If a company becomes insolvent, it is required to cease trading immediately while an insolvency practitioner proceeds with winding up the company.
In this scenario, if the company is using business premises, the landlord will become one of the company’s creditors.
While a landlord will ordinarily become one of the unsecured creditors to the company, on occasion they may have a rent deposit deed in place which will enable them to claim against for any rent arrears and dilapidations. Obviously, this claim will be limited to the amount of money being held as a deposit.
The rent deposit deed will often be found as a charge granted by the company in favour of the landlord and is registered at Companies House.
How are Unsecured Creditors (such as Landlords) paid in a CVL?
It is the insolvency practitioner’s role to pay creditors based on what funds can be raised from the liquidation of company assets. He will pay secured and preferential creditors before unsecured creditors, which means landlords should be aware that they may only receive a proportion of their unsecured debts.
What are Landlords Entitled to in a CVL?
Landlords are entitled to:
(a) deduct funds from any rental deposit
(b) to seek a court order for termination of the lease.
(c) In some situations, ‘peaceable re-entry’ may be appropriate
(d) Consent to the assignment of the lease to a new party
Peaceable Re-entry: When can Landlords take back Their Property Without Seeking Recourse to the Courts?
‘Peaceable re-entry’ means that, if a landlord has been informed of a company’s insolvency, there may be recourse to take back possession of the property, without first getting a court order (assuming that the right to forfeit is expressly granted by the lease).
This is a high-risk strategy, in tha, if anyone present opposes the landlord’s right to change the locks, it may then constitute a criminal offence to proceed. Further legal issues may also arise if there are goods at the property, which would then make the landlord an involuntary bailee. A landlord’s behaviour, in this scenario, is governed by the Torts Act, which outlines a statutory method by which bailees should handle goods found on the property.
Given the legal complications surrounding peaceable re-entry, landlords would be advised to have a solicitor present if they choose to enact this option. It will also be necessary to fix a notice of forfeiture to the exterior of the premises and to send copies of this notice to the tenant’s registered address.
The Liquidator’s Powers to Restrain Forfeiture
Landlords considering peaceable re-entry should be advised that the insolvency practitioner, should they deem it necessary, can apply to the court to either restrain or stay any forfeiture by civil action.
The Liquidator’s right to Disclaim the Leasehold
When a company goes into liquidation, a liquidator can disclaim the lease. This is a unilateral decision by the liquidator to simply hand back the property to the landlord. The liquidator will do this by sending a form under section 178 of the Insolvency Act 1986 to the landlord and all other interested parties to disclaim the onerous lease. In addition, the liquidator will send a copy of this notice to the Registrar of Companies and to the Land Registry.
This means that from that moment on, any ongoing running costs of the property, such as utility bills and rates, will become the responsibility of the landlord once again. This is another reason that landlords need to be cautious against using ‘peaceable re-entry’, since it may preclude them from deferring potential running cost claims to the insolvent company should a dividend become available.