It has always been recognised that the right conferred by section 178(4) or its predecessors is a statutory right to compensation for the loss caused by the operation of the disclaimer, and that this must be assessed in the same way as damages. There was a bold attempt in Ex parte Llynvi Coal and Iron Co.; In re Hide (1871) L.R. 7 Ch. App. 28 to argue that the landlord was entitled to compensation for the loss of his dividend in the liquidation, thus compounding the effect of the insolvency; but this was firmly rejected. What is determined by the disclaimer is the landlord's right to the rent, not merely his right to prove for it. As Sir George Mellish L.J. asked: "Surely he is to prove for the damage which could be recovered for the breach of contract?"

    There is no justification for employing a different approach in the assessment of compensation for such damage than would be employed if the claimant were claiming damages for breach of a contract which had been wrongfully terminated. In assessing damages in such a case, however, allowance would have to be made for accelerated receipt of any sums which had not fallen due at the date of breach (and which the contract did not make immediately due and payable in the event of breach). An award of compensation which failed to take this into account would overcompensate the claimant.

    It follows that I cannot accept the premise on which the judgment of the Court of Appeal was based viz: that in principle the compensation should be calculated without any discount for early receipt, and that a discount should not be imposed unless there was something in the Insolvency Act 1986, the Insolvency Rules 1986 or the authorities which required it. The opposite is the truth. Nor do I accept the proposition that the purpose of the disclaimer provisions, which the Court of Appeal described as the early closure of the liquidation, does not require the application of any discount for early payment. It is true that the reason the liquidator is given the right to disclaim onerous property is in order to enable him to achieve an early closure of the liquidation. But the reason the landlord is given a statutory right to compensation by section 178(6) is different. It is to ensure that he is fairly compensated for his loss, and this requires a discount for early receipt.

    The Court of Appeal conducted an examination of the authorities in order to explain the position which obtained before 1929, but in my view they failed to draw the right conclusion from them. In those days the absence of any right on the part of a liquidator of an insolvent company to disclaim an onerous lease left both parties in an unenviable position. The landlord could forfeit the lease if it contained a proviso for entry in the event of liquidation, as any well-drawn lease did. This would enable him to relet the property but he would lose the right to future rent under the lease, for he could not have both rent and possession, and he could not obtain compensation for the consequences of his own action in forfeiting the lease. In practice, therefore, where the passing rent was greater than the current market rent he would normally treat the lease as still on foot. But if he did so he would be likely to be met by the argument that he could only prove for rent already accrued due: see In re London and Colonial Co.; Horsey's claim (1868) L.R. 5 Eq. 561; In re New Oriental Bank Corporation (No. 2) [1895] 1 Ch. 753; Metropolis Estates Co. Ltd. [1940] 3 All E.R. 522 (C.A.). These decisions are not easy to reconcile with Hardy v. Fothergill (1888) 13 App. Cas. 351, as that case might have been considered to decide that he could prove for future rent in the event of the lessee's bankruptcy. But on the existing state of the authorities a claim for future rent was likely to encounter difficulty. I shall return to the reason for this later. In respect of such rent his only course in practice was to leave the property empty and submit proofs quarter by quarter as the rent fell due.

    The liquidator's position was equally unsatisfactory. He could not safely distribute the estate once he had notice of the landlord's interest. If he did so, he would be personally liable for the rents as they fell due. He could retain an amount by way of indemnity, but without an order of the court he would still be personally liable if the amount he retained proved insufficient. The court would give him leave to distribute, thus protecting him from any risk of personal liability, but only if he retained a sum sufficient when invested at compound interest to fund the future liabilities: (see Oppenheimer v. British and Foreign Exchange and Investment Bank (1877) 6 Ch. D. 744). In other words, he was required to retain an amount equal to their present or discounted value.

    Even this was not wholly satisfactory to either party. The landlord could not relet the property, and the liquidator was bound to retain a sum which gave no credit for its current rental value. In practice the parties were well advised to negotiate a surrender of the lease, and the court encouraged this course while recognising that it could not compel it: see In re New Oriental Bank Corporation (No. 2) [1895] 1 Ch. 753. The amount of the compensation payable by the liquidator to the landlord on a surrender was a matter for negotiation, but it would be surprising if it did not normally include a discount to reflect the present value of the future liabilities as well as credit for the current rental value of the property. The liquidator would be unlikely to agree to pay more than he would be compelled by the court to retain.

    The Court of Appeal rejected the appellants' argument that the question should be approached simply as a claim for damages for breach of an ordinary commercial contract in which the claimant is seeking compensation for the loss of future income; although that is what the language of section 178(6) indicates. Instead the Court of Appeal regarded the landlord as a secured creditor, his security taking the form of a right to re-enter and recover possession for non-payment of rent and to distrain for unpaid rent. This enabled the Court of Appeal to treat the respondent as a secured creditor who had voluntarily surrendered his security and was proving for the whole debt as if it was unsecured: see rule 4.88(2) of the Insolvency Rules 1986.

    The short answer to this is that a landlord is not a secured creditor within the meaning of section 248 of the Insolvency Act 1986. Section 248 defines "secured creditor" as a creditor of the company who holds a security over the property of the company. A secured creditor who does not realise or voluntarily surrender his security must put a value on his security and prove only for the balance as an unsecured creditor. None of these provisions is capable of applying to the landlord's right of re-entry. This is not a security interest subsisting in the tenant's property, nor is it capable of being realised by the landlord. It does not secure the performance of the tenant's liability to pay rent, which remains unsatisfied as well after re-entry as before. It cannot be valued or surrendered. If the lease is disclaimed it is not voluntarily surrendered by the landlord but brought to an end by the liquidator without his consent. Once it is disclaimed, the right to re-enter is gone together with the right to future rents payment of which it is supposed have secured. It is a very curious security which is liable to evaporate just when it is needed.

    Having thus circumnavigated section 178(6), the Court of Appeal applied rule 11.13(3) to the respondent's proof of debt. Rule 11.13 is concerned with the proof of debts payable at a future time. It provides as follows:

 "(1) Where a creditor has proved for a debt of which payment is not due at the date of the declaration of dividend, he is entitled to dividend equally with other creditors, but subject as follows

 "(2) For the purpose of dividend (and for no other purpose), the amount of the creditor's admitted proof (or, if a distribution has previously been made to him, the amount remaining outstanding in respect of his admitted proof) shall be reduced by [a percentage] calculated as follows -

I x M

12

 where I is 5 per cent. and M is the number of months (expressed, if need be, as, or as including, fractions of months) between the declaration of dividend and the date when payment of the creditor's debt would otherwise be due.

 "(3) Other creditors are not entitled to interest out of surplus funds under section 189(2) or (as the case may be) 328(4) until any creditor to whom paragraphs (1) and (2) apply has been paid the full amount of his debt."

    By rule 4.94 a creditor whose debt is not due at the date when the company went into liquidation is entitled to prove for the nominal, ie. undiscounted, amount of the debt; but this is subject to adjustment of the dividend when payment is made before the time it would have become due. Rule 11.13(2) adjusts the dividend payable in respect of the proof by requiring it to be discounted at the rate of 5 per cent. per annum over the period of acceleration. 11.13(3) is a very curious provision, newly introduced in 1986, when interest during the winding up was for the first time made payable on debts proved in the winding up. Its effect seems to be that there is no discount for accelerated receipt of a future debt in a solvent winding up.

    The judge was plainly right to hold that this rule has no application to a proof submitted by a landlord pursuant to section 178(4). Such a proof is not a proof for a debt of which payment was not due at the date when the company went into liquidation within the meaning of rule 4.94. At that date the landlord was not a creditor in respect of any loss or damage arising in consequence of the disclaimer, for the lease had not then been disclaimed. That is why section 178(6) only deems him to be a creditor. Nor does he afterwards prove for a debt of which payment is not due at the date of the declaration of a dividend. He proves for the statutory compensation to which he is entitled by virtue of the section. That is not a right to a future payment. The claim remains to be quantified; but subject thereto it is a present right to immediate payment.

    The respondent's argument attached great importance to the alleged anomaly of applying a discount to the landlord's claim in respect of future rents and not to the proofs of other creditors in respect of future debts. Both, the respondent submitted, suffered the loss of a future stream of income. Why, it was asked, should the landlord be singled out in this way?

    But there is no anomaly. The Court of Appeal evidently considered that the landlord could, but for the disclaimer, have proved for the future rent and recovered it without discount. But as I have already pointed out, in practice he could not have proved for the future rent. He would have had to wait until the rent fell due and then prove quarter by quarter. This is because rent is not a simple debt. It is the consideration for the right to remain in possession. The tenant's liability to pay future rent is not debitum in praesenti solvendum in futuro. Its existence depends upon future events. Rent in respect of a future rental period may never become payable at all. Rent payable in future under a subsisting lease cannot be treated as a series of future debts making up a pure income stream.

    There is a critical distinction between contracts which have been fully performed by the creditor and contracts which remain executory on his part. The creditor who has lent money which has not been repaid or supplied goods or services which have not been paid for sues or proves in respect of a debt. If the debt is not yet due at the date on which a dividend is declared, the dividend is subject to adjustment under rule 11.13. The creditor who has contracted for payment for goods or services still to be supplied by him, however, is not and may never become entitled to payment. He cannot sue or prove in respect of a debt. The office-holder may adopt the contract and enforce it in return for payment in full. But if the creditor is entitled to treat the contract as discharged by breach or the office-holder disclaims the contract, the creditor is entitled to compensation. He may quantify his loss and prove for it, giving credit for the cost of the goods or services which he is no longer bound to supply. Rule 11.13 has no application to such a proof.

    It would be wrong for me to leave rule 11.13 without drawing attention to the respects in which its drafting appears to be seriously defective. For more than a hundred years provision has been made for future debts to be discounted at the rate of 5 per cent. per annum in order to arrive at their present value. The process of discounting involves applying the discount to the reducing amount of the debt, thus arriving at a sum which, invested at compound interest, would equal the nominal value of the debt at the date when it fell due. Rule 11.13(2), however, applies the discounting formula to the full (ie, unreducing) amount of the admitted proof. Such a process would reduce the proof to zero after 20 years, and at no stage yields an amount which, invested at 5 per cent. compound interest, would equal the nominal value of the debt at the date fixed for payment.

    The second respect in which the drafting appears defective is in relation to the amount and priority of the discount to be added back where the company is solvent. Obviously the first priority is to satisfy the principal amount of the debts, including the discounted value of any future debt. Once these have been satisfied in full, one would expect the amount of the discount from the date of the liquidation to the date of final distribution to be paid pari passu with the interest payable during the winding up to other creditors. Instead, however, the creditor whose proof has been discounted recovers the full amount of the discount, not to the date of final distribution, but to the date, possibly still far into the future, when his debt would have fallen due for payment; and he recovers this, not pari passu with the interest payable to other creditors during the winding up, but in priority to such interest. It is difficult to believe that this was the intention of the Rules Committee.

Two subsidiary issues

    The first issue concerns the rate of discount. The best evidence of the appropriate discount rate is the yield on gilt-edged securities for an equivalent term. The judge found that this was 8.5 per cent. per annum. But he applied different rates to the passing rents (10 per cent.) and to the current market rents for which credit must be given (12 per cent.) to reflect the fact that the property was over-rented and the risk that the company might default. The appellants do not seek to support the judge's use of higher rates to reflect the risk of default, and are content for a rate of 8.5 per cent. The respondent contends for 5 per cent. to reflect the discount rate provided for by rule 11.13. I would reject the latter approach as without merit. The 5 per cent. rate is a purely nominal rate which has remained constant for more than a hundred years during periods of high and low interest rates alike, and its application would not yield a correct assessment of the amount of the respondent's loss.

    There was a second issue which concerned the date from which interest should run under section 189 of the Insolvency Act 1986. It is now common ground that if the value of the respondent's loss is to be assessed at the date of disclaimer then the discounted amount can properly be treated as outstanding at that date and carry interest for the whole period thereafter until payment.

Costs

    The respondent lodged a proof for £5.3 million. The appellants rejected the proof, as they were entitled to do, in toto without admitting it in part. At the hearing, and on the basis of its own expert evidence, the respondent reduced the amount of its claim to £3.5 million. The appellants contended for a sum of £200,000. The respondent recovered £1.053 million. This was far less than it claimed, and far more than the smallest sum for which the appellants contended. The judge recognised that this was hostile litigation, and that accordingly it would not be right to order the costs of both parties to be paid out of the assets of the company. At the same time he did not consider it appropriate to award the respondent its costs on the footing that costs should follow the event. Indeed he said that he could not tell what the event really was. The truth was that the issue had to be determined by the court; and that he had accepted the arguments and evidence of one party on some aspects and those of the other on others. In those circumstances he made no order for costs.

    The respondent accepts the judge's ruling that this was hostile litigation, but submits that the ordinary rule should follow. The judge was wrong to say that he could not tell what the event was. The respondent was the successful party, in that it obtained an award higher than it could have obtained without coming to court.

    I do not think that this is right, even at the most technical level. The respondent submitted an excessive proof. The appellants were entitled to reject it. The respondent appealed from their rejection of its proof. It was unsuccessful. It did not obtain an order that its proof be admitted. On this footing the respondent was the unsuccessful party. But the judge's order reflected the realities of the situation. Neither party was wholly successful or wholly unsuccessful. In my view the judge's order for costs was well within the exercise of his discretion and should be affirmed.

Conclusion

    I would allow the appeal and restore the Order of the judge but varied so as to reflect a discount rate of 8.5 per cent. per annum.