Pillar Denton Ltd & Ors v Jervis & Ors

This Court of Appeal determined the treatment of instalments of rent payable under leases when a corporate tenant enters administration. The court held that the "salvage principle" (also called the liquidation/administration expenses principle) is founded in equity and may convert part of a pre‑insolvency liability into an administration expense where the office holder retains the landlord's property for the benefit of the insolvency. The correct approach is to treat rent as accruing from day to day during any period of beneficial retention and to require payment at the contractual rate for the duration of that period; the duration is a question of fact and is not fixed by which contractual rent days happen to fall before or after entry into administration. The court overruled the earlier first‑instance decisions in Goldacre (Offices) Ltd v Nortel Networks UK Ltd and Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd to the extent that they treated whole installments as non‑apportionable solely because they fell due before, or within, administration without reference to factual beneficial retention. The decision engages the Insolvency Rules (notably rules on provable debts and administration expenses), Schedule B1 paragraph 43 of the Insolvency Act 1986, and the Apportionment Act 1870 in explaining the interplay of provable debts and administration expenses.

Background and parties: The appeal concerned rents under leases held by companies in the Game group (notably a company trading from many retail premises). A large quarterly instalment of rent fell due on 25 March 2012 and was unpaid when the group entered administration on 26 March 2012. Some stores continued to be operated by administrators and the business was sold quickly to a purchaser outside the insolvency. The appellants were landlords seeking to treat parts of the March instalment as administration expenses; respondents included the former group purchaser and the administrators.

Nature of the application / relief sought: The landlords appealed a first instance approach which had applied two recent High Court decisions and held that (i) where a quarter's rent payable in advance falls due before administration none of it is an administration expense and is only provable, and (ii) where a quarter's rent falls due during the administration the whole quarter is an administration expense. The landlords sought a ruling that part of an instalment payable in advance can be treated as an administration expense corresponding to the period during which the administrators retained the property for the benefit of the administration.

Procedural posture: Appeal from the High Court, Chancery Division (Mr Nicholas Lavender QC sitting as Deputy Judge of the High Court). Permission to appeal had been granted.

Issues before the court:

• Whether an instalment of rent payable in advance can, in part, be treated as an administration expense rather than only as a provable debt.
• If so, how to determine the extent of any administration expense: whether by reference to rent days or by reference to the period that the office holder beneficially retained the property.
• Whether the salvage ("Lundy Granite") principle, as explained in Re Toshoku Finance Ltd and subsequent authorities, requires any special treatment of advance rents.

Reasoning and resolution: The Court held that the salvage principle is equitable in origin and operates to deem part of an existing liability to be an insolvency expense where the office holder retains the property for the benefit of the insolvency estate. The court rejected the view that non‑apportionability at common law or under the Apportionment Act 1870 prevents equitable treatment: the fact that an instalment is contractually payable in advance does not bar equity from treating the obligation as accruing from day to day for the purpose of insolvency priority. The correct test is factual: identify the period of beneficial retention and treat rent as payable at the contractual rate for that period, accruing day to day and payable as an administration expense. On that basis the Court overruled the two recent High Court authorities (Goldacre and Luminar) that had produced an all‑or‑nothing result tied to rent days. The Court therefore allowed the appeal and the cross‑appeal, restoring the more flexible equitable approach (including the "wait and see" approach where appropriate).

Subsidiary findings: The salvage principle coexists with the rules on provable debts in the Insolvency Rules; provable status does not exclude the application of the salvage principle. The duration of beneficial retention is a question of fact; an office holder may be liable as an administration expense only for the period during which he actually retained the property for the estate's benefit.

Appeal allowed. The Court held that the salvage (Lundy Granite) principle, rooted in equity, can convert part of a pre‑insolvency instalment of rent payable in advance into an administration expense where the office holder beneficially retains the leased property for the purposes of the administration. Rent should be treated as accruing day to day and payable at the contractual rate for the actual period of beneficial retention; the duration of that period is a question of fact. The Court overruled the contrary approach in Goldacre and Luminar which tied priority mechanically to rent days.

Appeal to the Court of Appeal from the High Court, Chancery Division (Companies Court) (Mr Nicholas Lavender QC, deputy judge) following first instance consideration which had applied Goldacre (Offices) Ltd v Nortel Networks UK Ltd [2009] EWHC 3389 (Ch) and Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd [2012] EWHC 951 (Ch). This Court ([2014] EWCA Civ 180) allowed the appeal and the contingent cross‑appeal.