In re Atlantic Computer Systems plc

An administrator’s use of land or goods held under an existing lease or hire-purchase agreement does not automatically make the continuing rent or hire charges an expense of the administration. Under Insolvency Act 1986 section 11, the court has a flexible discretion to permit or restrain enforcement of proprietary rights. It must give substantial weight to those rights while considering the purpose and prospects of the administration, the likely losses, and all the circumstances.

Goods sub-let by the company remain in its possession, as against its supplier, for section 11(3)(c). Security over identified rights under existing sub-leases is fixed, not floating, merely because the company may initially collect and use the instalments.

Atlantic Computer Systems plc entered administration under Part 2 of the Insolvency Act 1986. Funders owned computer equipment which the company held under head leases or hire-purchase agreements and then sub-let to end users. The administrators collected sub-rentals but neither paid the continuing head-lease liabilities nor consented to enforcement.

Ferris J held that all sums accruing under the head leases after the administration order were administration expenses. The administrators appealed. The funders also sought leave under section 11 to terminate the head leases, repossess the equipment and, in AIB’s case, enforce security over sub-lease income. The Court of Appeal had to decide the status of the liabilities, the meaning of possession under section 11(3)(c), the nature of AIB’s charges, and whether leave should be granted.

1. Appeal allowed. Lord Justice Nicholls delivered the judgment of the court. Ferris J’s ruling that continuing head-lease liabilities automatically ranked as expenses of the administration was wrong.

2. The court held that the liquidation-expenses practice could not be transposed rigidly into an administration. Section 11 creates a moratorium affecting proprietary rights, but an administration is a temporary procedure directed to statutory purposes and governed by a wide judicial discretion. Section 19(5) gives automatic priority for liabilities under adopted employment contracts, but does not give comparable automatic priority for other existing contracts adopted or used by an administrator.

3. Administrators may consent to enforcement or pay rent or hire charges where appropriate. They must act promptly and responsibly. They may not use their power to withhold consent merely to improve the unsecured creditors’ bargaining position against owners or secured creditors.

4. Computer equipment sub-let to end users remained goods in the company’s possession for section 11(3)(c), because, as between the funders and the company, the company retained the relevant possession under the head arrangements. Repossession therefore required consent or leave.

5. AIB’s charges over the benefits of identified, existing sub-leases were fixed charges. The charged rights were specific present assets and were not ambulatory. The company’s initial liberty to receive and use instalments did not make the charges floating.

6. Applying the section 11 discretion, the court granted leave to terminate the head leases, repossess the equipment and, for AIB, enforce its security. The administration was likely to lead to winding up. Its proposed negotiations would improperly weaken the funders by preventing reliance on their proprietary rights, while current sub-rentals could not meet the head-lease liabilities.

7. The administrators were directed to pay each funder the collected sub-rentals, with accrued interest, up to the arrears then due under the corresponding head leases. Those payments counted as properly incurred administration expenses. No further order was made requiring payment of all continuing liabilities, and Norwich’s section 27 petition was not granted.

8. The court also gave non-exhaustive guidance: a leave applicant bears the burden; leave should normally be granted if it will not impede the administration; otherwise the court balances proprietary and creditor interests, usually giving considerable weight to the former and considering likely loss, proportionality, the company’s finances, the proposals, timing, prospects and conduct.

• Court of Appeal (Civil Division): Allowed the administrators’ appeal and replaced the automatic-expense ruling with discretionary relief under section 11: [1992] Ch 505.
• High Court, Chancery Division (Companies Court), Ferris J: Held that rentals and associated sums accruing under the head leases after the administration order were payable as administration expenses. The lower-court citation was not stated in the judgment.