Bloom-ing Marvellous Decision?

The Supreme Court’s decision in Bloom (Bloom v The Pensions Regulator 2013), better known as the Nortel and Lehman’s administrations, has established that liabilities arising after the commencement of insolvency proceedings are NOT an expense of administration but a provable debt.

By way of background, the Pensions Regulator (PR) has a statutory power to serve Financial Support Directions (“FSD’s”) upon companies in the same corporate group as an employer to support financially an underfunded pension scheme.  The rationale for this type of Direction conferred on the PR helps to prevent a pension scheme shortfall should that company fall into financial difficulties.

Insolvency

The issue before the Supreme Court was whether an FSD, issued to an insolvent company, would rank as an administration expense or a provable debt.

In administration, payments owed by an insolvent company rank in order of priority. A liability classified as an administration expense will have ‘super priority’ whilst a provable debt is an ordinary unsecured debt.

It was decided by the Supreme Court that liabilities arising after a company has gone into administration will rank with other unsecured debts of the company, and behind the recipient’s secured creditors.

Effect on Game Litigation

The Bloom decision sparked considerable legal interest about how the decision could influence the Game litigation. Although the Game litigation is distinguishable on the facts, the critical issue of priority of debts in an administration is the same.

Early in 2012, Game Group went into administration with the immediate effect of closing 277 stores. PriceWaterhouseCoopers were appointed as the administrators immediately following the March 2012 quarter day, avoiding liability in the administration for historic rent arrears.

As the law currently stands, where rent payable in advance falls due AFTER the date of administration it is deemed an administration expense and is payable but, if it falls due before it will rank as a provable debt and is not payable.

However, with the possible influence of the Bloom decision it will be interesting to see whether the Game Litigation will follow suit with rents falling due after administration ranking as a provable debt.

Effect on Landlords

For landlords and administrators, the law has enabled them to engage in a ‘winner takes all’ game in terms of when an administrator will be appointed. A practical advantage for a landlord has been that if a tenant enters into administration future rents will be payable as an administration expense. This places a landlord in a higher ranking than other debtors affording them priority payment.

However, should the impending appellate decision in the Game litigation be influenced by the Supreme Court decision in Bloom, it will mean that rent payable in advance either before or after the date of administration will rank only as a provable debt.  A Landlord will be left to rank alongside other unsecured debtors of the company.

We await the outcome of this much anticipated appeal.
 
by Rebecca Nash, Associate