Re Atlantic Computer Systems plc (No 1)

Re Atlantic Computer Systems plc (No 1) [1990] EWCA Civ 20 is a UK insolvency law case concerning the administration procedure when a company is unable to repay its debts.

Facts
Atlantic Computer Systems plc, recently taken over by British and Commonwealth Holdings, had hired a set of computers. It went into insolvency. The company lending the computers attempted to repossess them. The administrators argued this was impermissible.

Judgment
The Court of Appeal held that the computers could not be repossessed directly. The landlords and hire purchase sellers could not get money as an expense of administrative receivership either, because ‘the lessor or owner of goods has his remedies.’ Nicholls LJ gave guidance on exercising security rights against companies in administration. Referring to the old s 11, he said the following.

Typically, when lending money to a company, a bank will take as security a charge over all or most of the assets of the company, present and future, the charge being a fixed charge on land and certain other assets, and a floating charge over the remaining assets. The deed authorises the bank to appoint a receiver and manager of the company’s undertaking with power to carry on the company’s business. Such a receiver is referred to in the Act of 1986 as an ‘administrative receiver.

[...]

We feel bound, therefore, to make some general observations regarding cases where leave is sought to exercise existing proprietary rights, including security rights, against a company in administration.

(1) It is in every case for the person who seeks leave to make out a case for him to be given leave.

(2) The prohibition in section 11(3)(c) and (d) is intended to assist the company, under the management of the administrator, to achieve the purpose for which the administration order was made. If granting leave to a lessor of land or the hirer of goods (a "lessor") to exercise his proprietary rights and repossess his land or goods is unlikely to impede the achievement of that purpose, leave should normally be given.

(3) In other cases when a lessor seeks possession the court has to carry out a balancing exercise, balancing the legitimate interests of the lessor and the legitimate interests of the other creditors of the company: see per Peter Gibson J. in Royal Trust Bank v Buchler [1989] BCLC 130, 135. The metaphor employed here, for want of a better, is that of scales and weights. Lord Wilberforce adverted to the limitations of this metaphor in Science Research Council v Nassé [1980] AC 1028, 1067. It must be kept in mind that the exercise under section 11 is not a mechanical one; each case calls for an exercise in judicial judgment, in which the court seeks to give effect to the purpose of the statutory provisions, having regard to the parties' interests and all the circumstances of the case. As already noted, the purpose of the prohibition is to enable or assist the company to achieve the object for which the administration order was made. The purpose of the power to give leave is to enable the court to relax the prohibition where it would be inequitable for the prohibition to apply.

(4) In carrying out the balancing exercise great importance, or weight, is normally to be given to the proprietary interests of the lessor. Sir Nicolas Browne-Wilkinson V.-C. observed in Bristol Airport Plc v Powdrill [1990] Ch. 744, 767D-E that, so far as possible, the administration procedure should not be used to prejudice those who were secured creditors when the administration order was made in lieu of a winding up order. The same is true regarding the proprietary interests of a lessor. The underlying principle here is that an administration for the benefit of unsecured creditors should not be conducted at the expense of those who have proprietary rights which they are seeking to exercise, save to the extent that this may be unavoidable and even then this will usually be acceptable only to a strictly limited extent.

(5) Thus it will normally be a sufficient ground for the grant of leave if significant loss would be caused to the lessor by a refusal. For this purpose loss comprises any kind of financial loss, direct or indirect, including loss by reason of delay, and may extend to loss which is not financial. But if substantially greater loss would be caused to others by the grant of leave, or loss which is out of all proportion to the benefit which leave would confer on the lessor, that may outweigh the loss to the lessor caused by a refusal. Our formulation was criticised in the course of the argument, and we certainly do not claim for it the status of a rule in those terms. At present we say only that it appears to us the nearest we can get to a formulation of what Parliament had in mind.

(6) In assessing these respective losses the court will have regard to matters such as: the financial position of the company, its ability to pay the rental arrears and the continuing rentals, the administrator's proposals, the period for which the administration order has already been in force and is expected to remain in force, the effect on the administration if leave were given, the effect on the applicant if leave were refused, the end result sought to be achieved by the administration, the prospects of that result being achieved, and the history of the administration so far.

(7) In considering these matters it will often be necessary to assess how probable the suggested consequences are. Thus if loss to the applicant is virtually certain if leave is refused, and loss to others a remote possibility if leave is granted, that will be a powerful factor in favour of granting leave.

(8) This is not an exhaustive list. For example, the conduct of the parties may also be a material consideration in a particular case, as it was in the Bristol Airport case. There leave was refused on the ground that the applicants had accepted benefits under the administration, and had only sought to enforce their security at a later stage: indeed, they had only acquired their security as a result of the operations of the administrators. It behoves a lessor to make his position clear to the administrator at the outset of the administration and, if it should become necessary, to apply to the court promptly.

(9) The above considerations may be relevant not only to the decision whether leave should be granted or refused, but also to a decision to impose terms if leave is granted.

(10) The above considerations will also apply to a decision on whether to impose terms as a condition for refusing leave. Section 11(3)(c) and (d) makes no provision for terms being imposed if leave is refused, but the court has power to achieve that result. It may do so directly, by giving directions to the administrator: for instance, under section 17, or in response to an application by the administrator under section 14(3), or in exercise of its control over an administrator as an officer of the court. Or it may do so indirectly, by ordering that the applicant shall have leave unless the administrator is prepared to take this or that step in the conduct of the administration. Cases where leave is refused but terms are imposed can be expected to arise frequently. For example, the permanent loss to a lessor flowing from his inability to recover his property will normally be small if the administrator is required to pay the current rent. In most cases this should be possible, since if the administration order has been rightly made the business should generally be sufficiently viable to hold down current outgoings. Such a term may therefore be a normal term to impose.

(11) The above observations are directed at a case such as the present where a lessor of land or the owner of goods is seeking to repossess his land or goods because of non-payment of rentals. A broadly similar approach will be applicable on many applications to enforce a security: for instance, an application by a mortgagee for possession of land. On such applications an important consideration will often be whether the applicant is fully secured. If he is, delay in enforcement is likely to be less prejudicial than in cases where his security is insufficient.

(12) In some cases there will be a dispute over the existence, validity or nature of the security which the applicant is seeking leave to enforce. It is not for the court on the leave application to seek to adjudicate upon that issue, unless (as in the present case, on the fixed or floating charge point) the issue raises a short point of law which it is convenient to determine without further ado. Otherwise the court needs to be satisfied only that the applicant has a seriously arguable case.