it is virtually common ground that the company does not intend to redevelop. In addition, the interests of creditors generally are, as I have endeavoured to explained, unaffected by the 1954 Act proceedings, and it is a matter of chance that these are in form the claimant’s proceedings, when in substance they are the defendant’s, upon whom the onus of establishing Ground (f) rests.[17]The claimant is presently in a state of continuing uncertainty in relation to a store that it wishes to refurbish. It is wrong for that uncertainty to continue indefinitely. It is possible, when the matter comes before the court on the 1954 Act application, that either a short tenancy will be granted or a tenancy with a break clause. This might itself create some uncertainty, but that is a matter which can be considered upon all the evidence before the appropriate court, which both sides accept must eventually come to adjudicate upon this issue. Given that acceptance, it seems to me right that the matter should proceed with proper expedition. It would be wrong of this court to improve the position of the defendant or the bank to the prejudice of the claimant, which has a right to have its proceedings heard without undue delay, and (on the evidence as it stands) the terms of a new tenancy determined.[18]In those circumstances I am persuaded that I should accede to Mr Wonnacott's application, and I do so.