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