Shinners & Anor (Joint Administrators of London Bridge Entertainment Partners LLP) v London Trocadero (2015) LLP

A pre-insolvency contractual liability may be elevated to an administration expense under the Lundy or salvage principle, but only where equity requires priority because the office-holder retained property for the benefit of the administration. The principle is not confined to provable debts. It does not operate on a mere adoption or happenstance-of-timing basis, and it does not secure unrelated unsecured claims. A rent-deposit top-up obligation, after the rent for beneficial retention had already been paid and the lease forfeited, was not an administration expense. Paying it would unjustifiably alter the statutory priority waterfall and offend the pari passu rule.

The joint administrators of London Bridge Entertainment Partners LLP sought directions under paragraph 63 of Schedule B1 to the Insolvency Act 1986. The company had occupied premises under leases and a rent deposit deed. After administration began, the landlord withdrew rent for the period of beneficial retention from the deposit and demanded that the company replenish the deposit under clause 5.

The landlord contended that the top-up obligation should be treated as an administration expense. The administrators argued that it was a provable contractual liability, subject to the rule against double proof, and could not be elevated under the Lundy principle or otherwise under Schedule B1. The central issue was whether the top-up obligation enjoyed expense priority.

1. Applications dismissed. The administrators were entitled to decline to provide further security under clause 5 of the rent deposit deed.
2. The Lundy principle is not limited to provable debts. A non-provable liability may in principle be elevated to expense status, although the claimant must demonstrate why it should receive priority over other creditors. That burden is especially difficult where the liability is not admissible to proof.
3. The clause 5 obligation qualified as a liability to pay money or money’s worth and was capable of proof under rule 14.1 of the Insolvency Rules 2016. After forfeiture, the landlord’s claim for security for accrued tenant obligations overlapped in substance with its provable claim for those obligations. The top-up claim therefore engaged the rule against double proof, properly understood as a rule against double dividend.
4. The Lundy principle requires an equitable connection between the liability and the benefit obtained by the administration from retaining the property. It is not enough that a liability happened to arise while the office-holder retained the premises. The adoption principle relied on in Re Levi & Co Ltd was rejected as results-led and inconsistent with the reasoning in Jervis v Pillar Denton Ltd.
5. The administration rent had already been paid from the deposit. The remaining top-up was sought to secure dilapidations and forfeiture losses, not liabilities referable to the administrators’ beneficial retention. There was no equitable justification for elevating it to expense status.
6. The payment was neither likely to assist achievement of the purpose of administration under paragraph 65 of Schedule B1 nor necessary or incidental to the administrators’ functions under paragraphs 13 and 60. Requiring payment would therefore contravene the statutory scheme and unjustifiably alter the pari passu priority.