Receivership Update – September 2013
Print newsletter10/09/2013

Appeal granted on issues of rent as administration expense
The High Court has recently given directions [1] relating to the priority of rent and […]
The High Court has recently given directions [1] relating to the priority of rent and service charges in the administration following an application by the administrators of the collapsed retailer, Game. This case now forms part of a string of cases where landlords and administrators have sought clarity on the question of whether rent and service charges are to be treated as an expense of an administration.
Pursuant to the decision in Goldacre [2], rent and service charges payable in advance and which fall due before the appointment of an administrator are not considered an expense of the administration, but where such rent falls due during a period when the administrator was occupying the property for the purposes of the administration, then the whole sum ranks as an administration expense. This position was endorsed in the Luminar [3] case.
However, the new owner of Game, who is in occupation of the properties under a licence to occupy, sought to challenge the Goldacre and Luminar principle, arguing that although the rent became due during a period when the property was being used for the purposes of the administration, if the administrator vacated, or the lease was forfeited, before the expiry of the rent payment period, the rent should not be considered an administration expense.
The High Court followed Goldacre and Luminar in the first instance, but granted permission to appeal on the basis that the new owners had a real prospect of success on appeal. The High Court also noted that the matter was of concern to administrators and landlords generally.
WM Comment
The Goldacre and Luminar decisions have come under much scrutiny so, from a practical perspective, it is hoped that an appeal will assist in clearing up this murky and contentious issue. Insolvency practitioners can, for now, rely on the protection of the existing principle but should be prepared to respond quickly should an appeal decision reverse Goldacre and Luminar.
Watch this space for further updates.
[1] In the matter of Games Station Limited and others (2013) (unreported)
[2] Goldacre (Offices) Ltd v Nortel Networks UK Ltd (In Administration) [2009] EWHC 3389 (Ch) [2010] Ch 455
[3] Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd (In Administration) [2012] EWHC 951 (Ch) [2012] 4 All E.R. 894

High Court extends the application of the doctrine of marshalling
Introduction In Highbury Pension Fund Management Company v Zirfin Investments Ltd[1] (Highbury) the High Court […]
Introduction
In Highbury Pension Fund Management Company v Zirfin Investments Ltd[1] (Highbury) the High Court has extended the doctrine of marshalling. Office holders dealing with group insolvencies will need to take account of this important new development.
Background
The aim of the equitable doctrine of marshalling is to achieve fairness between secured creditors.
Let’s look at an example. Bank (B) is the first ranking secured creditor of a debtor (D). B has security over all of D’s assets. Another creditor (C) has a second charge over D’s head office building, but has no further security. D goes into administration. If the administrator sells the head office first, and repays B (as he is obliged to do) out of the proceeds, C has no other security and, on the face of it, he has lost out. This is where the doctrine of marshalling comes to C’s rescue. C is entitled to stand in B’s shoes (or “subrogate”) in relation to B’s other security, until C has recovered the value attributed to the head office, over which he had his second charge. As a result, C is placed in the position he would have enjoyed if B had been paid out of realisations from other assets.
Before Highbury, it was thought that the doctrine only applied to “marshal” security given to two creditors by the same debtor. This is known as the Common Debtor Rule.
Facts
In Highbury, Zirfin Investments Limited (Zirfin) had borrowed money from Barclays Bank (the Bank), secured by a charge over a property (Number 31). The Bank also made loans to companies affiliated to Zirfin (the Affiliates) which were secured by charges over the Affiliates’ own properties. In addition, the Bank took a guarantee from Zirfin in respect of the Affiliates’ obligations, that guarantee was also secured on Number 31.
Zirfin was also indebted to Highbury Pension Fund Management Company (Highbury), in whose favour it had granted second and third charges over Number 31.
When Zirfin and the Affiliates defaulted, the Bank enforced its security over Number 31, and took from the proceeds not only the amount of Zirfin’s direct indebtedness, but also its obligations as guarantor of the Affiliates. If the Bank had looked to the Affiliates own assets as security, there would have been enough surplus from the sale of Number 31 to satisfy the Zirfin’s obligations to Highbury.
On the face of it Highbury was left as an unsecured creditor of Zirfin. Highbury could not stand in the Bank’s shoes in relation to other security given by Zirfin to the Bank, as there was none.
Issues
The issues were:
- whether the doctrine permitted the marshalling of securities held over property that did not belong to the common debtor; and in particular
- whether a second ranking creditor of a guarantor was entitled to marshal securities granted to the first ranking creditor by the primary debtor – in this case, the Affiliates.
Decision
The court gave judgment for Highbury, ruling that it was entitled to share in the security constituted by the Affiliates’ charges, although only to the extent of any surplus remaining after amounts secured by those charges had been fully paid to the Bank.
The court held that where an independent and separate equity existed, such as a surety’s equitable right to call upon a principal debtor to discharge the guaranteed obligations, then an exception to the Common Debtor Rule would apply, and a second ranking creditor could look to security given to the first ranking creditor by a third party.
In this case, Zirfin had a right of indemnity and subrogation against the Affiliates to the extent Zirfin had paid the Bank under its guarantee of the Affiliates liabilities. The Court concluded that Highbury was entitled to benefit from these rights.
This benefit was qualified so that Highbury could only participate in the proceeds of realisation of the Affiliates’ properties after the Bank had been repaid in full to ensure that the application of the equitable remedy did not prejudice the Bank, by giving Highbury any greater right than Zirfin would have had to subrogate to the Bank’s security.
The terms of Zirfin’s guarantee to the Bank provided that Zirfin could not be subrogated to the rights of the Bank under the Affiliates’ loans until all sums due by the Affiliates to the Bank had been repaid in full.
The Court made clear that the Bank could not be criticised for choosing to enforce against Number 31 and not the Affiliates’ property. A creditor cannot be compelled when or how it is to enforce its security against a debtor. It has absolute discretion to decide from which of the secured assets to seek recovery.
Application
This is an important case for office holders preparing outcome statements in the context of group insolvencies. Where there would otherwise be no return for subordinated secured creditors (by virtue of a senior secured creditor being entitled to, and exhausting, realisations) this case could operate to provide opportunities for subordinated secured creditors to be paid out of asset realisations made in another group company. Prior to the decision in this case, it was thought that the Common Debtor Rule would prevent this.
[1] [2013] EWHC 238

Increased demand for Renewable Projects
Recent Government amendments have provided greater certainty in the support mechanisms for renewable energy projects. […]
Recent Government amendments have provided greater certainty in the support mechanisms for renewable energy projects. As a result, Walker Morris’ Renewables, Energy and Resources Group is seeing a growing demand for renewable energy projects across the board, including solar, wind and hydro schemes of varying sizes.
Both new entrants in the sector and existing players are not only looking for operational assets but also sites for development, preferably with planning permission and grid connection in place but many developers, in the right circumstances, are now taking on sites without such consents in place.
Looking into the potential of existing sites (whether land or buildings) for use in renewable energy schemes is another avenue open to receivers looking to maximise income from their portfolio. We have a range of clients interested in acquiring or taking a lease over suitable sites, and we can also advise you on some of the key issues to consider in determining the value of sites.
Even if projects have been considered in the past and rejected owing to development costs being too high, with lower deployment costs (e.g. solar PV panel costs have halved in the last few years) landowners are being encouraged to look at their portfolio again to see if projects are now viable.
There are clearly ongoing challenges, with grid connection and planning permission still remaining difficult in some areas but, with our team of experts, we can guide projects around some of the common pitfalls.