Administration Expenses—Lundy Granite principle (Re London Bridge Entertainment Partners LLP (in administration))

Administration Expenses—Lundy Granite principle (Re London Bridge Entertainment Partners LLP (in administration))

Insolvency and Companies Court (ICC) Judge Barber held that the Lundy Granite principle does not extend to an obligation to ‘top up’ a rent deposit fund, where sums had been withdrawn from the fund to pay rent.

Re London Bridge Entertainment Partners shows how seemingly immaterial business decisions made when an entity is solvent will be thrown into relief when the same entity becomes insolvent. Here, the decision to ‘pay first, ask questions later’ from the deposit fund meant that the landlord effectively lost its priority ranking in respect of those rent payments; a priority it could otherwise have been entitled to.

The case also demonstrates that the ambit of provable debts will continue to be construed broadly, while the category of administration expenses will be narrowly construed. Written by Samuel Parsons, barrister at Guildhall Chambers.

Re London Bridge Entertainment Partners LLP (in administration) [2019] EWHC 2932 (Ch), [2019] All ER (D) 96 (Nov)

What are the practical implications of this case?

This case demonstrates the care that must be exercised when a commercial counterparty cannot pay. It was common ground that, if the rent for the period of the administrators’ beneficial retention had remained unpaid, it would have been an expense of the administration [18]. The creditor landlord could therefore have been granted a significant priority in the administration in respect of those sums. But by drawing on the deposit to pay for the rent instalment, the landlord closed this avenue off.

ICC Judge Barber was unimpressed with the argument that this would give rise to ‘unfairness’ or engage the equitable Lundy Granite ((1871) 6 Ch App 462) principle. She determined that the landlord’s decision to draw on the deposit was made consciously and freely. Perhaps of more concern to practitioners, she also observed (at [166]) that:

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About the author:

Zahra started working as a paralegal at Lexis Nexis in Banking and Insolvency teams in April 2019. Zahra graduated with a 2.1 honours in a BA French and Spanish, completed the GDL at BPP University and is seeking some experience before commencing the LPC. She has undertaken voluntary work for law firms in London, Argentina and Colombia.