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Court ruling threatens business rescues

Published: 6 March 2014
There could now be fewer business rescues via administration and more terminal insolvencies following a key ruling by The Court of Appeal.
Court ruling threatens business rescues
The case concerned the video game retailer Game, which went into administration in March 2012, when the quarter's rent day for a number of its shops had just passed.

On the basis of the law at the time the administrators did not have to pay that quarter's rent as an administration expense. As a result, the administrators benefited from virtually a quarter's free rent.

Now, though, The Court of Appeal has overruled the previous law. It has been decided that, when using premises for the purpose of an administration or liquidation, administrators and liquidators must pay rent as an expense of the process for the duration of that period, on a daily basis.

The decision is good news for landlords, and arguably strikes a fair balance between their rights and the competing interests of creditors.

However, it also means that administrators will have to think long and hard before accepting an appointment, to ensure that there are sufficient funds to make an administration viable.

In addition, the ruling does not apply only to lease rents but also equipment leases or any other contract where the administrator has use of an asset but the payment became due before the administration, and remains unpaid.

Legal services firm Thomas Eggar suggests that the lack of a 'window of free use' could mean that there will be fewer administrations in cases where there is a lot of potential lease liability, and perhaps a rush to close trading units where it is not clear that they could easily be sold.

"This could have serious effect on the number of administrations we see, resulting in more terminal insolvencies than rescues," it says.


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