Christopher Moran Holdings Ltd v. Bairstow and Another

The House of Lords held that a landlord's right to prove under section 178(6) of the Insolvency Act 1986 for loss consequent on a liquidator's disclaimer of a lease is a statutory right to compensation analogous to damages for breach of contract and must be quantified by reference to present value. Accordingly a discount for accelerated receipt is required when assessing that compensation. The Insolvency Rules 1986 rule 11.13 does not apply to such a proof because the compensation is a present right created by the disclaimer, not a future debt. The landlord is not a "secured creditor" by virtue of the right of re-entry and that right cannot be equated with a realisable security for the purposes of section 248. The appropriate discount rate on the facts was assessed at 8.5% per annum.

The respondent landlord owned a freehold and granted a 25 year lease. The tenant company entered a members' voluntary liquidation and the liquidators disclaimed the lease under section 178 of the Insolvency Act 1986. The disclaimer brought into existence under section 178(6) a statutory right for the landlord to prove for any loss or damage sustained in consequence of the disclaimer. The landlord proved for the undiscounted aggregate difference between contractual rents and hypothetical re-letting receipts over the unexpired term. The liquidators rejected the proof on the ground that the sums should be discounted to reflect accelerated receipt; Ferris J accepted that view and applied a discount, the Court of Appeal reversed and allowed the undiscounted proof, and the House of Lords heard the appeal.

The principal issues were (i) the character of the right created by section 178(6) (whether it is a present right to compensation or a claim for future debts), (ii) whether ordinary discounting for accelerated receipt must be applied when quantifying that compensation, (iii) whether the landlord should be treated as a secured creditor or subject to Insolvency Rules provisions for future debts (in particular rule 11.13), and (iv) the appropriate discount rate and the date from which statutory interest (section 189) runs.

The House of Lords reasoned that the right granted by section 178(6) is compensatory and analogous to damages for repudiatory breach: it is a present right to be quantified and paid; therefore ordinary principles require allowance for advancement and discounting of future receipts to their present value. Rule 11.13 and the mechanics for proving future debts do not apply because the landlord's right did not exist until the disclaimer and is not a debt "not due" at the date of dividend. The landlord's right of re-entry is not a security within section 248 and cannot be treated as a realisable secured interest. The appropriate discount rate was a matter of evidence and, on the judge's findings, 8.5% per annum was appropriate; interest under section 189 runs from the date of the disclaimer.

The House of Lords therefore allowed the liquidators' appeal, restored the first-instance order subject to varying the discount rate to 8.5%, and upheld the trial judge's exercise of discretion on costs.

Appeal allowed. The Lords held that a landlord's proof under section 178(6) is a statutory right to compensation analogous to damages and must be discounted to reflect accelerated receipt; rule 11.13 does not apply and a landlord is not a secured creditor by reason of a right of re-entry. On the facts the appropriate discount rate was 8.5% and section 189 interest runs from the date of disclaimer.

First-instance judgment: Ferris J [1996] 1 W.L.R. 649 (held discount should be applied). Court of Appeal: Mummery L.J. [1997] 1 W.L.R. 1376 (allowed landlord's appeal; no discount). House of Lords: [1999] UKHL 2 (allowed liquidators' appeal and restored first-instance order subject to varying the discount rate).