Who is paid first if a company is liquidated?
A recent case considered this thorny issue in the context of commercial rent deposits.
The order of priority for distribution of a company’s assets on liquidation or administration is as follows:
- Fixed charge creditors;
- Expenses of the insolvency proceedings;
- Preferential creditors;
- Floating charge creditors;
- Unsecured provable debts;
- Statutory interest;
- Non-provable liabilities; and
The higher the ‘debt’ is classified up the list, the more likely it is that some or all of the debt would be paid. A recent case highlighted the importance of how debts are classified in this way.
In the case, London Bridge Entertainment Partners (in administration) (“the Tenant”) owed a quarter’s rent in arrears, amounting to £615,000. The Landlord, London Trocadero (2015) LLP, opted to make a withdrawal from the existing rent deposit to cover a sum equal to that of a quarter’s rent in arrears.
The Landlord then sought to enforce the Tenant’s obligation under the lease for the deposit also to be topped-up (a sum would then be available for the Landlord to use for the cost of any dilapidations or further rent arrears) and claimed that this obligation should be regarded as an expense of the insolvency proceedings which would elevate the debt to second on the list and mean they would be more likely to be paid.
The Tenant however argued that the top-up obligation must be regarded as an expense of administration as the obligation to top-up of the rent deposit constitutes a pre-administration contract and, as such, would be regarded as an unsecured provable debt – moving the debt down the list and making payment less likely.
In reaching its decision, the court decided the rent payable during the period of administration must be considered an expense of the insolvency proceedings as the property was being used for the benefit of the company in administration. However, the top-up of the deposit was not an expense of the insolvency proceedings..
The court stressed that the outcome would, however, have been very different for the Landlord, had they not hastily made a withdrawal from the rent deposit to cover the rent arrears.
The advice to landlords who find themselves in similar positions in the future must be to exercise caution when seeking to use the deposit to cover rent arrears.
More generally, the case is important as it demonstrates, particularly in the instance of insolvency, the need to seek specialist legal advice before withdrawing money from the deposit or topping up the deposit once a withdrawal has been made.
For further information about this news, commercial leases, rent deposit deeds and other commercial property contracts, please contact Artan Llabjani on 020 7288 4773
Alternatively, you can also contact one of our other solicitors in the Commercial Real Estate team here.