LAWYERS have won a landmark ruling in an insolvency case of a hospitality business hit by the COVID-19 pandemic which brings new legal meaning to “in jeopardy”.
The case, won by the Dispute Resolution team at leading legal firm Cartmell Shepherd Solicitors, involved a West Cumbrian business which took two leases - one for a hotel and another for a restaurant.
To raise part of the capital the business accepted a £300,000 loan from the landlord, signing a debenture which granted the Respondents a floating charge over assets.
Under the terms of both leases, signed in 2017, the business was also to pay an amount of turnover rent on top of base rent.
By January 2020 the business had erroneously overpaid turnover rent to the tune of £90,000.
When the COVID-19 pandemic struck, the business, like many in the hospitality industry was badly hit, and started to struggle to pay its HMRC bills.
The Respondent Landlord had already refused to repay the £90,000 sum and appointed administrators.
This appointment was based on their belief that the Qualifying Floating Charge had become enforceable as their security was “in jeopardy” due to the worsening financial circumstances of the company.
If the appointment of administrators was found to be valid, then this would give the Respondent landlord permission to forfeit the leases.
Were this to happen, the Respondents would have received a financial windfall, retaining the money already paid by the company in respect of the lease premiums as well as the benefits borne from the company’s last three years of trading.
With limited time restraints, Cartmell Shepherd’s Dispute Resolution team applied to the court, seeking to declare the appointment of administrators as invalid and a nullity.
The Applicants argued that in reality the major cause of any financial problems was the overpayment of the turnover rent.
Had the overpayment not been made and subsequently retained by the Respondents, the business said it would have been able to comfortably pay HMRC, regardless of any hardship caused by the coronavirus pandemic.
The Applicants argued, therefore, that if the Respondents’ security was in jeopardy, then this was created solely by the Respondents and their retention of the overpayment.
In making his ruling the presiding judge cited the dictionary reference of “in jeopardy” submitted by the Applicant, that: “If someone or something is in jeopardy, they are in a dangerous situation where they might fail, be lost or be destroyed.”
He then referred to cases relied upon by both parties, finding that the facts of the two older cases cited by the Applicant - either side of the turn of the 20th Century - offered more guidance than the more recent cases put forward by the Respondents.
The first, Re New York Taxi Cab Company (1913), provided that assets of a Company which is not in pecuniary difficulty and which had no creditor pressing or threatening proceedings, but could not pay the debenture interest in full and would not be able to do so for some considerable time, were not in jeopardy.
This was compared to the facts in Re Victoria Steamboats Limited (1897), where that Company was in arrears, with an imminent threat of a winding-up petition and subsequent liquidation. The judge in that case held that this was a clear case of jeopardy.
The judge pointed out that in this case of the hotel and restaurant business in July 2020, all repayments in relation to the loan were paid on time and in full, and until the COVID-19 outbreak, so were all lease payments.
Further to this, the Company had no substantial debts to trade creditors, nor was there any threat of enforcement by HMRC in relation to outstanding bills after HMRC gave every business the opportunity to defer tax falling due in the first quarter of 2020-2021.
Despite the backdrop of a global pandemic and belonging to one of the worst-hit industries, the Company had still managed to make a profit for the quarter April-June 2020.
After considering all evidence put before the court, the judge held that he did not consider that at the date of the appointment the status of the Company was such that that the
Respondent’s security was in imminent danger of being lost or reduced in value to the extent that the security could no longer be relied upon, therefore the appointment of administrators was not valid and the Application was granted.
The whole case from the appointment of administrators, through two directions hearings, to judgment at a final hearing was completed in just 10 days.
Acknowledging the unavoidable urgency of the application, the judge commended both parties for their cooperation and organisation, saying they had both “acted in exemplary fashion”.
Mark Aspin of Cartmell Shepherd Solicitors, a member of the innovative UK200Group, acted for the Applicants, assisted by Selina Gonzalez. Simon Goldberg and Graham Bartlett of Trinity Chambers were retained as Counsel.