 House of Lords |
Session 1998-99
Publications on the Internet Judgments |
| Judgments - Christopher Moran Holdings Ltd. v. Bairstow and Another
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Lord Hobhouse of Woodborough Lord Millett
(RESPONDENT)
(APPELLANTS)
LORD SLYNN OF HADLEY
My Lords, I have had the advantage of reading in draft the speech of by noble and learned friend, Lord Millett. For the reasons he gives I too would allow the appeal. The judges order should be restored subject to the discount rates applied being varied to 8.5%.
LORD LLOYD OF BERWICK
My Lords, I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Millet. For the reasons he gives I would allow the appeal.
LORD HOPE OF CRAIGHEAD
My Lords, I have had the advantage of reading in draft the speech prepared by noble and learned friend, Lord Millett. I agree with it, and for the reasons which he gives I also would allow the appeal and make the order which he has proposed.
LORD HOBHOUSE OF WOODBOROUGH
My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Millett and agree with him that this appeal should be allowed for the reasons which he gives. Your Lordships are disagreeing with a unanimous judgment of the Court of Appeal delivered by Mummery L.J. (reported at [1997] 1 W.L.R. 1376) and I therefore consider it appropriate that I should briefly in my own words state why it is that I would allow this appeal. Section 178 of the Insolvency Act 1986 gives a liquidator the option to disclaim onerous property, that is to say, any unprofitable contract or any other property of the company which is such that it may give rise to a liability to pay money or perform any other onerous act. On 10 December 1994 the liquidator chose to exercise that power and disclaimed the 25 year lease dated 9 January 1990 of 48 Gray's Inn Road, London WC1. The disclaimer operated so as to determine from the date of the disclaimer the rights, interests and liabilities of the company in respect of the property. The consequence of this was well summarised in the speech of Lord Nicholls of Birkenhead in Hindcastle Ltd. v. Barbara Attenborough Associates Ltd. [1997] A.C. 70 at 87:
The act of disclaimer brings into existence the right of the lessor to claim for the loss or damage which he has sustained in consequence of the operation of the disclaimer. This right is given by section 178(6) of the Act. A lessor is deemed to be a creditor of the company to the extent of the loss or damage and he is accordingly given the right to prove for the loss or damage in the winding up. This is a statutory right to compensation directly analogous to a right to claim damages for a statutory fault. Its character is compensatory. It is a right which comes into existence without more at the moment of the disclaimer. It is not a right to the performance of the contract disclaimed; it is not a right to the payment of future debts. Two things follow from this. The first is that the assessment of the compensation involves, as the statute says, an ascertainment of the loss or damage sustained by the lessor as a result of the disclaimer. It is necessary to quantify the relevant sum in money terms. This is precisely the same exercise as has to be undertaken when assessing the damages for a breach of contract, as, for example, where one party has repudiated a contract and the other party has accepted that repudiation as terminating the contract and he then exercises his secondary right to claim damages. (See Lord Diplock in Photo Productions Ltd. v. Securicor Transport Ltd. [1980] A.C. 827 at 849.) It is interesting to note that this is the way in which the Lord Justices chose to express themselves in Ex parte Llynvi Coal and Iron Co.; In re Hide (1871) L.R. 7 Ch. App. 28. Thus Sir G. Mellish L.J. said at p. 34: "Surely he is to prove for the damage which could be recovered for the breach of the contract." Any award of damages involves arriving at a single monetary figure which in present terms quantifies that loss. Where the loss will be suffered over a period in the future, the computation will have to make allowance for any advancement that has occurred. (e.g. Overstone Ltd. v. Shipway [1962] 1 W.L.R. 117). To fail to take into account the element of advancement leads to an over-compensation of the claimant. I consider that the Court of Appeal fell into error at pp. 1383-1384 in the present case when, under the heading General Principles, they gave their first reason for deciding in favour of the lessor. They failed to take into account that ordinary principles require that the element of advancement should be allowed for and that the sum awarded should be appropriately scaled down. The second consequence of the character of a disclaimer of a lease and the requirement to pay compensation is that the right to prove for loss and damage is not a right to prove in respect of any debt due in the future. Such considerations cease to be relevant. For example, rule 11.13 of the Insolvency Rules 1986 cannot have any application. The creditor is not proving for a debt "of which payment is not due at the date of the declaration of dividend." He is claiming in respect of a present right to compensation which came into existence at the date of disclaimer, that is to say, in the present case, on 10 December 1994. The argument of the lessor and the third ground of decision of the Court of Appeal (at pp. 1388-1389) are therefore misconceived. The rule has no application. Further (as the lessor has expressly conceded before us) the position under a lease has particular characteristics which it may share with other types of synallagmatic relationship. Whilst the lease is subsisting, the lessor is not entitled to prove for any instalment of rent until the date upon which that payment becomes due. Similarly, if the lease is determined, the right to rent is also determined. This is an additional reason why the attempt of the lessor to introduce rule 11.13 into the assessment of the compensation to which he is entitled under section 178(6) is mistaken. Subsequent to the commencement of the winding up but before the disclaimer, he had no right to receive future payments of rent; he would have to wait until they fell due. The provisions of rule 11.13 would not have applied nor, at the time that a dividend was declared, would there have been a future debt in respect of which a dividend could be paid. After the disclaimer the right to rent is lost. There is only a right to compensation. That involves a comparison between the pre-disclaimer and post-disclaimer positions. For material purposes this difference is the aggregate of the differences between the contractual rent and the market rent over the period of the remainder of the lease discounted to allow for advancement. The second ground on which the Court of Appeal decided in favour of the lessor (at pp. 1384-1388) is accordingly in my judgment mistaken. It does not take into account the inability of the lessor to make an advanced proof of rent and the fact that section 178(6) gives him an immediate right to compensation without having to wait. Further, for the reasons stated by Lord Millett, the references to security are mistaken. The right of re-entry does not secure the payment of rent. The approach in the 19th century cases, for example In re New Oriental Bank Corporation (No.2) [1895] 1 Ch. 753, do not derive from any assertion that the lessor is a secured creditor. They arise from the practical problems resulting from the then inability of a liquidator to disclaim a lease and the need to protect the lessor, who (as stated previously) has to wait before he can prove for instalments of rent, from being defeated by a premature distribution of the assets of the company. The Court of Appeal were obviously impressed, as were your Lordships, by the detailed historical review undertaken by Mr. Etherton Q.C. But the Court of Appeal were mistaken to be persuaded that the right to compensation now given by section 178(6) was simply to be equated with a preservation of the right to be paid rent from time to time during the remainder of the lease. The right to compensation is a different kind of right to the primary right of performance. Just as an acceptance of a repudiatory breach means that the injured party can sue at once for damages without waiting for the time of performance, so also the exercise of the right of disclaimer and the provision in section 178(6) give the lessor an immediate right to compensation. Making an adjustment for the element of advancement is an essential ingredient in the quantification of the compensation. On the remaining questions argued before us I do not need to add anything to what has been said by Lord Millett. I agree that, on the findings of fact made in this case by the Judge, the 8½ per cent. discount rate is the appropriate rate. It is a matter of evidence. There is no remaining dispute on the question of statutory interest. It runs from the date of the disclaimer. On the question of costs, I agree with what Lord Millett has said. I agree with the Order proposed.
LORD MILLETT
My Lords, A solvent company is a tenant of property under an onerous lease. It goes into members' voluntary liquidation, and the liquidator disclaims the lease. The landlord comes in to prove for his loss. Must the landlord submit to an appropriate discount to reflect the present value of the rents and other payments which would have accrued in the future but for the disclaimer? The judge (Ferris J.) held that he must: see [1996] 1 W.L.R. 649; the Court of Appeal that he need not: see [1997] 1 W.L.R. 1376. The facts The respondent is the owner of a freehold property 48 Gray's Inn Road, London W.C.1. In 1990 it granted a lease of the property to a company now known as Park Air Services Plc. ("the Company") for a term of 25 years from 29 September 1989. Rent was payable quarterly in advance with provision for periodic upwards only rent reviews. By the date of the first rent review in September 1994 the state of the property market had declined to such an extent that the passing rent was more than four times the then rental value of the property. On 9 December 1994 the Company entered into members' voluntary winding up and the appellants were appointed liquidators. The Company has been fully solvent throughout. On the following day the appellants gave notice to the respondent under section 178(2) of the Insolvency Act 1986 disclaiming the lease. This entitled the respondent under section 178(6) to prove in the winding up for any loss or damage which it had sustained in consequence of the operation of the disclaimer. The respondent duly submitted a proof of debt for a sum in excess of £5.3 million. This sum represented the difference between (i) the amounts which would have been receivable by the respondent in respect of rent insurance rent and other sums payable under the lease for the residue of the term if there had been no disclaimer and (ii) the amounts which the respondent would be likely to receive in respect of rent insurance rent and other sums on a notional reletting or series of relettings for a similar term after the disclaimer. Each of these amounts was calculated without any discount for accelerated receipt. The appellants rejected the proof on the ground that each of the relevant amounts ought to have been discounted for accelerated receipt. The respondent appealed against the rejection of its proof. The appeal was heard by Ferris J. He upheld the appellants' contention and assessed the respondent's loss at £1,053,000 with interest. The appellants duly paid this amount. The Court of Appeal allowed the respondent's appeal. The effect of the judgment of the Court of Appeal was to increase the amount for which the respondent was entitled to prove to £2,548,899 together with interest thereon pursuant to section 189 of the Insolvency Act 1986. That sum, together with interest, has been paid. The appellants now appeal to your Lordships. The main question: should a discount be applied? The office-holder's right to disclaim onerous property has been part of our bankruptcy law since the Bankruptcy Act 1869. It was introduced into corporate insolvency by section 267 of the Companies Act 1929. It is currently contained in section 178 of the Insolvency Act 1986. Subsection (4) states the effect of a disclaimer as follows:
(b) does not, except so far as is necessary for the purpose of releasing the company from any liability, affect the rights or liabilities of any other person." It has long been recognised that the effect of the disclaimer of a lease is to extinguish the lease as between the landlord and the tenant. Where (as in the present case) these are the only parties involved, the disclaimer operates to determine the lease altogether with the result that the landlord's reversion is accelerated: see Hindcastle Ltd. v. Barbara Attenborough Associates Ltd. [1997] A.C. 70 at p. 87 per Lord Nicholls of Birkenhead. This is because the subsection expressly provides that the tenant's rights and liabilities in respect of the leasehold property are determined. These include its right to possession and its liability to pay rent. Once these are determined, the landlord is entitled to immediate possession and has no right to any further payment of rent. In Hindcastle Ltd. v. Barbara Attenborough Associates Ltd. your Lordships explained that the disclaimer has the same effect even where third parties such as sureties are involved. When the lease is disclaimed it is determined and the reversion accelerated, but the effect of subsection (4)(b) is to preserve the rights and liabilities of others, such as guarantors and original tenants, as though the lease continued: see ib. at p. 88. Since the disclaimer operates to bring to an end both the tenant's liability to pay rent and the landlord's right to receive it, the landlord cannot prove for future rent. The tenant's obligation to pay it has gone. Since this is the consequence of an act which is authorised by statute, the landlord has no right to claim damages at common law for his loss. Instead section 178(6) gives him a statutory right to compensation. This provides as follows:
This gives the landlord an immediate right to prove for the loss or damage which he has sustained in consequence of the operation of the disclaimer, that is to say in consequence of the determination of the lease and the acceleration of the reversion. This is normally measured by reference to the difference between the rents and other payments which the landlord would have received in future but for the disclaimer and the rents and other sums which the disclaimer will enable him to receive by reletting. But the subject-matter of the landlord's proof is compensation for loss of his right (inter alia) to future rent, not the rent itself, to which he no longer has any claim. The amount of this loss has to be assessed. This involves giving credit for the receipts which the disclaimer will enable him to obtain by reletting. Thus even the undiscounted amount of the landlord's proof does not represent the aggregate amount of the rents and other sums which he would actually have received but for the operation of the disclaimer. The appellants contend that, in order accurately to reflect the value of receipts which would have accrued at a future time, but in respect of which the landlord is given an immediate right of proof, the amount of such receipts must be discounted to an amount which reflects their present value. |
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