Robert Brown v Frazer Ulrick & Anor

On an appeal against rejection of a proof of debt, the court considers the claim de novo and determines, on the balance of probabilities, the amount properly provable.

The ordinary measure for breach of a contractual covenant is the cost of achieving the promised performance. Diminution in value may replace that measure where reinstatement is disproportionate, the performance is only marginally deficient, the claimant is principally concerned with financial value, or the claimant would not undertake the work and would obtain a windfall. Those considerations apply to covenants governing the condition in which leased premises must be returned. A contractual entitlement to reasonable enforcement costs is not excluded by insolvency rules governing the costs of proving a debt.

The applicant landlord appealed under rule 14.8 of the Insolvency (England and Wales) Rules 2016 against the liquidator’s rejection of a proof of debt for £277,397 arising from alleged breaches of covenants in a residential lease.

The claim principally comprised the cost of restoring substantial alterations to the property and garden, together with loss of use, legal costs and interest. The applicant also sought the liquidator’s removal under section 171(2) of the Insolvency Act 1986, but that application was adjourned. The central issues were the proper measure of damages, the evidential standard on the appeal, and whether legal costs incurred in enforcing the lease were provable.

1. Appeal and applicable approach. The liquidator’s rejection was reconsidered de novo. The applicant bore the burden of establishing the claim on the balance of probabilities. Written evidence not tested in cross-examination would be rejected only if properly regarded as incredible.
2. Measure of damages. The ordinary measure for breach of contract was expectation loss, normally the cost of putting the innocent party in the position performance would have achieved. Diminution in value could be appropriate where reinstatement was disproportionate, the performance was only marginally different, the claimant was concerned principally with financial value, or the claimant would not carry out the work and would profit from a technical breach. These factors applied equally to lease covenants.
3. Application to the property. The alterations were substantial and deliberately contrary to express covenants. The reinstatement cost was not disproportionate to the property’s value. The covenants protected the landlord’s personal interest in receiving the property back in its original style and condition, and he genuinely intended to carry out the works. The cost of remedial works, £156,845, together with VAT of £31,369, was therefore admitted.
4. Other losses. Loss of rental income and council tax were not established as additional losses. Loss of use during the works was recoverable at £10,500. Interest on unincurred remedial expenditure was not provable.
5. Costs. Rule 14.5(a) did not override the contractual entitlement under clause 21.1.2 of the lease to reasonable costs of enforcing the tenant’s obligations. The claimed costs were therefore provable, subject to assessment for reasonableness.
6. The rejection was set aside. The proof was approved for the remedial works, VAT, loss of use, and costs to be assessed.

This was a first-instance appeal under rule 14.8 of the Insolvency (England and Wales) Rules 2016 against the liquidator’s rejection of the proof of debt. The application to remove the liquidator was adjourned.