Shinners & Anor (Joint Administrators of London Bridge Entertainment Partners LLP) v London Trocadero (2015) LLP [2019] EWHC 2932 (Ch)

'Such a course would appear to be wrong in principle, because it would involve a judge effectively overruling the lawful provisions of a statute or statutory instrument. It would also be highly problematic in practice because it would throw many liquidations and administrations into confusion: the law would be uncertain, and many creditors who felt that the statutory ranking caused them unfair prejudice would make applications to the Court. ' 59. '

'Thus was created a discretion to allow a creditor to use a process of execution to recover in full a debt for which he would otherwise have had to prove in the liquidation. '

'It is also common ground that the salvage principle and the right to prove for a debt are not mutually exclusive. Thus, the mere fact that a right is a provable debt does not mean that the salvage principle cannot apply' (4) In Laverty v British Gas Trading Ltd [2014] EWHC 2443 (Ch), Sales J referred at [8] to 'provable debts which are to be elevated so as to be payable as if they were expenses of the administration on the basis of the principle in the Lundy Granite case (sometimes referred to as the 'salvage principle')'

'the so-called 'rule against double proof' in English law is a misnomer. The true rule is not against double proof but against double dividend. It operates to bar the payment of two dividends in respect of what is in substance the same debt, rather than the presentation of two proofs for the same or substantially the same debt. '

'In re Fenton; Ex p Fenton Textile Association Ltd [193 Il 1 Ch 85 was another case of a surety under a pre-insolvency guarantee, but this time he had not actually paid. Nor could he pay, because he was bankrupt and his assets had vested in his trustee. The creditor was still owed the money and entitled to prove in the liquidation. The Court of Appeal held, first, that one could not have more than one proof in respect of the same debt ('the rule against double proof'); otherwise, if there had been, say, four guarantors, there could have been five people receiving dividends on the same debt. Secondly, the Court of Appeal said that until the creditor had been paid, he had the superior right of proof and a right of proof by a surety was excluded. '

'so long as the estate of the principal debtor remains liable to the principal creditor the surety will not be permitted to prove against the estate of the principal debtor, as such a proof would be a double proof for the same debt, and would therefore be inadmissible as being contrary to the established rule of bankruptcy. '

'Should the surety subsequently pay off the principal creditor before the latter has lodged a proof, he would undoubtedly be able to prove in the bankruptcy, and if he paid the principal creditor off after the latter has lodged a proof, the dividends in respect of such proof would be made available for the surety. But I cannot agree that a surety who has not paid off the principal creditor can prove in the bankruptcy of the principal debtor so as to share in the distribution of his assets unless the principal creditor has renounced in some way his right to lodge a proof himself while preserving, of course, his rights against the surety. To allow such a sharing in the assets would be to subject the assets to two claims in respect of the same debt, and this is contrary to the well-established rule in bankruptcy against double proof. '

'These citations may appear to suggest a tension between the approach of the Court of Appeal in Re Fenton and that of the Court of Appeal in Barclays v TOSG and the House of Lords in Kaupthing. Yet Re Fenton was cited in each without express or apparent disapproval; and as appears above, it was cited with apparent approval by Lord Hoffmann, who, incidentally, had represented the unsuccessful appellant in Barclays v TOSG, in Secretary of State v Frid. That begs the question whether there is any real dichotomy between the cases.'

'the obvious and immediate way of safely securing the purpose or principle of the rule is to preclude any proof by S. That, as I read the cases (such as Re Fenton) is what the court has always done. The policy of the rule and the practice of the Court has been to determine the matter at the point when S lodges its proof' (per Hildyard J at [175]). In less clear cases, the court 'may have to wait and see, although even then the game is over once a distribution is made, since on no account can two distributions be made in respect of what is in substance the same debt'

'My provisional view is, therefore, that the authorities are not inconsistent: they address two different situations, one being or being analogous to the paradigm, the other being less obvious but potentially productive of the same substantive unfairness. In the first, paradigm type of case, the authorities all stipulate rejection of the proof; in the other, they resort to the underlying rationale of the rule to permit deferral to the point when the risk of double dividend actually eventuates. '

'It is quite obvious that if this proof is allowed the Oriental Commercial Bank will pay a double dividend on the same debt. It appears to me clearly that it is substantially the same debt; because if all parties had been solvent, whatever sums the Oriental Commercial Bank might have paid to the Agra Bank, although they would have paid it, no doubt, for the purpose of performing the contract they had entered into by their endorsement, yet, substantially, whatever sums they might have paid to the Agra Bank would have gone in reduction of the sum which the Oriental Commercial Bank had promised to pay to the European Bank. In that case the Oriental Commercial Bank could never have been called upon to pay these bills twice over. It would have made no difference that they had entered into two contracts with two separate parties that they would pay the bills — namely, with the European bank as acceptors, and with the Agra Bank as holders. It is clear that they would have performed both contracts by paying the bills once, because they had guaranteed the acceptors... '

'That is in my view an election by the liquidator to continue in possession of the property, and if he continued in the possession of the property he could only do so upon the terms of the lease, and it is only equitable, if he keeps the lease as an asset of the company and for the purposes of the liquidation, that he should satisfy those conditions upon which the assets remain his; in other words he should pay the rent in full. '

'When the liquidator retains property for the purpose of advantageously disposing of it, or when he continues to use it, the rent of it ought to be regarded as a debt contracted for the purposes of the winding up of the company, and ought to be paid in full like any other debt or expense properly incurred by the liquidator for the same purpose... '

'In all of [the authorities] you will find that they are based on the principle I am about to state. If you have a company or person whose estate is being dealt with or administered by the Court, and a liquidator or receiver appointed by the Court has occupied or used premises that are part of the estate, then, as to 126. rent and other outgoings payable to the landlord or other parties in respect of the premises for that occupation or user and for which the company or person whose estate is being dealt with or administered is liable, the Court will see that such rent and other outgoings are paid out of the assets got in by the liquidator or receiver. '

'It must be remembered that in .. a case as between mortgagee and mortgagor, the latter remains liable to rent, even if the mortgagee is in possession; and that the mortgagee on going into possession, even though remaining in possession and paying no rent, does not become liable, in respect of such occupation, to the [headl landlord for rent.'

'I am told that there is no direct authority on the exact point, a fact which has caused me some surprise because it must have been a matter of common occurrence that a liquidator has retained possession of leasehold premises for the benefit of the liquidation under circumstances similar to those of the present case. '

'That being the general rule as to rent the question is whether the same rule ought not to apply to the sum now in dispute. In In re Silkstone and Dodworth Coal and Iron Co, Fry J after referring to the facts of that case said, '

'31 The difference between the treatment of pre-liquidation debts under the Lundy Granite principle and the treatment of post-liquidation liabilities emerges clearly from the 19th century cases on rates. In In re Watson Kipling & co (1883) 23 ChD 500, which concerned an assessment of rates made after the liquidation upon property occupied by the company, Kay J rejected the submission of counsel for the rating authority, at p506, that 'where a liability is incurred during the winding up, that liability ought to be paid in full, and therefore these rates ought to be paid in full because they were made during the winding up. ' 32 He applied instead the Lundy Granite Co principle and said that it was not enough that the company was in rateable occupation. It must have retained occupation for the benefit of the estate. But in In re National Arms and Ammunition Co (1885) 28 CID 474 Bowen and Fry LJJ said that this was wrong. Bowen LJ said, at pp480, 482: '

'Now that being the rule in a compulsory liquidation, the same principle applies equally to a voluntary liquidation. The liquidators in the present case knew the contents of this lease at the time when they elected to continue in possession of this beneficial term and it would in my opinion be highly inequitable to allow them to enjoy the benefit and disregard the covenants in the lease. It is suggested that the reversioners should from time to time have sought to re-enter for breach of the repairing covenants or have imposed terms on the liquidators in lieu of exercising their right of re-entry, but as to the covenant by the lessees to deliver up the premises in good repair at the end of the term the reversioners had obviously to wait till the end of the term before they could found any proceedings on that covenant. In my opinion the principle stated in the authorities to which I have referred is entirely applicable to the present case, and the liquidators having elected to hold the premises for the sake of the profit rental they obtained ought to be allowed to hold them only on the terms and conditions contained in the lease. I hold therefore that the reversioners are entitled to be paid in full the amount of their claim and not merely to prove for dividends in respect of it'

'So far as administration is concerned, section 19 only applies to liabilities incurred during the administration. On the literal meaning of those words, such liabilities include liability for wages accruing during the contractual period of notice or the damages payable for the failure to give notice. Mr Sumption submitted that the words should be read as being limited to those liabilities incurred in return for services actually rendered for the benefit of the administration. He relied by analogy on the salvage cases which render assets in liquidation liable for expenses incurred by the liquidator for the purpose of the more beneficial realisation of the company's assets: see In re Oak Pits Colliery (1882) 21 Ch D 322. However, I do not think these principles assist Mr Sumption. Although the authorities show that debts incurred before the liquidation do not obtain priority, they indicate that even on the salvage principle all liabilities under a contract incurred after the time of adoption of the contract by a liquidator are entitled to priority. Thus in In re S. Davis and Co Ltd [1945] Ch 402 damages for failure to deliver up goods bailed to a company under a bailment contract 'adopted' by a liquidator were held entitled to priority even though the obligation to deliver up only arose after the liquidator had ceased to manage the company's business. Again in In re Levi & Co Ltd [19191 1 Ch 416 sums due under a covenant to deliver up in good repair at the termination of a lease which had been used by a liquidator were held entitled to priority on the salvage principle even though some of the disrepair occurred before the liquidator took possession. The salvage principle in liquidation indicates that if a liquidator adopts a contract for the purpose of the more beneficial conduct of a liquidation all such liabilities under such contract after the date of adoption are entitled to priority. This principle is therefore of no assistance in seeking to limit the administrator' s liability in this case. I therefore reach the view that in the Paramount case the employees are entitled under section 19 to payment in lieu of notice, including pension contributions in respect of the notice period. '

'The salvage principle in liquidation indicates that if a liquidator adopts a contract for the purpose of the more beneficial conduct of a liquidation, all such liabilities under such contract after the date of adoption are entitled to priority. The principle is therefore of no assistance in seeking to limit the administrators' liability in this case.'

'In my judgment, that principle applies here so that, as the rent falling due on the next quarter day is a payment in advance, it is not subject to 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 as one of the costs and expenses of the administration and would not fall to be apportioned should the administrators vacate the premises during that quarter. It follows also from this that the earlier decision of Shackell & Co v Chorlton & Sons [1895] I Ch 378 in the other direction is no longer good law, notwithstanding its application in In re ABC Coupler & Engineering Co Ltd (No 3) [19701 1 WLR 702, where the point was conceded. The fuller citation of authority in In re Levi & Co Ltd [1919 ] 1 Ch 416, and its approval in Powdrill v Watson [19951 2 AC 394, establishes that a liquidator electing to hold leasehold premises can do so only on the terms and conditions contained in the lease, and that any liability incurred while the lease is being enjoyed or retained for the benefit of the liquidation is payable in full as a liquidation expense. The same principle in my judgment applies in an administration. As Lord Hoffmann recognised in In re Toshoku the liability to pay rent is not treated as an expense having priority until (and lasts only so long as) the office holder makes use of or decides to retain the property. Subject to that, any such liability accruing during that period is in my judgment to be treated as an expense having the requisite priority. '

'88. The judge [HHJ Purlel in part justified his conclusion by reference to the 'adoption' of contracts as explained by the House of Lords in Powdrill v Watson [19951 2 AC 394. However, that case concerned a very different point. In so far as the House of Lords considered the salvage principle it did so only by analogy (which it rejected). But what Lord BrowneWilkinson said, at p450, was that: '

'The principle evolved from the cases is thus one which permits, on equitable grounds, the concept of a liability incurred as an expense of the liquidation to be expanded to include liabilities incurred before the liquidation in respect of property afterwards retained by the liquidator for the benefit of the insolvent estate. '

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

'In regards [sic] to the rent, your clients have taken from the rent deposit account the current quarter rental (29th September25th December) [sic]. Please note that the administrators' acknowledgement of the liability to pay rent whilst in possession of the Premises is in respect of a liability accruing on a day to day basis (see re Game Station (2014) EWCA Civ 180). As is entirely usual the costs and expenses of the administration will be therefore accounted for (If not already paid) once possession ceases and ultimately any remaining balance will be paid at the conclusion of the administration. '