Timing of insolvency could hit landlords’ rights

Landlords thought they had finally won the right to be paid ahead of other creditors when a retailer fails, following a recent court judgment on property caught up in
an insolvency.

However, business advisers may have already found a way to circumvent these landlords’ rights, by controversially picking the right time to put their client in an
administration to avoid rent liabilities.

In the Goldacre v Nortel case at the end of last year, the judge ruled that insolvency practitioners dealing with leased premises in an administration would have to pay the rent on all properties as a cost of the administration, and honour the pre-existing landlord contract.

The upshot of this is that the upcoming quarter of rent due would need to be paid in full as a cost of the administration, if the company enters insolvency before the quarter starts.

However, advisers said that the quarter rent could be avoided if the insolvency begins after the quarter’s due date – effectively giving nearly three months free in the premises. But would that mean directors illegally trading companies while insolvent?

“The directors will have to satisfy themselves to do that. If they believe insolvency is pretty likely they may feel a duty to creditors that if they wait they won’t have this big administrator expense which has to be paid ahead of other creditors,” said Devi Shah, restructuring partner at Mayer Brown.

If an IP needs to continue to trade a business in order to obtain the best return to creditors, such as the Ethel Austin or Woolworth administrations, they have traditionally paid rent on a daily or weekly basis on whichever property they are using. This work-around could provide the IP flexibility to liquidate the company if necessary, sell individual stores or close loss-making stores, keeping administration costs down.

Landlords of troubled retailers could be fooled into a false sense of security as many businesses are potentially waiting for the passing of this Jun e’s quarterly rent deadline before entering administration in order to keep costs down and to achieve a fairer return to other creditors.

If the administration date cannot be finessed the new case law dictates that administrators have to abide by pre-existing landlord contracts, potentially creating a much bigger cost for the insolvency.

This added expense in administrations may prompt a rise in Company Voluntary Arrangements (CVAs), which slashes business debt and repayments are made over approximately five years.

CVAs could be more popular as landlords would be treated the same as other creditors, and they tend to be a quicker process than going through an administration. There could also be an increase in pre-packs where the sale is arranged before an administration begins.

“There is a good deal of concern in the IP market that this is going to affect the way administrations are run in the future,” said John Verrill, insolvency partner at law firm Dundas & Wilson.

The profession had expected the court decision to be appealed, however that has failed to materialise, and they are advising businesses on the ramifications of the decision.

“This case shifts the balance of power to landlords,” said Shah.

“Why should landlords have this priority after what was a very poor decision,” said Verrill.

What would have happened at Woolies?

How would the recent precedent set in Goldacre v Nortel have affected the landlords’ costs that Deloitte administrators dealt with at Woolworths?

In the Woolworths administration, insolvency practitioners (IPs) continued trading all the stores for approximately a month.

Deloitte administrators, appointed in November 2008, began closing some of the stores a month later while it sought buyers and continued to trade the other stores.

The administrators would have paid either a daily or weekly rate in these stores, up until the final premises closed at the end of January 2009.

There were more than 780 stores in total under the Woolworths umbrella.

Under Goldacre v Nortel, rent liabilities would have dramatically increased at Woolworths, as administrators would have had to pay for three months rent on all stores for January 2009 to March 2009 - whether closed or trading.

IN OUR VIEW

Directors may now be left with an even tougher decision about when to place their business into administration. As the laws surrounding payment of rent in insolvency grows more complex, it could mean the best course of action for a failing company is to hold off on administration. This may anger creditors even if it can provide the best return.

Further reading:

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