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Insolvency Law

Expert guidance on all aspects of corporate and personal insolvency

23 OCT 2009

Lomas & Ors v RAB Market Cycles (Master) Fund Ltd & Ors [2009] EWHC 2545 (Ch) (21 October 2009) - Mr Justice Briggs discussing admin expenses

Mr Justice Briggs has handed down his judgment in Lomas & Ors v RAB Market Cycles (Master) Fund Ltd & Ors [2009] EWHC 2545 (Ch) (21 October 2009). The case concerns the potentially long running Lehman Brothers administration. The learned judge had to consider an application for directions pursuant to paragraph 63 of Schedule B1 to the Insolvency Act 1986. In particular the judgment notes that, "The Administrators invite the court to determine how they should treat certain cash received by Administrators of Lehman Brothers International (Europe) (LBIE) after having entered administration in consequence of corporate events or actions which affect securities held by LBIE as custodian under its standard form International Prime Brokerage Agreement (Charge Version) ("the Charge IPBA")" The judgment features a particularly interesting passage on administration expenses. The judge notes at paragraph 98:

"The question of what constitutes an administration expense is now governed by rule 2.67(1) of the Insolvency Rules 1986 (as amended). Both Mr Trower and Mr Sher submitted that the payments which the Administrators considered that they should make in the present circumstances fell within sub-rule (f), as being "any necessary disbursement by the administrator in the course of the administration …". Mr Trower submitted that although for the purposes of liquidators' expenses, the decision of the House of Lords in Re Toshoku Finance UK plc [2002] 1 WLR 671 had removed what was previously thought by some to be a general discretion in the court to identify particular debts as expenses, the flexible approach to that question in the context of administration adopted by Sir Donald Nicholls V-C in Re Atlantic Computer Systems plc[1992] Ch 505, at pages 527-8, remains good law.

99. At paragraph 38 of his opinion in Toshoku, Lord Hoffmann said this, in relation to Sir Donald Nicholls' analysis in Atlantic Computer Systems:

"The second point is the proposition that whether debts should count as expenses of the liquidation is a matter for discretion of the court. In my opinion there is no such discretion. Rule 4.218 determines what counts as expenses, subject only to the limited discretion under section 156 of the 1986 Act to re-arrange the priorities of expenses inter-se. The court will of course interpret rule 4.218 to include debts which, under the Lundy Granite Co principle, are deemed to be expenses of the liquidation. Ordinarily this means that debts such as rents under a lease will be treated as coming within paragraph (a), but the principle may possibly enlarge the scope of other paragraphs as well. But the application of that principle does not involve an exercise of discretion any more than the application of any other legal principle to the particular facts of the case."

100. In my judgment that dictum is no less applicable to administration expenses than it is to liquidation expenses, subject to two caveats. The first is that the court habitually deals flexibly with applications for permission by, for example, secured creditors of a company in administration to enforce their security, or by landlords to forfeit a lease of property to the company. In such circumstances it is commonplace for the creditor to be restrained, for the better functioning of the administration, provided that the administrator discharges what would otherwise be unsecured liabilities, as they arise. The imposition by the court of such a condition for the refusal of permission to the creditor to enforce his security or forfeiture could convert a debt which might otherwise not be an administration expense into one that was.

101. Furthermore, under the Lundy Granite principle itself, the retention by administrators of property for the benefit of the administration may mean that liabilities incurred by reason of that retention, although unsecured, become administration expenses. Mr Trower pointed me to the obiter dicta of Mr Warren QC in Re Japan Leasing (Europe) plc [1999] BPIR 911 as a further example of the application of the same principle, where administrators adopted an agency contract of the company by accepting a payment proffered to it as agent, with the consequence that obligations to pay money arising under that contract after its adoption fell to be paid as administration expenses. Japan Leasing was of course decided prior to Toshoku, and before the substantial alignment of the administration expenses regime with that applicable to liquidation."

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