Yet another expense

The treatment of business rates by the Insolvency Rules, as judicially construed, is a hurdle to achieving the recovery purposes of administration

The Journal, April 2007, page 43

The subject of business rates payable in respect of properties of an insolvent company has over the years proved rather more problematic and controversial than might have been expected. In Scotland, legislation virtually ignores the subject and it is difficult to find any references to such a practical issue in textbooks. In England there are more detailed provisions, but they do not specifically address rates.

Insolvency practitioners have generally treated claims by the local authority as unsecured claims. This has been the case even in receiverships where the receivers have traded the business and therefore effectively been “in occupation” of the property. In Toshoku Finance UK plc [2002] 1 WLR 671 the House of Lords held that rates should be paid as an expense of a liquidation under rule 4.218 of the (English) Insolvency Rules, which deals with priority of payment of expenses.

In Centre Reinsurance International Co v Freakley [2006] 1 WLR 2863, which concerned a pre-15 September 2003 administration, the court held that rates were not payable as an expense. However, following the introduction of the new administration provisions in the Enterprise Act 2002 with effect from that date, the Insolvency Rules were revised. Rule 2.67 of the English rules, which deals with the expenses of an administration, is broadly similar to rule 4.218.

No rule model

There are no equivalent provisions in the Scottish Insolvency Rules. Rule 2.39, which deals with the determination of outlays and remuneration in administration, broadly speaking applies the equivalent liquidation rules with amendments of wording. These rules could not be held up as models of clarity and drafting. The principal rule (4.32(i)) reads:

“Subject to the provisions of rules 4.33 to 4.35, claims by the liquidator [read administrator for rule 2.39 purposes] for the outlays reasonably incurred by him and for his remuneration shall be made in accordance with section 53 of the Bankruptcy Act as applied by rule 4.68 and as further modified by paragraphs (2) and (3) below”.

Paragraph (2) inserts an additional subsection in s 53, and para (3) makes a further amendment to s 53(6). The erudite reader will realise that the Bankruptcy Act deals with sequestration and that the effect of the provision is therefore to apply to administration the rules in relation to liquidation as they apply to liquidations the provisions on personal insolvency. However the nub of the situation is that the rules are largely concerned with the determination of the liquidator’s remuneration, and the only reference to outlays is to those “reasonably incurred by him”. In rule 4.67, which deals with the order of priority of payment of the expenses of a liquidation, the outlays “properly chargeable or incurred by the provisional liquidator or liquidator in carrying out his functions in the liquidation” are a first priority unless specifically mentioned as having a lesser priority.

So far so clear.

Favoured authorities

A recent High Court case in England has however thrown the cat well and truly among the pigeons. In Exeter City Council v Bairstow and Others [2007] EWHC 400 (Ch), Mr Justice David Richards on 2 March handed down a decision to the effect that non-domestic rates due for the period of the administration (whether the property was occupied or not) should be paid as an expense of the administration under rule 2.67 in priority to the administrator’s own fees.

Given the similarity of wording between rule 2.67 and rule 4.218, it is hardly surprising that the judge followed the House of Lords in Toshoku Finance. Whilst not binding in Scotland, it would now seem only a matter of time before a Scottish local authority seeks to recover sums due to it by way of business rates from a company in administration, given that this would be likely to be held not only an expense of the administration, but one which carries a priority over the administrator’s own remuneration.

The writer understands that prudent administrators have made provisions for this situation when assessing the possible courses of action available to them and the potential outcomes of the administration. The possibility that rates will have to be met as an administration expense means, in the absence of any priority for funding of the administration, a further hurdle in the assessment of the possibilities of achieving the rescue purposes of administration; and, if indeed business rates are to be treated as an administration expense irrespective of whether the property is occupied or not, the effective automatic priority which will be accorded the local authority from the date of the administrator’s appointment, irrespective of how the administration is conducted, will be yet a further disincentive to the rescue culture.

It also seems contrary to the spirit of the provisions that rates should automatically qualify as an expense of an administration (and presumably by analogy, a liquidation), irrespective of any actings or decisions of the administrators or liquidator.

Alistair Burrow, Head of Recovery, Tods Murray LLP