Hindcastle Ltd v Barbara Attenborough Associates Ltd

The House of Lords held that the disclaimer provisions in the Insolvency Act 1986 (in particular section 178(4)) operate to determine the rights, interests and liabilities of the insolvent company in respect of disclaimed property but do not, except so far as is necessary to release the insolvent, affect the rights or liabilities of other persons. Applying the statutory language and its legislative history, the court concluded that a guarantor and an original tenant remain liable to the landlord after a subsequent assignee's liquidator disclaims the lease. The Court therefore followed Hill v East and West India Dock Co. (1884) 9 App. Cas. 448, overruled Stacey v Hill [1901] 1 Q.B. 660 to the extent that it conflicted with that position, and interpreted the disclaimer provisions as effecting a statutory deeming so that third-party rights and liabilities survive the disclaimed lease.

The landlord (Hindcastle Ltd) sued the original tenant, a subsequent assignee and a guarantor for unpaid rents and other sums after the liquidator of a later assignee (Prest Ltd) disclaimed the lease as onerous. The lease had been assigned twice: first from the original tenant to CIT Developments Ltd (CIT), with CIT giving direct covenants to the landlord and a director (Mr Whitten) providing a guarantee for a limited period; later CIT assigned to Prest. Prest went into liquidation and its liquidator disclaimed the lease. The landlord obtained summary judgment at first instance and the Court of Appeal dismissed an appeal by CIT's liquidator and Mr Whitten.

Nature of the claim: claim by landlord for unpaid rent and other sums due before and after disclaimer; relief sought was payment from the original tenant, the assignee with direct covenants and the guarantor.

Issues framed:

• whether a disclaimer by a liquidator determines the lease so as to discharge guarantors and original tenants;
• the proper construction of the disclaimer provisions in sections 178 to 182 of the Insolvency Act 1986 (and their statutory predecessors);
• whether prior authorities (notably Hill v East and West India Dock Co. and Stacey v Hill) can be reconciled or require overruling.

Court’s reasoning: The Lords examined the language and legislative history of the disclaimer provisions, distinguished among cases where only landlord and insolvent tenant are involved, where third parties have liabilities (guarantors, original tenants) and where third parties have proprietary interests (sub‑tenants), and concluded that the statutory scheme aims to free the insolvent from liabilities while affecting third parties only to the minimum extent necessary. To achieve this, the statute should be read as producing a deeming effect so that third parties’ rights and liabilities remain as though the lease continued. On that basis the guarantor and original tenant remained liable despite the later assignee’s disclaimer. The House therefore rejected the reasoning of Stacey v Hill and followed Hill v East and West India Dock Co. The court also considered contractual drafting arguments in the licence and found they did not alter that statutory effect.

The court noted wider context (the Landlord and Tenant (Covenants) Act 1995) but observed it did not apply to most existing leases and so did not alter the outcome in this case.

Appeal dismissed. The House held that section 178(4) of the Insolvency Act 1986 determines the insolvent company's rights, interests and liabilities in respect of disclaimed property but preserves the rights and liabilities of other persons except so far as necessary to release the insolvent. Accordingly, a guarantor and an original tenant remain liable to the landlord after a subsequent assignee's liquidator disclaims the lease; the decision in Stacey v Hill was disapproved to that extent and Hill v East and West India Dock Co. was followed.

First instance: summary judgment for the landlord given by Mr Justice Simon Goldblatt Q.C. (sitting as deputy judge of the High Court). Court of Appeal (Sir Stephen Brown P, Rose and Millett LJJ) dismissed the defendants' appeal (reported at [1995] Q.B. 95). The appeal to the House of Lords was dismissed on 22 February 1996.