In re Park Air Services Plc (Christopher Moran Holdings Ltd v Bairstow)

Disclaimer of a lease under section 178 of the Insolvency Act 1986 extinguishes the tenant’s liability for future rent and gives the landlord an immediate statutory right to compensation. The claim is for loss caused by disclaimer, rather than for future rent or another future debt.

Compensation must be assessed according to ordinary damages principles. Future receipts must therefore be reduced to present value, with credit for income obtainable by reletting. Rule 11.13 of the Insolvency Rules 1986 does not govern that assessment. A landlord’s right of re-entry is not security over the company’s property and does not make the landlord a secured creditor.

A solvent company held an onerous 25-year lease. After entering members’ voluntary liquidation, its liquidators disclaimed the lease under section 178 of the Insolvency Act 1986. The landlord proved for the difference between the contractual receipts and likely receipts from reletting, without discounting either stream for accelerated receipt.

Ferris J, reported at [1996] 1 WLR 649, held that an appropriate discount was required and assessed the loss at £1.053 million. The Court of Appeal, reported at [1997] 1 WLR 1376, held that no discount was required and increased the proof to £2,548,899 plus interest.

The central question was whether statutory compensation for the loss of future rental receipts had to be discounted to present value. Subsidiary questions concerned the appropriate discount rate, the commencement of statutory interest and costs.

1. Appeal allowed unanimously. Lord Millett delivered the leading speech. Lord Slynn of Hadley, Lord Lloyd of Berwick and Lord Hope of Craighead agreed with his reasons. Lord Hobhouse of Woodborough also agreed and gave concurring reasons. The order of Ferris J was restored, varied to apply a discount rate of 8.5 per cent.

2. Per Lord Millett and Lord Hobhouse, disclaimer under section 178(4) of the Insolvency Act 1986 determines the company’s rights, interests and liabilities in the lease. Where landlord and tenant are the only relevant parties, the lease ends and the landlord’s reversion is accelerated. The landlord consequently loses the right to future rent.

3. Section 178(6) instead creates an immediate statutory right to compensation for loss caused by disclaimer. The subject of the proof is compensation for the loss of future contractual receipts, not the receipts themselves. The loss must be assessed like damages for the wrongful termination of an executory contract. Credit must be given for receipts obtainable by reletting, and future receipts must be discounted to present value. An undiscounted award would overcompensate the landlord.

4. Per Lord Millett, a landlord is not a secured creditor within section 248 merely because the lease contains rights of re-entry or distress. Re-entry is not a security interest over the tenant’s property, cannot be valued or realised as security, and does not satisfy the rent liability. The Court of Appeal’s reliance on rule 4.88(2) of the Insolvency Rules 1986 was therefore misplaced.

5. Rule 11.13 did not apply. The landlord was proving for present statutory compensation arising on disclaimer, not for a debt payable in the future. Rent under a subsisting lease is also dependent on continued possession and future events; it is not a series of presently existing debts payable later. Lord Millett observed, obiter, that the drafting of rule 11.13 appeared seriously defective in its discounting formula and in the priority accorded to the restored discount in a solvent winding up.

6. The appropriate discount rate was a matter of evidence. The best evidence was the yield on gilt-edged securities for an equivalent term. On the judge’s findings, 8.5 per cent was appropriate; the nominal 5 per cent rate in rule 11.13 was unsuitable. Interest ran from the date of disclaimer. Ferris J’s order making no order for costs was within his discretion because neither party was wholly successful.

1. House of Lords: The appeal was allowed unanimously. The order of Ferris J was restored, subject to substitution of an 8.5 per cent discount rate: [2000] 2 AC 172.
2. Court of Appeal: The landlord’s appeal was allowed. Its admitted proof was increased to £2,548,899 plus statutory interest: [1997] 1 WLR 1376.
3. High Court: Ferris J upheld the liquidators’ contention that accelerated future receipts required discounting and assessed the landlord’s loss at £1.053 million with interest: [1996] 1 WLR 649.