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If a company is insolvent, but continues to occupy its business premises, then to what extent are the business rates a ‘necessary disbursement’, and so payable as an expense of the administration (which means they are payable before the insolvency practitioner’s own fees, and also before any floating chargeholder’s debts)?
The position has been complicated by Enterprise Act 2002 and, according to the CA, there are now different rules depending upon whether it is an administration or a liquidation. As a result of Exeter [2007], noted in last month’s issue (p3), the situation now is: LiquidationPost-EA 2002 administrationPre-EA 2002 administration | occupied property: ‘necessary disbursement’ and so payable as ‘expense of the administration’ (ie the rates get priority); | occupied property: ‘necessary disbursement’ and so payable as ‘expense of the administration’ (ie the rates get priority); | occupied property: not automatically payable but court could order payment in certain circumstances; | | unoccupied property: not payable as a liquidation expense. | unoccupied property: ‘necessary disbursement’ and so payable as ‘expense of the administration’ (ie the rates get priority). | unoccupied property: not automatically payable but court could order payment in certain circumstances. |
This is an important decision for administrators (who had previously thought that rates in post-EA 2002 administrations would not have priority as ‘necessary disbursements’). But, it also has significant implications in respect of possible back-claims from LAs for the recovery of business rates in administrations that have previously been closed (and where the administrators have already obtained a discharge of liability). Such a discharge will not prevent the court from reopening the situation if there has been ‘misapplication’ of money. This is potentially very important for many administrators, who will no doubt be considering whether there are counter-arguments that can be raised (if so, then they are likely to be similar to those raised in the Spectrum Plus litigation on fixed and floating charges over book debts – for instance, whether it is relevant that administrators acted on the basis of legal advice, and whether they were ‘on notice’). Likewise, there will then be arguments as to whether the liquidators themselves can, in turn, claim a refund of overpayments made to floating charge-holders (on the basis that those payments were made under a mistake of law). All in all, it can be seen that this decision does have potentially enormous ramifications and it could lead to major disputes about previously closed administrations. Aside from that, it is likely to raise serious difficulties in many administrations, as administrators will have to consider whether the objective of administration can continue to be achieved if rates have to be paid out as a (priority) administration expense. As such, this somewhat technical decision could affect the viability of a significant number of administrations. Exeter v Vivian Murray [2007] EWHC 400 (Ch). Source: Freshfields Bruckhaus Deringer. © Practical Lawyer
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