Hindcastle Ltd v Barbara Attenborough Associates Ltd

Under section 178(4) of the Insolvency Act 1986, disclaimer determines an insolvent tenant’s rights, interest and liabilities under a lease. It does not discharge an original tenant, guarantor or other person whose liability can survive without preventing the insolvent’s release.

For those preserved rights and liabilities, the statute treats matters as though the lease continued. A guarantor’s loss of recourse against the insolvent is replaced by a right to prove in the insolvency. If the landlord takes possession, however, future claims under the tenant covenants end because possession is inconsistent with treating those obligations as continuing. A subtenant’s proprietary interest also survives where its determination is unnecessary to release the insolvent tenant.

Hindcastle Ltd granted a 20-year office lease to Barbara Attenborough Associates Ltd. The lease was assigned first to CIT Developments Ltd, which entered direct covenants with the landlord, and later to Prest Ltd. Patrick Whitten guaranteed CIT’s obligations. Prest entered liquidation, and its liquidator disclaimed the lease as onerous property.

The landlord obtained summary judgment against the original tenant, CIT and Mr Whitten for rent and other charges falling due before and after disclaimer. The Court of Appeal dismissed CIT’s and Mr Whitten’s appeal: [1995] Q.B. 95. The House of Lords had to determine whether disclaimer under section 178 of the Insolvency Act 1986 ended the liabilities of an original tenant, an assignee which had covenanted directly with the landlord, and a guarantor.

1. Appeal dismissed unanimously. Lord Nicholls of Birkenhead delivered the leading speech. Lord Keith of Kinkel, Lord Griffiths and Lord Browne-Wilkinson agreed with his reasons. Lord Lloyd of Berwick also agreed and gave additional reasons.

2. Per Lord Nicholls, section 178(4) of the Insolvency Act 1986 determines the insolvent company’s rights, interest and liabilities in the disclaimed property. It preserves other persons’ rights and liabilities except so far as their alteration is necessary to release the company. Accordingly, disclaimer by an assignee’s liquidator does not discharge an original tenant, a directly covenanting former assignee or a guarantor.

3. The leasehold estate is determined and the reversion accelerated. Nevertheless, for preserved third-party rights and liabilities, the statute operates as a deeming provision. Those rights and liabilities continue as though the lease had not been determined. Sections 181 and 182 confirm that a person may remain liable to perform the tenant covenants and may seek a vesting order. Such an order may effect a statutory re-creation of the lease.

4. If no vesting order is made and the landlord takes possession, future liabilities of an original tenant or guarantor cease. The landlord cannot possess the premises while also claiming future rent from others. A subtenant’s proprietary interest, by contrast, survives because ending it is unnecessary to release the insolvent tenant. The subtenant continues on the terms which would have applied had the tenant’s interest continued.

5. The ordinary rule that releasing a principal debtor may discharge a surety did not govern statutory disclaimer. The saving in section 178(4)(b) preserved the guarantor’s liability. The guarantor’s indemnity against the insolvent tenant was extinguished, but section 178(6) substituted a right to prove in the insolvency. That outcome placed the risk of the tenant’s insolvency where the guarantee intended.

6. Stacey v Hill [1901] 1 Q.B. 660 was overruled. Its conclusion that disclaimer released the guarantor failed to give effect to section 178(4)(b), conflicted with Hill v East and West India Dock Co (1884) 9 App. Cas. 448, and produced irrational distinctions between original tenants and guarantors.

7. The language of CIT’s covenant and Mr Whitten’s guarantee did not make their liabilities cease on disclaimer. The accompanying provision for a new lease contemplated that disclaimer might end the lease only so far as concerned the tenant for the time being. The appeal was therefore dismissed.

1. House of Lords: The appeal in Hindcastle Ltd v Barbara Attenborough Associates Ltd [1997] AC 70 was dismissed unanimously. The liabilities of CIT and Mr Whitten survived Prest’s disclaimer, and Stacey v Hill was overruled.

2. Court of Appeal: The appeal from the summary judgment was dismissed: [1995] Q.B. 95. The court applied Hill v East and West India Dock Co and distinguished Stacey v Hill.

3. High Court: Simon Goldblatt Q.C., sitting as a deputy judge, granted the landlord summary judgment for just over £50,000 against the three defendants.