Judgments - Kahn and Another (Appellants) v Commissioners of Inland Revenue (Responents)

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    32. He applied instead the Lundy Granite Co principle and said that it was not enough that the company was in rateable occupation. It must have retained occupation for the benefit of the estate. But in In re National Arms and Ammunition Co (1885) 28 Ch D 474 Bowen and Fry LJJ said that this was wrong. Bowen LJ said, at pp 480, 482:

    "If the company retains the possession of property which would be rateable in the hands of anyone else, it is only reasonable that it should be rateable in the hands of the company...[T]he true test is whether there has been a beneficial occupation within the ordinary meaning of those words in cases as to rating."

    33. This test was applied by Vaughan-Williams J. in In re Blazer Fire Lighter Ltd [1895] 1 Ch 402. The liquidator had closed the business and done nothing on the premises except to instal a caretaker to protect them from vandalism. That was sufficient to continue the company in rateable occupation. So the rates were an expense of the liquidation.

    34. It therefore did not follows that because a liquidator might in certain circumstances retain possession of leased property without having to pay the rent as an expense of the liquidation, he did not the same circumstances have to pay the rates. In Re ABC Coupler & Engineering Co Ltd (No 3) [1970] 1 WLR 702, for example, the rent did not become a liquidation expense until some time after the winding up order, notwithstanding that the company remained in occupation. And in Re HH Realisations Ltd (1975) 31 P & CR 249 the company remained in occupation for some time after the rent had ceased to be a liquidation expense. But in both cases the company would in my opinion have been liable to pay rates on the simple ground that it was in rateable occupation. The rates would have been an obligation incurred after the liquidation which (unlike the rent) was not provable and was therefore payable in full.

    35. My Lords, I have spent some time examining the origins and scope of the "liquidation expenses" principle because it formed the basis of the two recent authorities upon which Mr Phillips particularly relied. In re Atlantic Computer Systems Plc [1992] Ch 505 was about whether rental due under hire purchaser agreements should be treated as an expense of administration. But the judgment of Nicholls LJ contains a discussion of the principles upon which obligations based upon pre-liquidation agreements should be treated as expenses in a liquidation. He said (at p 522) that a creditor could ordinarily be given leave to execute against the company's assets for a "new debt incurred by the liquidator for the purposes of the liquidation":

    "it is just and equitable that the burden of the debt should be borne by those for whose benefit the insolvent estate is being administered."

    It was, he said, a corollary of this principle that a debt was incurred for the purposes of the liquidation ought to be paid in full as an expense of the liquidation.

    36. Nicholls LJ then went on to say:

    "The latter principle is not confined to new debts incurred by the liquidator. It applies also to continuing obligations under existing contracts such as leases which the liquidator chooses to continue for the benefit of the winding up."

    In this connection he discussed the Lundy Granite Co case (1871) LR 6 Ch App 462, the Oak Pits Colliery case (1881) 21 Ch D 322 and others in the same line of authority. He then said, at p. 523:

    "It is important to keep in mind that this principle, relating to outgoings on property retained by a liquidator for the purposes of the winding up, is no more than a principle applied by the court when exercising its discretion in a winding up. The principle, which it will be convenient to call the 'liquidation expenses' principle, is a statement of how, in general, the court will exercise its discretion in a common form set of circumstances. The liquidator himself has power, in a suitable case, to pay the relevant outgoings. But the court retains an overriding discretion, to give leave under section 130(2) [of the 1986 Act] or to give directions to a liquidator that the relevant outgoings shall be paid by him as an expense of the liquidation."

    37. Two points arise out of these passages. First, Mr Phillips is entitled to say that Nicholls LJ assimilates the grounds upon which post-liquidation debts count as expenses with the grounds upon which a continuing obligation which has arisen under a pre-liquidation contract may be treated as a liquidation expense. This certainly provides support for his submission that post-liquidation expenses must satisfy the "liquidation expenses" principle. But in my respectful opinion the two categories of expenses cannot be assimilated in this way. The considerations which determine whether they should count as expenses are different. Assimilation is inconsistent with the authorities to which I have referred and with the statutory regime which has existed since 1890.

    38. The second point is the proposition that whether debts should count as expenses of the liquidation is a matter for the discretion of the court. In my opinion there is no such discretion. Rule 4.218 determines what counts as expenses, subject only to the limited discretion under section 156 of the 1986 Act to re-arrange the priorities of expenses inter se. The court will of course interpret rule 4.218 to include debts which, under the Lundy Granite Co principle, are deemed to be expenses of the liquidation. Ordinarily this means that debts such as rents under a lease will be treated as coming within paragraph (a), but the principle may possibly enlarge the scope of other paragraphs as well. But the application of that principle does not involve an exercise of discretion any more than the application of any other legal principle to the particular facts of the case. I should say that Mr Phillips made it clear that he also did not suggest that the court was able to exercise what would ordinarily be called a discretion.

    39. There is of course no question that section 130(2) of the 1986 Act (the lineal descendant of section 87 of the 1862 Act upon which the Lundy Granite Co principle was originally constructed) confers a statutory discretion. But the discretion is as to the remedy which the creditor should be allowed to exercise; whether he should be able to bring proceedings, levy distress or execution or should have to wait for the distribution of the assets in due course of liquidation. The fact that a debt counts as an expense of the liquidation does not necessarily mean that the creditor should be allowed immediately to bring proceedings or levy execution. The order of priorities under rule 4.218(1) may mean that if he is paid at once, the assets to satisfy prior expense claims may be insufficient. So the question of remedy is entirely a matter of discretion. But the discretion does not determine whether a claim is a liquidation expense or not. It is rather the other way round; the claim must be a liquidation expense before the court can have any discretion to grant a remedy which will enable the creditor to obtain payment in priority to other claims.

    40. Sir Donald Nicholls V-C applied the two propositions in the Atlantic Computer Systems case [1992] Ch 505 to arrive at his decision in In re Kentish Homes Ltd [1993] BCLC 1375. The question there was whether a post-liquidation liability to community charge on empty flats was an expense of the liquidation. He recorded (at p 1380) that it was common ground that "the company is the chargeable person in respect of the flats for the relevant periods". But he said that the liability was nevertheless not a liquidation expense. In his opinion, it would rank as such only if the court, as a matter of discretion, directed the liquidators to discharge the obligation out of the assets in their hands. And in his view there was no ground upon which the court should do so. The case did not fall within the Lundy Granite Co principle because the liquidators had not retained possession of the flats for the purpose of the winding up. An administrative receiver had taken possession. Nor was there any other equitable ground upon which the liquidators should pay.

    41. The Court of Appeal said that they were driven to the conclusion that this case was wrongly decided. I respectfully agree. In the first place, the question of whether the community charge should count as an expense of the liquidation was not a matter for the judge's discretion. In depended upon whether it came within one of the paragraphs of rule 4.218. In my opinion if, as was common ground, the company was the chargeable person, it was a necessary expense which came within (m). If, therefore, the liquidator had sufficient assets after satisfying the liabilities coming within paragraphs (a) to (l), he was obliged to pay it. Secondly, the Lundy Granite Co principle had no relevance. The liability did not arise out of a pre-liquidation obligation. If it came within the language of paragraph (m), it was a liquidation expense.

    42. I therefore respectfully adopt the simple approach of Brightman J in In re Mesco Properties Ltd [1979] 1 WLR 558, 561. The statute expressly enacts that a company is chargeable to corporation tax on profits or gains arising in the winding up. It follows that the tax is a post-liquidation liability which the liquidator is bound to discharge and it is therefore a "necessary disbursement" within the meaning of the Insolvency Rules.

    43. My Lords, I accept that it may be possible to characterise the liquidator's "retention" of the debt from TEE as an act for the benefit of the estate which could be brought within an attenuated version of Mr Phillips's liquidation expenses principle. But I think that such an exercise, suggesting a gloss on the language of rule 4.218 in respect of post-liquidation liabilities, could only cast doubt upon law which has been perfectly clear since the Mesco Properties case. It should in my opinion be left that way.

    44. Everyone agrees that this is a hard case for the company's creditors. The provisions of the 1996 Act which exclude bad debt relief in loan relationships between connected companies are to prevent groups of companies from manipulating their tax liabilities. But it does not seem fair to visit the consequences upon creditors in a winding up. The present case was specifically considered in Corporate Debt, Financial Instruments and Foreign Exchange Gains and Losses, a consultative document issued by the Inland Revenue on 26 July 2001. The Government said that it proposed to introduce legislation to make an exception to the bad debt rule where a creditor goes into liquidation.

    45. Mr Phillips said that the problem was not specific to this particular form of tax liability but existed in every case in which a liability might be imposed upon a company in liquidation. The answer, he said, was the adoption of a general liquidation expenses rule. I do not agree. The injustice, if any, does not arise because liabilities imposed upon a company in liquidation have priority as expenses of the liquidation, but because it may be unjust to impose certain liabilities upon companies in liquidation. Mr Phillips mentioned liabilities under environmental legislation which might also take precedence over other claims if there were no liquidation expenses principle. But in In re Mineral Resources Ltd [1999] 1 All ER 746 Neuberger J carefully considered the consequences for creditors of his decision that a company in liquidation could not disclaim a waste management licence. He recognised that this might result in post-liquidation liabilities which would rank ahead of other creditors. But he decided that the legislation, on grounds of public interest, required that the claims of the environment should be preferred.

    46. In my opinion, the question of whether such liabilities should be imposed upon companies in liquidation is a legislative decision which will depend upon the particular liability in question. It should not be ruled out by an illegitimate extension of the liquidation expenses principle, which was devised more than a century ago for an altogether different purpose.

    47. I would therefore dismiss the appeal.


My Lords,

    48. I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Hoffmann. I agree with him and for the reasons, which he has given, I too, would dismiss this appeal.


My Lords,

    49. I have had the advantage of reading in draft the speech of my noble and learned friend, Lord Hoffmann. I agree with it, and for the reasons which he gives I too would dismiss the appeal.


My Lords,

    50. With some reluctance, both for reasons given by my noble and learned friend Lord Hoffmann towards the end of his Opinion and because I found the arguments of Mr Phillips QC and judgments of Nicholls LJ and V-C more persuasive than have your Lordships and would not have accepted that the authorities are incapable of reconciliation, but, in deference to the unanimity of your Lordships' Opinions, I concur in the order proposed.


My Lords,

    51. I have had the privilege of studying the speech of my noble and learned friend, Lord Hoffmann, in draft. I agree with it and, for the reasons which he gives, I too would dismiss the appeal.


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