Shinners & Anor (Joint Administrators of London Bridge Entertainment Partners LLP) v London Trocadero (2015) LLP

This is the application of Henry Shinners and Nicholas Myers, as joint administrators of London Bridge Entertainment Partners LLP ('the Company'), for directions under paragraph 63 of Schedule Bl to the Insolvency Act 1986 as to:

The Respondent is the registered proprietor of The London Pavillion, 1 Piccadilly, London WI ('the Building'), a large five-storey building situated in a prominent location occupying a corner site on Piccadilly Circus. The Company was the lessee of parts of the Building under various leases. The premises demised to the Company were used as a museum trading under the name 'Ripley's Believe it or Not!' The Applicants ('the Administrators') are the joint administrators of the Company, having been appointed on 29 September 2017.

By an agreement for lease dated 4 July 2007 made between (1) London Trocadero Limited and (2) the Company ('the Agreement for Lease'), it was agreed (a) that London Trocadero Limited would grant and the Company would accept a lease in the terms summarised in Paragraph 4 below and (b) that the parties would enter into a rent deposit deed in the terms summarised at Paragraphs 6 to 8 below.

By a lease dated 2 November 2007 made between (1) London Trocadero Limited and (2) the Company ('the Lease'), Units G3, G4, G7, C9 and CIO and parts of the first, second, third, fourth, and fifth floors of the Building Cthe Property') were demised to the Company for a term of 25 years commencing on 2 November 2007 at an initial basic rent of El,750,000 per annum, payable quarterly in advance on the modern quarter days (1 January, 1 April, 1 July and 1 October). The passing rent at the date of forfeiture was €2,051,924.35. The Lease included, at Clauses 4.3, 4.4 and 4.5, covenants to repair, decorate and maintain the Property and fixtures and fittings therein. Clause 4.8 of the Lease contained a covenant against alterations.

By a further lease dated 10 July 2008 and made between London Trocadero Limited and the Company ('the Plant Room Lease'), a plant room on the fourth floor of the Building was demised to the Company for a term commensurate with the term of the Lease. The rent under the Plant Room Lease was a peppercorn rent.

The parties to the Lease entered into a rent deposit deed on the same date as the Lease ('the Rent Deposit Deed', or 'Deed'), under which the Company paid the Landlord the sum of €2,056,250 ('the Rent Deposit'). This was placed in a specifically designated treasury deposit account with a UK clearing bank ('the Account') in the name of the Landlord together with any other sums paid into the Account by the Company pursuant to the terms of the Rent Deposit Deed and any interest credited to the Account.

The Rent Deposit Deed contained, inter alia, the following provisions:

Clause 10.2 of the Rent Deposit Deed further provided that any breach of the obligations of the Tenant contained in the Deed would be deemed to be an event giving rise to the right of re-entry by the Landlord under the Lease.

On 20 August 2015, the freehold interest in the Building was acquired by the Respondent. The benefit of the Lease and the Plant Room Lease (which collectively will be referred to as 'the Leases'), together with the Rent Deposit Deed, were assigned to the Respondent (hereafter, for ease of reference, 'the Landlord') when it acquired the freehold.

On 29 September 2017, the Company went into administration and the Applicants were appointed as joint administrators of the Company.

The rent which fell due under the Lease on 1 October 2017, (€512,981.09 plus VAT, payable quarterly in advance for the quarter commencing 1 October 2017), was not paid. On or by 9 October 2017, the Landlord made a withdrawal from the Rent Deposit in order to settle the unpaid rent. This apparently had the effect of reducing the balance of the Rent Deposit to €1,292,161. On 9 October 2017, the Landlord, by its (then) solicitors, PCB Lawyers LLP ('PCB'), served notice on the Company pursuant to clauses 3.2 and 5 of the Rent Deposit Deed confirming that the rent for the quarter commencing 1 October 2017 had been withdrawn from the Rent Deposit and requiring the Company to replenish the Rent Deposit within 14 days,

The Company failed to replenish the Rent Deposit within 14 days. A notice pursuant to Section 146 of the Law of Property Act 1925, requiring the Company to remedy the breach, was served by the Landlord on the Company on 26 October 2017.

The Company did not respond to either notice and did not replenish the Rent Deposit.

On 1 November 2017, the Landlord's current solicitors, Hogan Lovells International LLP, asked the Administrators to consent to a forfeiture of the Leases. The Administrators initially refused, as they were attempting to assign the Leases to a third party, Exhibitions Holdings Limited ('EHL').

On 30 November 2017, the Landlord issued an application for permission to forfeit the Leases ('the Original Application').

The Administrators were unable to assign the Leases to EHL and on 21 December

It is common ground that for the period 29 September 2017 until the forfeiture of the Leases on 22 December 2017, the Property and the Plant Room were retained for the benefit of the administration.

It is also common ground that, if the rent for the period of the Administrators beneficial retention had remained unpaid, it would have been payable as an expense of the administration pursuant to the Lundy principle.

The difference between this case and a number of the cases which have come before the court in the past is that, in this case, the rent for the period of the Administrators' beneficial occupation has been paid; it was satisfied by the withdrawal from the Rent Deposit on or by 9 October 2017.

The Landlord maintains, however, that there are other sums due under the Lease, in respect of matters such as dilapidations, and also losses arising as a result of the forfeiture, (collectively referred to by Mr Robins as the 'non-expense claims', to differentiate them from the Clause 5 'top up' obligation itself), which remain unpaid and which the Landlord maintains will exceed what is left of the Rent Deposit. The quantum of the 'non-expense claims' is in dispute between the parties but serves to explain why the Landlord would wish to see the Company's top-up obligation under Clause 5 of the Deed treated as an expense of the administration.

As confirmed by Counsel for the Landlord at a hearing on 11 March 2019, when invited to clarify the scope of relief sought under the Amended Application, 'top-up is the only issue.... In short, the issue is: is the top-up obligation payable as an expense of the administration?'

As a corollary of the Amended Application, the Landlord issued a further application ('the Unfair Harm Application'), by which the Landlord sought an order that, as a condition of continuing to defend the Landlord's Amended Application, the Administrators should '(a) undertake to meet in their personal capacity any liability payable as an expense of the administration that cannot be met out of the Company's assets; or (b) confirm that this litigation, including any adverse costs order, is being funded by a third party sufficient to meet the [Landlord's] claims and costs; or (c) confirm that they have obtained insurance to cover the amount claimed by [the Landlord] and its costs; or (d) confirm that they have some other arrangement in place to meet these liabilities. '

The Administrators in turn have, by their own application, sought directions under paragraph 63 of Schedule Bl in the terms set out at paragraph 1 above, together with orders for the striking out or dismissal of the Amended Application and the Unfair Harm Application. At an earlier hearing, it was directed that the Administrators' application should be dealt with first.

In Re Nortel GmbH (in administration) [20131 UKSC 5 ('Nortel'), Lord Neuberger explained (at [391) that the order of priority for payment out of the company's assets in a liquidation or an administration is, in summary terms, as follows:

Debts arising under pre-administration contracts (that is to say, contracts entered into by the company prior to the commencement of its administration) are provable debts.

Under Rule 14.1(3)(b) of the Insolvency Rules 2016, the claims which are provable in any administration include 'any debt or liability to which the company may become subject after the relevant date by reason of any obligation incurred before that date. 'Liability' in this context includes 'a liability to pay money or money's worth':

The 'relevant date' for such purposes is the date on which the company entered administration: r. 14(1)(3) IR 2016.

The relevant 'liability', for the purposes of r.14.1(3)(b) IR 2016, will include contractual obligations. As explained by Lord Neuberger in Nortel at [75]:

Thus, as Lord Hoffmann explained in In re Toshoku Finance UK plc [2002] UKHL 6 at [25], 'debts arising out of pre-liquidation contracts such as leases, whether they accrue before or after the liquidation, can and prima facie should be proved in the liquidation. '

The reference in r.14.1(3)(b) to 'any debt or liability to which the company may become subject' makes clear that contingent liabilities are provable. This is confirmed by r. 14.1(5) and also by r. 14.2(1), which provides that 'All claims by creditors. are provable as debts against the company. whether they are present or future, certain or contingent, ascertained or sounding only in damages.

It follows that a liability arising upon the occurrence of a contingency after the commencement of an administration, by reason of an obligation incurred before the commencement of the administration, will ordinarily be a provable debt in the administration.

Debts and other liabilities arising under post-administration contracts (that is to say, contracts entered into by the administrator after the commencement of the administration) are not provable debts. Instead they are administration expenses, which are payable in priority to provable debts.

Under r.3.50(1) IR 2016, the claims which are made payable as administration expenses are all 'fees, costs, charges and other expenses incurred in the course of the administration. '

Administration expenses include 'expenses properly incurred by the administrator in performing the administrator's functions' (r.3.51(2)(a) IR 2016). The word 'expenses' in this context relates to expenses incurred in relation to obligations entered into by the office holder after the onset of the liquidation or administration: Exeter City Council v Bairstow [20071 EWHC 400 (Ch) at [521, per David Richards J (as he then was); Re Sixty UK Ltd (in administration) [2009] EWHC 3866 at [251, per HHJ McCahi11 QC.

Administration expenses also include 'any necessary disbursements by the administrator in the course of the administration': r.3.51(2)(g) IR 2016. A 'disbursement' falls within r.3.51(2)(g) 'if it arises out of something done in the administration (normally by the administrator or on the administrator's behalf), or if it is imposed by a statute whose terms render it clear that the liability to make the disbursement falls on an administrator as part of the administration — either because of the nature of the liability or because of the terms of the statute': Nortel at [1001 per Lord Neuberger. At [101] Lord Neuberger went on to explain: 'If an administrator, on behalf of the company, enters into a transaction which gives rise to tax, or starts (or adopts) proceedings which give rise to a liability for costs, that tax or those costs would fall within the rule, as they arise from his actions as administrator during the administration. '

As a result of the rules identified above, the insolvency legislation draws a clear distinction between:

In circumstances where the Lundy principle applies, however, certain claims arising under pre-administration contracts become payable as administration expenses.

In re Lundy Granite Co (1870-71) LR 6 Ch App 462 at 466, James LJ explained the principle as follows:

In re Toshoku Finance UK Plc [2002] 1 WLR 671 the House of Lords considered an application by liquidators of a subsidiary of Toshoku Ltd for directions as to whether corporation tax payable on interest on a debt owed by a fellow subsidiary which had not been received should be paid as an expense of the winding up in priority to other claims. The House of Lords decided that rule 4.218(1) IR 1986 required the tax to be discharged as a necessary disbursement. In the course of his judgment, Lord Hoffmann examined the origins and scope of the Lundy principle, highlighting (inter alia) the following:

Whilst the Lundy principle evolved in the context of liquidations, the rules relating to liquidation expenses were later adopted in the context of administration expenses as well: see Exeter City Council v Bairstow [2007] Bus LR 813 at [791 per David Richards J.

In rent cases, the rent which is payable as an expense under the Lundy principle is the rent for the period of the administrator's 'beneficial occupation' (Re New Oriental Bank corpn (No 2) [1895] 1 Ch 753 at 757 per Vaughan Williams J), or 'beneficial retention' (Jervis and others v Pillar Denton Ltd [2014] EWCA Civ 180 at [40] and [82] per Lewison LJ) of the premises in question.

Since the case of Jervis, it has been established that, for such purposes, rent is treated as accruing from day to day, rather than by reference to whether given rent days fall before, during or after the period of beneficial retention. In reaching this conclusion, Lewison LJ (at noted that the salvage principle as formulated by James LJ in the Lundy Granite case was not expressed in terms of when rent falls due or when rent accrues. Rather, it was framed:

On this basis, Lewison LJ concluded:

In reaching this conclusion, Lewison LJ overruled the decision of HHJ Judge Purle QC in Goldacre (Offices) Ltd v Nortel Networks UK Ltd [20101 Ch 455 and the decision of HHJ Judge Pelling QC in In re Luminar Lava Ignite Ltd [2014] Ch 165, a point to which I shall return.

The pari passu rule is a fundamental principle of both corporate and personal insolvency proceedings.

In each case, however, there may be circumstances in which an administrator may need to make a payment to an unsecured creditor in contravention of the pari passu rule.

The Insolvency Act 1986 provides that an administrator may make such a payment:

As Lord Neuberger observed in Nortel at [1201:

The Court, however, has no power to re-order liabilities in the waterfall simply on the basis that it would be 'fair' to do so. As confirmed by Lord Neuberger in Nortel at [116]:

Having considered the legislative framework and the principles developed in the caselaw, I turn next to the present case.

In the present case, the question to be determined is whether the obligation of the Company under Clause 5 of the Rent Deposit Deed, to top up the Deposited Sum within 14 days of the Applicant's demand dated 9 October 2017, following the Applicant's withdrawal from the Deposited Sum of €615,577.31 in respect of rent payable in advance for the quarter commencing 1 October 2017, should be treated as an expense of the administration, whether by operation of the Lundy principle or otherwise.

This involved examination of the following issues, namely:

I shall deal with each in turn.

The first issue raised was whether the Lundy principle was limited to provable debts and, if so, whether the top-up obligation was capable of proof.

On behalf of the Administrators, Mr Robins maintained that the Lundy principle was limited to provable debts. The 'gateway', as he put it, was level 5 of the Nortel waterfall. Ms Bhaloo did not agree with the 'gateway' analysis. She maintained that the Lundy principle was, as she put it, a 'free-standing principle established by the caselaw and that whilst many of the cases refer to provable debts, that was simply because it was 'the most common situation', there being 'very few unprovable

In reply, Mr Robins referred me to the judgment of Lord Hoffmann in In re Toshoku at [19] and [20], where, having traced the 'obscure origins' of the Lundy principle back to In re Exhali coal Mining co Ltd (1864) 4 De GJ & S 377, Lord Hoffmann concluded (with emphasis added):

Mr Robins identified four further examples in the caselaw in support of his contention.

At first glance, these are powerful examples. In none of these examples, however, was the court actively comparing the position of non-provable (level seven) and provable (level five) debts. I also remind myself that the 'foundation of the [Lundy] principle is the application of equity' (Jervis, per Lewison LJ); it is a principle which has evolved over time. Given that, it would in my judgment be wrong in principle to impose an absolute bar on non-provable liabilities being elevated to expense status, however unlikely such an elevation may be in practice, particularly given the expansive interpretation of the concept of 'obligation' adopted by the Supreme Court in recent years.

I therefore reject Mr Robins' submission that the Lundy principle is limited to provable debts. It does not follow, however, that the question whether a given debt or liability is provable or non-provable is entirely irrelevant. As confirmed by Lindley LJ in Re Oak Pits Colliery Co (1882) 21 Ch D 322 at 329, anyone seeking expense status

The next question is whether the top up obligation is capable of proof. On behalf of the Administrators, Mr Robins submitted that the top up obligation was not a debt or liability within the meaning of rule 14.1 IR 2016. Instead, it was an obligation to provide security for a debt or obligation. As summarised at paragraphs 92 of his skeleton argument, Mr Robins' position was as follows:

In support of these submissions, Mr Robins referred me to New Hampshire Insurance Company v Magellan Reinsurance Company [2009] UKPC 33 and in particular, a quote from the Court of Appeal's decision in the case, namely, that 'an obligation to provide security for a debt which may become payable was not itself a debt' : para [81. I was not greatly assisted by this decision. As rightly noted by Ms Bhaloo, the case involved the statutory criteria for presenting a winding up petition under the laws of the Turks and Caicos Islands, a jurisdiction which did not extend the right to petition to contingent creditors or creditors with unliquidated claims. In reply, Mr Robins confirmed that he relied simply upon quoted passage to illustrate a conceptual point. In the absence of detailed submissions on the issue of what qualifies as a 'debt' under Turks and Caicos law, however, this took us no further forward.

Mr Robins further referred me to rule 14.1(3), which provides, inter alia: 'Debt', in relation to winding up and administration, means (subject to the next paragraph) any of the following — (a) any debt or liability to which the company is subject at the relevant date; (b) any debt or liability to which the company may become subject after the relevant date by reason of any obligation incurred before that date;

Mr Robins submitted that, for the purposes of rule 14.1(3)(b), it is not every 'obligation' that is capable of giving rise to a provable debt; it has to be an obligation which is capable of giving rise to a 'debt or liability'. I accept that submission. Mr Robins further submitted that the term 'debt', as employed in rule 14.1(3)(b), must, in context, be construed 'in an ordinary, commonly understood sense of the term.. In other words, a liquidated sum that is payable to a creditor absolutely in discharge of a right to receive payment'. Whilst, at first glance, such a construction has its attractions, it is incompatible with rules 14.1(4) and 14.1(5) and I reject it.

Ultimately, however, the scope of the term 'debt', as employed in rule 14.1(3)(b), is largely academic. I say this because, in my judgment, the top up obligation contained in Clause 5 of the Rent Deposit Deed clearly qualifies as a 'liability to pay money or money's worth' (r. 14.1(6)) in any event. I reject the narrow construction of the term pay' which Mr Robins invited me to adopt in this context. For the purpose of rule 14.1(3)(b), therefore, the top up obligation under Clause 5 qualifies as a 'liability to which the company may become subject after the relevant date by reason of any obligation incurred before that date'.

The next question is whether the top up obligation offends the rule against double proof.

The rule against double proof is helpfully summarised by Lord Walker in In re Kaupthing Singer & Friedlander Ltd (No 2) 2012 1 AC 804 at p813 as follows:

The function of the rule is not to prevent a double proof of the same debt against two separate estates (that is what insolvency practitioners call 'double dip'). The rule prevents a double proof of what is in substance the same debt being made against the same estate, leading to the payment of a double dividend out of one estate. It is for that reason sometimes called the rule against double dividend.

Mr Robins submitted that, even if otherwise satisfying the requirements of rr, 14.1 and 14.2 IR 2016, the top-up obligation contained in Clause 5 of the Rent Deposit Deed was not a debt or liability that could be proved because it would be contrary to the rule against double-proof.

To illustrate his point, Mr Robins gave the example of a landlord who, at the time of his tenant's entry into liquidation, is owed €500,000 under the terms of a lease (for say, unpaid rent and dilapidations) and €500,000 pursuant to a top-up obligation in a rent deposit deed. If he sought to lodge a proof for both claims, argued Mr Robins, the liquidator would undoubtedly view both proofs as in respect of the same debt. He would admit the underlying debt to proof but would not 'double up'. The fact that the landlord had the benefit of two separate contracts, each of which supported a claim of €500,000, would not lead to the conclusion that he could prove for both.

That, Mr Robins maintained, was precisely the position in the present case. The Landlord's claims under the Lease, to the extent that they were valid claims, were already provable. The Landlord could not also prove for an additional liability under Clause 5 of the Rent Deposit Deed that was, as he put it, 'reflective' of those provable debts, as that would be contrary to the rule against double proof.

On behalf of the Landlord, Ms Bhaloo contended that the rule against double proof was in reality a rule against double dividend and did not, of itself, impact on the ability to prove in the first place. In this regard she referred me to the passage from the judgment of Mellish LJ in In re Oriental Commercial Bank at pp103-4 and in particular his conclusion that 'the true principle is, that there is only to be one dividend in respect of what is in substance the same debt. ..

Ms Bhaloo also referred me to the judgment of Oliver LJ in Barclays Bank v TOSG Trust Fund Ltd [1984] AC 626. Whilst the House of Lords reached a different conclusion on the facts on the issue whether the rule against double proof had been engaged in TOSG, Oliver LJ's exposition of the rule against double proof (at p.636644) was later approved by Lord Walker in Kaupthing at [121. At page 636, Oliver LJ had said:

Ms Bhaloo went on to refer me to the judgments of Kerr LJ at p650 and Slade LJ at 659. These passages, she maintained, showed a clear distinction between whether a dividend is payable on a given debt and whether the debt is provable in the first place.

A similar submission was made by Mr Fisher of Counsel in the recent case of Bundeszentralamt Fur Steuern v Heis and others 2019 EWHC 705 ('the MF Global case'). This was an application for a stay of appeals brought by the German Federal Tax Office and by Deutsche Bank AG against the rejection by the Joint Special Administrators of MF Global UK Limited of their respective proofs of debt. In the context of this application, 'the rule against double proof' was 'the subject of considerable debate' [4] before Hildyard J. During the course of the application, Mr Fisher submitted (at [148]) that:

On behalf of the Joint Special Administrators in the MF Global case, Mr Moss widened the debate, depicting Barclays v TOSG as a variation and extension of the basic 'rule against double proof' to cater for cases where there was remaining doubt as to whether both proofs related to the same or substantially the same debt. Starting with the case of Kaupthing, Mr Moss pointed out that Lord Walker (at [12]) had also quoted Lord Hoffmann's examination of further case law and summary of the position in Secretary of State and Industry v Frid as follows:

Reference was made in particular to the judgment of Lawrence LJ in In re Fenton (at page 114), where he said that:

In Fenton, Lord Harnworth MR agreed, subject to the caveat (at page 110) that he did not wish to exclude the possibility that the claimant might in the future establish a provable debt 'in some events'. Romer LJ in turn considered In re Oriental Commercial bank to be 'direct authority against such a proof being allowed' (page 119) and stated (at pages 118-119):

As noted by Hildyard J in MF Global UK Limited:

In MF Global, Mr Moss initially suggested that there was and that to the extent that any dicta in Barclays v TSOG were inconsistent, such dicta were incorrect. Ultimately, however, he accepted, with some encouragement from Hildyard J, it would seem [at 164]:

In MF Global UK Limited, Hildyard J (at [172-31 concluded that some of the apparent differences in the formulation of the rule stemmed from confusing 'the ultimate objective or principle of the rule with the means by which it was achieved'. The objective or principle of the rule, as stated by Mellish LJ in Re Oriental and Commercial Bank was 'perfectly clear: that 'an insolvent estate ought not to pay two dividends in respect of the same debt', and (broadened a little to capture what is in substance the same debt, even if not in form) that:

The means by which the objective of the rule may be achieved, however, will depend on whether or not it is clear from the outset that one proof is in substance the same debt as another. In a clear case (such as the paradigm situation of principal creditor and surety, 'S'):

At paragraph [1781 of his judgment, Hildyard J concludes:

I respectfully agree with Hildyard J's analysis.

On present facts, however, the question whether the rule against double proof should more appropriately be termed the rule against double dividend is ultimately academic. As rightly noted by Mr Robins, in the classic rule against double proof situation, both proofs meet the statutory test for proof of debts in the Insolvency Rules. They are both debts or liabilities that arise out of an obligation incurred before the commencement of the insolvency proceedings. What matters is whether the proofs are in respect of what is in substance the same debt. Mr Robins submitted that 'it does not matter whether you say that a proof for the clause 5 top-up obligation would not be admitted at all or that if admitted it would not carry any right to payment because, either way, you get to the same end result, which is that nothing can be payable in respect of it. '

As put by Oliver LJ in TOSG, in considering whether the rule against double proof (or dividend) is offended, the test is 'whether the two competing claims are in substance claims for payment of the same debt twice over'

Ms Bhaloo submitted that the court should test whether the top up obligations were independent of those of the tenant under the Lease by asking itself: 'Were this company solvent, would the tenant have to both comply with its obligations under the lease and top up the rent deposit deed... ' ?

In this regard Ms Bhaloo referred me to a passage from Mellish LJ's judgment in In re Oriental at p. 102:

Ms Bhaloo effectively invited me to interpret the passage quoted from the judgment of Mellish LJ as requiring the court to consider what the position would have been if the company had continued trading and had not gone into liquidation. I reject that invitation. In my judgment, when Oliver LJ postulated the counterfactual 'if all parties had been solvent', the meaning which he intended to convey was 'if all parties were able to pay all debts in full'.

Ms Bhaloo maintained that the Rent Deposit Deed entitled the Landlord to a top-up that was not 'in any way dependent on or interlinked with the obligations of the tenant under the Lease'. It followed, she submitted, that 'they are not in substance the same debt... The Landlord is entitled to both the top-up and compliance with obligations [under the Lease]. . . ' The fact that the Lease had been forfeit, she argued, was immaterial.

There was an air of unreality to these submissions. At the point of forfeiture, Clauses 9 and 10 of the Rent Deposit Deed were engaged and the basis upon which the Rent Deposit was held changed; post forfeiture, there arose an obligation — a conditional obligation but an obligation nonetheless — on the part of the Landlord to pay the

By Clause 2 of the Rent Deposit Deed, the Rent Deposit stands charged 'as a continuing security for the payment and discharge of any of the Tenant's Obligations [as defined] from time to time existing and also for any proper loss which the Landlord may incur in or incidental to and consequent upon forfeiture of the Lease' t Upon forfeiture and delivery up, the Tenant's Obligations cease prospectively; accrued rights remain but there are no ongoing or prospective obligations to secure. Whatever the position might be prior to forfeiture of the Leases, upon forfeiture the Rent Deposit is held as security for (1) past breaches of the Tenant's Obligations under the Leases and (2) proper losses suffered by the Landlord in consequence of the forfeiture.

In submission, Ms Bhaloo conceded that category (2) (proper losses suffered by the Landlord in consequence of the forfeiture) is not a provable debt in its own right. Whilst clauses 2 and 4 of the Rent Deposit Deed entitled the Landlord to withdraw from the Deposited Sum losses suffered by the Landlord in consequence of forfeiture, the Landlord enjoyed no separate cause of action at common law against the Company for such losses. As put in opening, 'if a lease is forfeit, absent specific provisions such as these provisions in the Rent Deposit Deed, it is incontrovertible that the Landlord doesn't have a general claim for losses consequent upon forfeiture' ; 'it doesn't create a separate cause of action either in debt or damages. So, because there is no separate cause of action. that amount is not provable. There is no claim for it apart from to withdraw it from the Rent Deposit.'

Category (1), however, is different. The Landlord has a free standing provable claim in relation to (1) (the 'Tenants Obligations', as defined); a claim which, when asked, Ms Bhaloo was unable to confirm the Landlord would abandon. The Landlord clearly cannot prove both for (1) and for security for (1). In the words of Oliver LJ in TOSG, post-forfeiture, these two competing claims would, in substance, be claims for payment of the same debt twice over. Of the two competing claims, by way of loose analogy with the principal creditor/surety cases, primacy would have to be given to (1) rather than security for (1). To that extent at least, the top-up claim, in substance, does in my judgment offend the rule against double proof.

Even if I am wrong in that conclusion, however, for the reasons summarised below, I am satisfied that the obligation of the Company to provide further security to the Landlord pursuant to Clause 5 of the Rent Deposit Deed should not be treated as an expense of the administration, whether by operation of the Lundy principle or otherwise.

It was common ground that the Lundy principle is not limited to rent. Mr Robins accepted that, in principle, it could extend to 'any debt or liability to which the company may become subject after the relevant date by reason of any obligation

Ms Bhaloo submitted that if an officeholder retains leased premises for the benefit of the estate, the court must ensure that the landlord obtains 'the full value of the property': In re Lundy Granite Co per James LJ at 466. She submitted that the term, 'full value', 'means what it says; it is not confined to debts but refers to the full bundle of rights and obligations that make up a lease. When a landlord leases land to a tenant', she explained, 'he does not do so merely in exchange for rent, or even for rent, service charge and insurance. The lease encompasses a wide range of rights and obligations, all of which are important and all of which form part of the 'value' which the landlord receives in return for demising the property' (Landlord's skeleton argument, para 50). In this case, the Agreement for Lease entered into by the parties makes clear, she continued, that the obligations undertaken by the tenant under the Rent Deposit Deed formed part of the consideration for the Lease as well, There was no basis in the authorities, she argued, for limiting the 'value' to rent.

In short, Ms Bhaloo submitted that, in cases other than those involving periodical payments such as rent, the 'adoption principle' was alive and well, notwithstanding the decision of Lewison LJ in Jervis v Pillar Denton [20141 EWCA Civ 180.

In support of that contention, Ms Bhaloo took me to a number of authorities, which are addressed below.

In re Silkstone and Dodworth Coal and Iron Co (1881) 17 Ch D 158 at 160, on a summons for leave to distrain, Fry J set out the principle upon which the landlords could distrain, a notice having been served demanding either payment of arrears or the stoppage of works, and the liquidators having neither stopped nor paid, as follows:

In my judgment Silkstone is not an authority which supports the adoption principle. The decision was made on a summons for leave to distrain. In that context, any broader comments were obiter at best. Moreover, it is clear from the concluding words of the quoted passage — 'in other words he should pay the rent in full' - that the 'conditions' to which Fry J intended to refer were those relating to payment of rent.

Ms Bhaloo next took me to the case of Brown, Bayley & Dixon (1881) 18 Ch D 649. At 652, Fry J said:

It was the second half of that extract — 'if the company or the liquidator choose to remain in possession of the demised or mortgaged premises, they must so remain upon the terms and conditions of the instrument' - on which Ms Bhaloo sought to rely. Once again, however, on closer examination Brown, Bayley & Dixon was not an authority which unequivocally supported the adoption principle. In context, the remarks were ultimately obiter.

Ms Bhaloo also referred me to In Re Oak Pits Colliery co (1882) 21 Ch D 322, a case in which, at 330, Lindley LJ made the following remarks regarding the salvage principle:

This of itself does not support the adoption principle for which Ms Bhaloo contends. It is limited to rent referable to the period of beneficial retention.

Ms Bhaloo also took me to the case of In Hand v Blow [1901] 2 Ch 721, a case in which, at 736, Romer LJ said:

These were obiter comments, made in the context of an application by a head lessor for an order requiring receivers, appointed on the instigation of mortgagees by subdemise, to pay rent out of the proceeds of the company's goods sold by the receiver whilst in occupation of the premises. It was conceded that there was no privity of estate or contract as between the head lessor and the mortgagees by sub-demise and a fortiori none between the head lessor and the receiver appointed at their behest. The head lessor, however, sought to argue that the position was 'analogous' to that of a liquidator in possession of a company's property. The court rejected the analogy on the basis that that there was no privity of contract or estate between the head lessor and the mortgagees by sub-demise; the mortgagees by sub-demise were not liable to the head lessor in rent. As put by Romer LJ: '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.'

The application was dismissed at first instance and the subsequent appeal was also dismissed. It was simply in the context of addressing the attempted analogy that Romer LJ, on an obiter basis, summarised what came to be known as the Lundy principle. Little can be drawn from the quoted passage in context. A reading of Romer LJ's judgment in full reveals that his focus was on privity and not on what other 'outgoings' might or might not fall within the Lundy principle where it did apply.

Ms Bhaloo next took me to the case of In re Levi & Company Limited [19191 1 Ch 416. In this case, the company was an assignee of a lease subject to usual repairing covenants, including a covenant to deliver up the premises in good repair at the end of the term. The company went into voluntary liquidation in 1910 and the liquidators remained in possession until the lease expired in 1917, paying the rent reserved, and receiving a profit rental totalling €6000 from their underleases. On the termination of the lease, it was estimated that an expenditure of €400 to €500 was required to comply with the lessee's covenants in the lease. It was held that the reversioners were entitled to be paid that sum in full.

At page 419 of the report, Astbury J stated:

Pausing there, it will be seen that Astbury J was treating the liability to deliver up in good repair at the end of the term as what Lewison LJ would later describe in Jervis as a 'happenstance' of timing; that is to say, if, having entered into beneficial possession of premises, a liquidator happens to remain in possession of those premises at the time of accrual of a given liability, that liability in its entirety is treated as an expense, regardless of whether it, or any part of it, is referable to the period of the liquidator's beneficial retention of the premises or not. On the facts of Levi, the liquidators were in possession for seven years, but in principle, on Astbury J's reasoning, the liquidators would have faced the same result had they commenced beneficial retention one month, or even one week, prior to expiration of the term: on the back of a covenant to deliver up in good repair at the expiration of the term, they would have been liable, on expiry of that term, to pay for all dilapidations caused at any stage during the term of the lease as an expense, regardless of the fact that those dilapidations did not relate to their period of beneficial retention.

At page 420 of the report, Astbury J continued:

Astbury J continued (with emphasis added):

Pausing there, it should be noted that, when quoting this passage from Fry J's judgment in the Silkstone case, Astbury J in Re Levi stopped short of the concluding words of the passage in question, which read 'in other words, he should pay the rent in full.'

Astbury J continued (in Re Levi, at 421):

For the reasons already given, however, properly analysed, In re Brown Bayley & Dixon is not, in my judgment, an authority in support of the adoption principle. The comments quoted were obiter: see paragraphs 102-104 above.

Astbury J in Re Levi next maintained (at 422) that 'a similar principle as to rates was applied in In re National Arms and Ammunition 28 Ch D 474...

In re National Arms and Ammunition, however, Bowen LJ had based his judgment on the simple proposition that since the company was in rateable occupation, it was liable to pay the rates, and that the liability for rates was incurred after the date of the winding up. It was a post-liquidation liability. As confirmed by Lewison LJ in Jervis (at [721), 'it is now tolerably clear that the reasoning of Bowen LJ is the correct analysis': see In re Toshoku at [31-321 and In re Nortel at [1031. As explained by Lord Hoffmann in Re Toshoku at paragraphs 31-32:

In short, In re National Arms and Ammunition was not a case governed by the Lundy principle. The rates in issue were a post-liquidation liability. See too Exeter City Council v Bairstow 2007 Bus LR 813, paras 34-39, 84 and 87.

Finally, Astbury J in Re Levi referred to the case of Hand v Blow. Again, for the reasons already given, Hand v Blow is not, in my judgment, an authority which supports the adoption principle: see paragraphs 107-109 above.

Based on these somewhat shaky foundations, Astbury J concluded in Re Levi (at 423) (with emphasis added):

In my judgment, the decision in Re Levi was a 'results-led' decision which should not be followed.

Ms Bhaloo was at pains to stress that Re Levi had been cited with apparent approval by Lord Browne-Wilkinson in the case of Powdrill v Watson [1995] 2 AC 394 at 450. The case of Powdrill, however, concerned the interpretation of specific statutory provisions governing the circumstances in which an office-holder may be said to have adopted a contract of employment and the effect of such adoption. One of the statutory provisions considered was section 19 of the Insolvency Act 1986 (as it then was). Under section 19(5) IA 1986, an administrator was deemed to have adopted a contract of employment if, after a 14-day period mentioned in section 19(5), he caused the company to continue to carry out the contract* The Lundy principle was raised by analogy, in submissions on the effect, or scope, of such adoption. It was accepted before me that Lord Browne-Wilkinson's comments on the scope of the Lundy principle in that context were obiter, the actual decision being based on

As rightly submitted by Mr Robins, Lord Browne Wilkinson's obiter summary of the Lundy principle is not consistent with Lewison LJ's later analysis of the same in Jervis: see para 136 below.

In Re Jervis, the company leased a number of commercial premises on leases which provided that the rent was payable in advance on the usual quarter days. The company went into administration one day after the March rent became due under

As noted by Lewison LJ in Re Jervis at [100], the results of the Goldacre and Luminar cases had left the law in a very unsatisfactory state. If rent was payable in arrear, the office holder had to pay rent as an expense of the liquidation or administration for any period during which he retained possession of the property for the benefit of the insolvency process, apportioned if necessary to reflect the true extent of the benefit. If, by contrast, the rent was payable in advance, no such apportionment could be made. In some cases, this would result in the office holder paying more than the true benefit (as in Goldacre). In other cases it would result in his paying less (as in Luminar). A consequence of the decisions in Goldacre and Luminar had been that it had become common for companies to enter administration on the day immediately following a quarter day, thus avoiding liability to pay the rent in full even if possession of the leasehold property was retained. It was against this background that the appeal in Jervis came before the Court.

In Goldacre, the company was a tenant of property held under two leases, each providing for rent quarterly in advance. Following the company's entry into administration, the administrators retained possession of 'a relatively small part' (Judge Purle, Goldacre, at [2]) of the property for the benefit of the administration. The remaining parts of the property were sublet to others. The landlords served notices under the Law of Distress Amendment Act 1908. This transferred to the landlord the company's right to receive rent from the subtenants. In effect, therefore, the landlords were receiving part of the rent in full direct from the subtenants. The case concerned instalments of rent that fell due from the company under the leases in the period during which the administrators retained possession of part of the property for the purpose of the administration.

It is important to note that, when the case of Goldacre came to court, the administrators had already undertaken to pay the landlord, as an expense of the administration, the pro rata proportion of the total rent payable under the lease which reflected those parts of the premises which were occupied by the company for the purposes of the administration (Goldacre, argument, at p.457). The administrators argued, not that they shouldn't pay any rent at all, but rather, that the rent payable by them under the salvage principle 'should be tailored to the use [of the premises] that they [were] making' (Goldacre at [18]).

In response, Mr Jourdan, on behalf of the landlords (Goldacre at [1 8]), referred to the passage from Lord Browne-Wilkinson's judgment in Powdrill v Watson at p450 quoted above, where he had stated (with emphasis added) that 'even on the salvage

Mr Jourdan went on (at Goldacre [191) to cite In re S Davis & Co Ltd [1945] Ch 402, a case on bailment, and In re Levi & Co Ltd [19191 1 Ch 416, considered before submitting:

Accepting the landlords' argument, Judge Purle stated (in Goldacre at [201):

At para [29], Judge Purle concluded (with emphasis added) that 'rent will continue to be payable as an administration expense quarterly in advance under the terms of the two leases so long as the administrators retain or use any part of the premises demised under each such lease for the benefit of the administration. '

Goldacre was overruled in Jervis. Having undertaken a thorough review of the origins and scope of the Lundy principle, Lewison LJ (Sharp and Patten LJJ concurring), concluded that Judge Purle was 'wrong to apply the adoption principle'

In so concluding, Lewison LJ reasoned, inter alia, (with emphasis added), as follows:

The Court of Appeal in Jervis also overruled Luminar, a case described as 'the corollary' of the decision in the Goldacre case [Jervis at [90]). In that case the relevant companies held leases under which rent was payable quarterly in advance. Rent fell due in June and September 2011 and the companies entered administration in October 2011. The administrators continued in beneficial possession until shortly after the March 2012 quarter day. Due to a series of concessions on each side, the issue before the court concerned the rent that fell due on the September 2012 quarter day. Having considered the reasoning of Lord Hoffmann in Re Toshoku, Judge Pelling QC concluded that the Lundy principle did not extend to 'debts that have already become due at the date of the commencement of the liquidation or administration concerned. ' He went on to conclude that where rent is payable in advance and falls due for payment prior to the commencement of the liquidation or administration, then it is provable but not payable as a liquidation or administration expense even though the liquidator or administrator retains the property for the purposes of the liquidation or administration for the whole or part of the period for which the payment in advance was payable.

Lewison LJ concluded [at 96-7] that HHJ Pelling was wrong to interpret Lord Hoffmann's analysis in Toshoku as distinguishing between debts accruing before liquidation and debts accruing afterwards. In principle, both were capable of falling within the salvage principle.

In the present case, Ms Bhaloo submitted that Lewison LJ's rejection in Jervis of 'the adoption principle' was limited simply to what she referred to as 'rent' or 'periodical payment' cases and relied upon Lewison LJ's concluding words in para [89]. She maintained that Jervis simply introduced an 'equitable overlay', applicable only in rent or periodical payment cases. In all other cases, she maintained, the adoption principle was alive and well; indeed, actively preserved by Lewison LJ in his concluding words at para [89].

I reject that analysis. It is correct to state that the issue arising on the appeal in Jervis (and therefore, the issue that the Court of Appeal had to decide) concerned the treatment of rent payable under a lease held by a corporate tenant which had entered into administration. In the course of his judgment, however, Lewison LJ undertook a thorough interrogation of the underlying caselaw and explained fully the conceptual basis and rationale of the Lundy Granite principle. In Jervis, Lewison LJ was not, as submitted by Ms Bhaloo, 'introducing an equitable overlay' to temper the rigours of the adoption principle in cases involving rent and periodical payments, leaving the adoption principle otherwise intact; he was, as put by Mr Robins, 'uncovering the very foundations of the Lundy Granite principle and stressing time and time again the equitable origins of the rule.' I do not read Lewison LJ's concluding words at [89] as an attempt to preserve, still less to preserve with approval, the adoption principle in all but rent and periodical payment cases; that would run entirely counter to the reasoning of his judgment. At most he was confining his decision to the case before him. The underlying reasoning of his judgment, however, is clearly of broader significance.

Lewison LJ adds at paragraph 80 (with emphasis added):

Whilst, as tacitly acknowledged by Lewison LJ in the concluding words of paragraph 89 of his judgment, the case of Jervis itself concerned the treatment of rent payable under a lease held by a corporate tenant that entered administration, read as a whole, the explanation given in his judgment of the conceptual basis and rationale of the Lundy principle is entirely inconsistent with the preservation of the 'adoption' or 'accruals' approach in relation to pre-insolvency liabilities other than rent or periodical payments.

As rightly noted by Mr Robins, Lewison LJ 'did not go as far as his own logic because adoption is all or nothing. . .lt is as far removed as can be imagined from the equitable basis of the Lundy principle... That equitable basis must apply across the board irrespective of the sort of liability that you are talking about.. ..lt would not be consistent with that to say, Lewison LJ expressly confined it to periodical payments and therefore you still have some sort of happenstance of timing approach for anything that does not fit neatly into that pigeonhole. It is not about categorising liability...it is about identifying the extent to which the liability under the preadministration contract is correlative to the benefit to the estate after commencement of insolvency proceedings and the whole point of Lewison LJ's decision is to say that it is not a strict accruals basis. ' I accept these submissions.

Moreover, for the reasons already explored in this judgment, Re Levi was a highly questionable decision from the outset. In my judgment, the authorities upon which Astbury J based his decision did not support his conclusion. In addition, numerous authorities, which did not sit well with the 'adoption' approach applied in Re Levi, were not cited to Astbury J. These included Shackell & Co v Chorlton & Sons Ltd [1895] 1 Ch 378, a decision which Judge Purle felt compelled to declare 'no longer good law' in order to reach his decision in Goldacre, but which was subsequently approved by Lewison LJ in Jervis [at 1021 when overruling Goldacre.

Whilst Re Levi was cited with apparent approval by Lord-Browne Wilkinson in Powdrill, his comments on the salvage principle were obiter, were not based on detailed submissions on the principle and, for the reasons given by Lewison LJ, were inconsistent with the decision In re HH Realisations Ltd expressly approved by the Supreme Court in In re Toshoku at [28] and with the body of caselaw addressing cases in which rent was payable in arrear.

Moreover whilst Re Levi was not a rent case, Astbury J (at p419) clearly treated the liability to deliver up in good repair at the end of the term as what Lewison LJ would later describe in Jervis as a 'happenstance' of timing; that is to say, if, having entered into beneficial possession of premises, a liquidator happens to remain in possession of those premises at the time of accrual of a given liability (in this case at the end of the term), that liability in its entirety is treated as an expense, regardless of whether it, or any part of it, is referable to the period of the liquidator's beneficial retention of the premises. Such an approach in my judgment does not accord with the equitable basis

The obligations arising on the part of the tenant under the Leases and under the Rent Deposit Deed remain with the Company. The issue before me is whether, by operation of the Lundy principle or otherwise, the obligation under Clause 5 of the Rent Deposit Deed to top up the Deposited Sum should be elevated to expense status.

In my judgment the Lundy principle does not apply to the 'top-up' obligation arising under Clause 5 of the Rent Deposit Deed and there is no other basis upon which the top-up obligation could properly be treated as an expense of the administration.

It is common ground that the rent for the period of the Administrators' beneficial retention of the premises, if and to the extent that it had remained unpaid, would have been elevated so as to be payable as an administration expense, on the basis of the Lundy principle. That rent, however, has already been paid. As Mr Robins put it, the Administrators 'cannot pay it twice'. It was paid in full on or about 9 October 2017, when the Landlord elected to withdraw the rent for 1 October 2017 to 31 December 2017 in the sum of €615,577.31 (inclusive of VAT) from the Rent Deposit.

The Landlord has no outstanding claims for rent under the Leases, whether referable to the period of the Administrators' beneficial retention or otherwise. To the extent that the Landlord does not already hold security for any other claims arising under the Leases, they will be provable claims in the Company's administration and will rank pari passu with the ordinary unsecured claims of the Company' s other creditors.

Ms Bhaloo has conceded that the Landlord has no separate claims under common law against the Company for losses arising in consequence of forfeiture and to that extent is confined to its entitlement under clause 4 of the Rent Deposit Deed to draw permitted sums from the Deposited Sum in respect of such losses.

Anyone seeking to elevate a pre-insolvency claim to expense status within the insolvency must demonstrate why he should enjoy such priority over other creditors. In a leasehold case such as this, for reasons already explored, it is not enough to state simply that the liability accrued during the office-holders' beneficial retention of the leased premises. That 'happenstance of timing' approach does not accord with the equitable basis of the Lundy principle and cannot survive the reasoning of Jervis.

In my judgment, the Landlord has failed to demonstrate why equity, or, in the words of James LJ in Re Lundy Granite, 'common sense and ordinary justice', dictate that the top-up liability should enjoy expense status. In reality, given that the Administration Rent has been paid and that the Leases have been forfeit, the top up is sought simply to secure what Mr Robins described as the 'non-expense claims' , such as dilapidations, none of which, in the case as presented to me, were said to be referable to the period of the Administrators' beneficial occupation, together with losses in consequence of forfeiture, which Ms Bhaloo accepted were not even provable. In my judgment, on the facts of this case, there is no equitable justification for extending the Lundy principle to cover such claims and losses.

As Mr Robins put it in his skeleton argument 'In short, the Landlord is seeking to use Clause 5 of the Rent Deposit Deed as a mechanism to obtain payment in full of unsecured debts which do not fall within the Lundy principle and which should not be paid in full.'

Ms Bhaloo contended that until the recent making of the paragraph 63 application, the Administrators had not challenged the application of the Lundy Granite principle. In my judgment little turns on this. The Administrators did not encourage the Landlord to withdraw a sum in respect of Administration Rent from the Rent Deposit; they were only told after the event that the sum had been withdrawn.

Ms Bhaloo also referred me to a letter from Howard Kennedy dated 8 November 2017. The third paragraph of the letter (with emphasis added) read as follows:

The letter dated 8 November 2017 went on to state that the administrators were 'not currently in a position to replenish the rent deposit account' but were intending to procure an assignment of the lease and that on such assignment it would be anticipated that the incoming tenant would be required to provide a rent deposit in place of that previously provided by the Company. In the event, an assignment did not prove possible.

Read as a whole, the letter of 8 November 2017 was in my judgment far from a concession on the issue whether the top up obligation contained in Clause 5 of the Rent Deposit Deed should be treated as an expense. Moreover, even if any such concession had been made, I was taken to nothing in the evidence to suggest any grounds upon which the Administrators might be prevented from retracting the same.

Ms Bhaloo also sought to rely upon the fact that the Administrators eventually conceded forfeiture triggered by a s. 146 notice based on the failure to top up the Rent Deposit Deed. Little turns on this however; the question whether the top up obligation should be treated as an expense is entirely distinct from the question whether the Company was in breach of its obligations under clause 5 of the Rent Deposit Deed.

Absent Lundy elevation, there is no other basis in the statutory insolvency scheme on which the Administrators could be required to discharge the Company's obligation under clause 5 of the Rent Deposit Deed to top up the Account. In circumstances where the Leases have been forfeited by the Landlord, the Administrators have rightly confirmed that they do not think that the making of the top up payment would be 'likely to assist achievement of the purpose of administration'. Accordingly, it is not permitted within paragraph 65 of Schedule B 1. Further, the making of the top up

In my judgment, the payment sought by the Landlord would be contrary to the statutory insolvency scheme, as an unjustified exception to the pari passu rule.

The suggestion that the estate would obtain a windfall if top up security were not provided to the Landlord is irrelevant. As Lord Neuberger held in Nortel at [1 16][123], the Court has no power to re-order liabilities in the waterfall on the basis that it would be 'fair' to do so. Even the Ex p James line of cases cannot begin to justify the contention that an administrator can be ordered to change the ranking of a particular debt simply because the statutory ranking appears unattractive: Nortel at [1231.

The claimed 'unfairness' only arises because the landlord elected to use the Rent Deposit to discharge the Administration Rent. That was a conscious decision by the Landlord; it was under no obligation to do so. If that election was the result of bad advice from PCB, the Landlord's remedy is to bring a claim against PCB for damages for professional negligence.

For all of these reasons, I conclude as follows:

In the light of my conclusions, I shall dismiss the Landlord's Amended Application and its Unfair Harm Application.

I shall hear submissions on costs and any consequential relief required on the handing down of this judgment.