The controversial practice of retailers going into administration and letting down their creditors, only to re-open for business free of debt, was dealt a partial blow in a court case yesterday.
Landlords to the stricken computer games retailer Game won a Court of Appeal judgment which could prevent bust companies from getting away without paying rent while reorganising their finances during administration. Game, like HMV, continued to trade during the administration or insolvency process, emerging from its restructuring with a smaller, more profitable chain. But landlords had complained that it was not fair that they were unable to claim rent on the shops that were still trading.
A consortium of landlords successfully argued yesterday that rent should be paid on what they described as a “pay as you trade” basis for stores that were still operating, whether or not the owner had filed for administration.
Game will have to pay £3m as a result – an amount it had factored into its accounts already, although it said it “strongly argued” against what was seen as a test case for the principal of administration proceedings. It is assessing whether to take the judgment to the Supreme Court.
“The real ramification of this decision is, however, that it will have a significant financial impact on all landlords, tenants and insolvency practitioners involved in current and future business insolvencies in this country,” Game said in a statement.
Land Securities, Hammerson, Intu and British Land argued they had unfairly missed out on rent after Game’s collapse in March 2012. Because of what they described as a legal loophole, the new Game was able to trade rent-free for three months. Under existing law, if a company goes into administration the day after the quarterly rent payment is due, then the rent for that quarter can go unpaid. Technically, the landlord joins the queue with other unsecured creditors, which gives them little realistic chance of getting paid.
The case would mark a big shift in the way property companies deal with administration practitioners during insolvencies, Hammerson said. “The previous system was deeply unsatisfactory for both landlords and insolvency practitioners and this judgment provides a workable, common-sense resolution.”
Brian Green, an insolvency practitioner at KPMG, said the new precedent ended an “anomaly which stretches back over many years”.
However, some pointed out that the new regime would make it harder for businesses to buy themselves breathing space from landlords while they attempted to find buyers – a process that might eventually save thousands of jobs.