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[1996] 1 BCLC 446

Re Sobam BV and another (both in receivership)

CHANCERY DIVISION (COMPANIES COURT)

ARDEN J


15, 16, 19, JUNE, 14 DECEMBER 1995



Receivers - Rates - Unoccupied property - Liability of receiver for unoccupied property rates - Whether receiver liable for payment of rates - Whether receiver obliged to exercise statutory discretion to pay rates - Whether rates an expense of the receivership - Whether receivers liable to pay rates to avoid liability for fraudulent trading - Local Government and Finance Act 1988, ss 45(1), 45(1)(b), 65(1) - Law of Property Act 1925, s 109(8) - Companies Act 1985, s 458.

In 1989 two companies, Sobam BV and Satelscoop BV (the owners), acquired the freehold title to adjoining office blocks in the City of London (the properties). The purchase was financed by a syndicate of banks led by a trustee. To secure the purchase moneys the owners granted debentures in favour of the trustee which were in the same terms and contained provisions allowing the appointment of a receiver over the properties in the event of default, authorising the receiver to take possession of the properties and specifying that the receiver was to be the agent of the owners. In November 1993 the trustee appointed B and G as receivers under the debentures. The trustee undertook to the receivers to meet all costs and expenses associated with the running and disposal of the properties, which had been unoccupied, for rating purposes, since July 1993. The receivers secured the properties, undertook repairs and made arrangements for sale. In February 1995 the properties were sold pursuant to the power of sale in the debentures, whereupon the council claimed that the receivers were liable to pay unoccupied property rates from 21 November 1993 to 21 March 1995 pursuant to ss 45(1), 45(1)(b) and 65(1) of the Local Government and Finance Act 1988, which provided inter alia that the owner of a property was liable for the rates and was defined as being the person entitled to possession of the property, which included the receivers. The receivers denied liability for the rates and the receivers and the trustee sought directions from the court. The issues for determination by the court were (i) whether the receivers were persons entitled to the possession of the properties for the purposes of s 65(1) of the 1988 Act, (ii) whether the receivers were obliged to exercise their discretion under s 109(8) of the Law of Property Act 1925 to pay rates, (iii) whether the rates were payable as an expense of the receivership and (iv) whether the court should direct the receivers to pay the rates since otherwise they would or might incur liability for fraudulent trading.

Held - (1) The general principle of rating law that the possession of an agent was to be attributed to his principal applied to entitlement to

[1996] 1 BCLC 446 at 447

possession of a property by a receiver. A receiver was not, therefore, by reason only of his appointment as such, liable for unoccupied property rates where he was appointed on terms that he was the agent of the company, notwithstanding that the debenture gave the receiver the power to act on his own behalf, until such time as he actually exercised that power. Furthermore, given that two persons acting in different capacities could not be in possession of the same property at the same time, a person was only entitled to possession for the purposes of s 65(1) of the Local Government and Finance Act 1988 if he was immediately entitled to possession, and not, as in the case of the receivers, only entitled to exercise rights that would result in possession being obtained.

(2) The receivers were not obliged to exercise their discretion under s 109(8) of the Law of Property Act 1925 in favour of the payment of unoccupied property rates to the council and their conduct in declining to do so was not unfair or unjust, having regard to the fact (i) that the owners' obligation to pay rates arose out of their acquisition of the properties prior to the receivership, and (ii) that the receiver was not personally liable for payment of the rates.

(3) Rates accruing due after the appointment of a receiver in respect of property acquired prior to the receivership were not payable by the receiver as an expense of the receivership. On the facts the receivers did not use the properties and even if they had done so, as agent for the owners, the rates would still have been the liability of the owners and not the receivers.

(4) The court should not direct the receivers to pay the rates on the basis that they would or might otherwise incur liability for fraudulent trading. When the owners incurred liability to pay the rates this was an unsecured debt for which the receivers were not subsequently liable. The receivers had no intent to defraud under s 458 of the Companies Act 1985 and their decision to postpone the sale of the properties did not deprive the council of its rights or prejudice it as an unsecured creditor of the owners in respect of the unpaid rates.

Cases referred to in judgment

Airlines Airspares Ltd v Handley Page Ltd [1970] 1 All ER 29, [1970] Ch 193, [1970] 2 WLR 163.

Astor Chemicals Ltd v Synthetic Technology Ltd [1990] BCLC 1.

Atlantic Computer Systems plc, Re (No 1) [1991] BCLC 606, [1992] 1 All ER 476, [1992] Ch 505, [1992] 2 WLR 367, CA.

Banister v Islington London BC (1972) 71 LGR 239, DC.

Blazer Fire Lighter Ltd, Re [1895] 1 Ch 402, [1891-4] All ER Rep 1174.

Gomba Holdings UK Ltd v Minories Finance Ltd [1989] BCLC 115, [1989] 1 All ER 261, [1988] 1 WLR 1231, CA.

Gosling v Gaskell [1897] AC 575, [1895-9] All ER Rep 300, HL; rvsg [1986] 1 QB 669, CA.

Gyton v Palmour [1944] 2 All ER 540, [1945] KB 426, DC.

Heath v Drown [1972] 2 All ER 561, [1973] AC 498, [1972] 2 WLR 1306, HL.

Lathia v Dronsfield Bros Ltd [1987] BCLC 321.

Leigh Estates (UK) Ltd, Re (1994) BCC 292.

Liverpool Corp v Hope [1938] 1 All ER 492, [1938] 1 KB 751, CA.

[1996] 1 BCLC 446 at 448

London United Breweries Ltd, Re, Smith v London United Breweries Ltd [1907] 2 Ch 511.

McKillop, Petrs [1994] 2 BCLC 550, 1995 SLT 216, CS(OH).

Marriage Neave & Co, Re, North of England Trustee Debenture and Assets Corp v Marriage Neave & Co [1896] 2 Ch 663, [1895-9] All ER Rep 393, CA.

Marshall v Camden London BC [1981] RVR 94.

National Provincial Bank of England Ltd v United Electric Theatres Ltd [1916] 1 Ch 132, (1915) 85 LJ Ch 106.

Nicoll v Cutts [1985] BCLC 322, CA.

Patrick and Lyon Ltd, Re [1933] Ch 786, [1933] All ER Rep 590.

Powdrill v Watson, Re Leyland DAF Ltd (No 2), Re Ferranti International plc [1995] 1 BCLC 386, [1995] 2 All ER 65, [1995] 2 AC 394, [1995] 2 WLR 312, HL; affg in part and on other grounds Powdrill v Watson [1994] 2 BCLC 118, [1994] 2 All ER 513, CA, and Re Leyland DAF Ltd (No 2), Re Ferranti International plc [1994] 2 BCLC 760, [1994] 4 All ER 300, [1995] 2 AC 394, Ch D.

R v Grantham [1984] BCLC 270, [1984] 3 All ER 166, [1984] QB 675, [1984] 2 WLR 815, CA.

R v Lockwood [1986] Crim LR 244, CA.

R v St Pancras Assessment Committee (1877) 2 QBD 581.

Ratford v Northavon DC [1986] BCLC 397, [1986] 3 All ER 193, [1987] QB 357, [1986] 3 WLR 771, CA.

Refuge Assurance Co Ltd v Pearlberg [1938] 3 All ER 231, [1938] Ch 687, CA.

Rhodes v Allied Dunbar Pension Services Ltd, Re Offshore Ventilation Ltd [1989] BCLC 318, [1989] 1 All ER 1161, [1989] 1 WLR 800, CA.

Richards v Overseers of Kidderminster [1896] 2 Ch 212.

Rylands Glass & Engineering Co Ltd, Re (1904) LT Jo 87.

Sarflax, Re [1979] 1 All ER 529, [1979] 1 Ch 592, [1979] 2 WLR 202.

Sargent v Customs and Excise Comrs [1995] 2 BCLC 34, [1995] 1 WLR 821, CA.

Westminster City Council v Haymarket Publishing Ltd [1981] 2 All ER 555, [1981] 1 WLR 677, CA.

Willment (John) (Ashford) Ltd, Re [1979] 2 All ER 615, [1980] 1 WLR 73.

Cases also cited or referred to in skeleton arguments

Beswick v Beswick [1967] 2 All ER 1197, [1968] AC 58, HL.

Cumberland Court (Brighton) Ltd v Taylor [1963] 2 All ER 536, [1964] Ch 29.

Great Eastern Railway Co v East London Railway Co (1881) 44 LT 903, CA.

Heath v Pugh (1881) 6 QBD 345, CA.

Kentish Homes Ltd, Re [1993] BCLC 1375.

Leitch (William C) Bros Ltd, Re [1932] 2 Ch 71.

Solomons v Gertzenstein Ltd [1954] 2 All ER 625, [1954] 2 QB 243, CA.

Westminster City Council v Haste [1950] 2 All ER 65, [1950] Ch 442.

Originating summons

John Russell Brown, Peter Mark Gerold and the Long Term Credit Bank of Japan (a company incorporated in Japan), the receivers, applied for an order

[1996] 1 BCLC 446 at 449

under s 35(1) of the Insolvency Act 1986 for directions as to whether they were liable to pay to the respondent, the Common Council of the City of London, (the rating authority), non-domestic empty rates in respect of two parts of a property the subject of the fixed charge receivership, being Milton House and Shire House, Silk Street, London EC2. The freehold title to the two parts of the property was vested in Beheer-en-Beleggingmaatschappij Sobam BV (Sobam) and Satelscoop BV (Satelscoop), two companies incorporated in Holland. The facts are set out in the judgment.

Elizabeth Gloster QC and Richard Gillis (instructed by Clifford Chance) for the applicants.

Christopher Lewsley (instructed by A J Colvin, Comptroller and City Solicitor) for the respondent.

Cur adv vult

14 December 1995. The following judgment was delivered.



ARDEN J.

This is a summons for directions under s 35 of the Insolvency Act 1986 (the 1986 Act). The applicants are the Long Term Credit Bank of Japan (hereafter 'LTCB') and the joint receivers appointed by it of the properties mentioned below. The receivers are John Russell Brown and Peter Mark Gerold, and I shall refer to them as 'the receivers'. The respondent is the Common Council of the City of London (hereafter 'the council'). Miss Elizabeth Gloster QC and Mr Richard Gillis appeared for the applicants and Mr Christopher Lewsley appeared for the respondents.

The background

On 28 December 1989, two Dutch companies (hereafter 'the companies') called Satelscoop BV (hereafter 'Satelscoop') and Beheer-en-Beleggingmaat-schappij Sobam BV (hereafter 'Sobam'), acquired the freehold title of adjoining office blocks known as Milton House and Shire House, Silk Street, London EC2 (hereafter together 'the properties').

The purchase of the properties was financed by a syndicate of banks comprising LTCB, Mitsui Trust and Banking Co Ltd, the Mitsubishi Trust and Banking Corp, the Sumitomo Trust and Banking Co Ltd and the Nippon Credit Bank Ltd (hereafter 'the banks'). LTCB acts as trustee for the banks. The moneys advanced by the banks to Satelscoop and Sobam were secured by debentures dated 28 December 1989 (the debentures) granted by each company in favour of LTCB as trustee for and on behalf of the banks. The debentures are in substantially identical forms and contain all the normal provisions. The material provisions of each debenture are as follows:

'Clause 3.01

3.01 . . . the Company hereby:

(a) charges as beneficial owner in favour of [LTCB] as trustee for the Banks . . . with the payment and discharge of the Secured Obligations by way of first fixed charge (which so far as it relates to land in England and Wales vested in the Company at the date hereof shall be a charge by way of legal mortgage) the following, namely

[1996] 1 BCLC 446 at 450

(1) all estates and interests in freehold, leasehold and other immovable property . . . (including but without limitation, the registered and unregistered land in England and Wales specified or referred to in the Schedule hereto) . . .'

The properties were specified in the schedule.

'Clause 14

14.01 At any time after having been requested so to do by the Company or after the happening of an Event of Default the Agent may appoint one or more persons to be Receiver or Receivers of the whole or any part of the Charged Property . . .

14.03 Every Receiver for the time being holding office by virtue of an appointment . . . hereunder . . . shall . . . have . . . in relation to the Charged Property . . .

(a) all the powers . . . conferred by the Law of Property Act 1925 on mortgagors and on mortgagees in possession and receivers appointed under that Act . . .

(c) power in the name or on behalf and at the cost of the Company to exercise all the powers and rights of an absolute owner and do or omit to do anything which the Company itself could do . . .

14.04 In addition . . . every Receiver . . . shall (notwithstanding any winding-up or dissolution of the Company) have the following powers, namely:

(a) power to take possession of, collect and get in the Charged Property . . .

(p) to exercise any of the above powers on behalf of and in the name of the Company (notwithstanding any liquidation of the Company) or on his own behalf.

14.06 All monies received by any Receiver appointed under this debenture shall (subject to the rights and claims of any person having a security ranking in priority to the security constituted by or pursuant to this Debenture) be applied in the following order . . .

(c) in providing for the matters (other than the remuneration of the Receiver) specified in the first three paragraphs of section 109(8) of the Law of Property Act 1925 . . .

(e) in or towards the satisfaction of the Secured Obligations, and any surplus shall be paid to the Company or other person entitled thereto . . .

14.07 Every Receiver so appointed shall be deemed at all times and for all purposes to be the agent of the Company which shall be solely responsible for his acts and defaults (other than wilful default) and for the payment of his remuneration,'

On 19 November 1993, LTCB in exercise of its powers under the debentures appointed the receivers as receivers of the properties. It was anticipated that the properties would be vacant and producing no income and accordingly LTCB undertook to the receivers to meet all costs, expenses and fees associated with the running and disposal of the properties. On 21 November 1993 a lease of the properties to British Petroleum plc

[1996] 1 BCLC 446 at 451

(hereafter 'BP') expired and BP delivered up possession to the companies acting by its receivers. For rating purposes the properties had been unoccupied since about July 1993 when BP had gone out of occupation for rating purposes. The properties have remained unoccupied.

Since their appointment the receivers, acting as agents of the companies, have secured the properties, overseen repairs required by the former tenants, employed various professional advisers in connection with the properties, including Weatherall Green & Smith as marketing and management agents, and agreed to sell the properties. On 13 February 1995 the properties were in fact sold by LTCB exercising its power of sale under the debentures in order to overreach second charges against the properties.

The council is the relevant rating authority for the properties. The council asserts that the receivers are liable to pay unpaid non-domestic unoccupied property rates (hereafter 'unoccupied property rates') in respect of the properties for the period from shortly after the date of the receivership, namely 21 November 1993 to 21 March 1995 (hereafter 'the relevant rating period'). The amount claimed by the council is £3,492,516.47. I refer to the rates in question as 'the rates'. The companies are not in liquidation. It is common ground that the receivers have acted as agents of the companies.

Liability for unoccupied property rates

The relevant provisions are in ss 45 and 65 of the Local Government Finance Act 1988 (the 1988 Act). Section 45(1) provides:

'A person (the ratepayer) shall as regards a hereditament be subject to a non-domestic rate in respect of a chargeable financial year if the following conditions are fulfilled in respect of any day in the year--(a) on the day none of the hereditament is occupied, (b) on the day the ratepayer is the owner of the whole of the hereditament, (c) the hereditament is shown for the day in a local non-domestic rating list in force for the year, and (d) on the day the hereditament falls within a description prescribed by the Secretary of State by regulations.'

It is common ground that those conditions are satisfied. Under s 45(4), the chargeable amount is 50% of the rate when occupied. It is common ground that the liability would be discharged in this case by payments to the council. By s 45(1)(b) the ratepayer is defined as the owner. Section 65(1) provides as follows: 'The owner of a hereditament or land is the person entitled to possession of it.'

The issues

The issues are:

(1) Are the receivers persons 'entitled to the possession of' the properties for the purposes of s 65(1) of the 1988 Act?

(2) Are the receivers under an obligation to pay the rates by virtue of cl 14.06 of the debentures and s 109(8) of the Law of Property Act 1925?

(3) Are the rates payable as an expense of the receivership?

(4) Should the court direct the receivers to pay the rates because otherwise they would or might incur liability for fraudulent trading?

[1996] 1 BCLC 446 at 452

I have for reasons that will appear below reversed the order of issues (3) and (4) which were argued in the contrary order. The council did not argue that the banks were liable for the rates.

It will be apparent that, if a receiver is not liable for unoccupied property rates but (as in this case) decides to postpone sale, the rates are only an unsecured liability of the company in receivership. The rights of a rating authority against a company in receivership are however often worthless if all the assets of the company are under the control of the receiver. A rating authority provides services such as the provision of police, fire services and highways maintenance out of the funds raised by rates. Unlike a supplier who is in a position to decline to make future supplies, the rating authority will not be able to stop providing these services. The only remedy of the rating authority will be to petition for the winding up of the company, and, where the company is the owner (as defined), it will be exempt from unoccupied property rates by virtue of an exemption contained in para 2(2)(k) of the Non-Domestic Rating (Unoccupied Property) Regulations 1989, SI 1989/2261 (the 1989 Regulations). The particular questions to be decided on this application go to the heart of the law of receivership.

Brief history of the relevant law of receivership

Both counsel in their submissions referred to the history of the law relating to the liability of mortgagees and receivers. The history helps to explain the current legal position, which is so seemingly complex and difficult to follow. In reaching my conclusions I have had regard to the way that the law has developed in this field, which I will now briefly summarise. This summary is not a comprehensive survey but a narrative intended to put the issues in this case in their historical context.

Before it became usual to appoint receivers out of court when a corporate borrower defaulted on a secured loan, mortgagees who went into possession on default found that they had extensive liability for loss occurring while they were in possession. To avoid this liability, the practice was developed of including in charges and debentures a provision, which enabled the mortgagee or debenture holder on the occurrence of an event of default to appoint a receiver who under the terms of the charge or debenture was the agent of the mortgagor. This practice continues to be used where security is given. The agency is not an ordinary one because duties are also owed to the debenture holder (see generally Gomba Holdings UK Ltd v Minories Finance Ltd [1989] BCLC 115 at 116-117, [1988] 1 WLR 1231 at 1233-1234 per Fox LJ). The agency lasts until the mortgagor goes into liquidation (Gosling v Gaskell [1897] AC 575, [1895-9] All ER Rep 300) and see, in the case of administrative receivers as defined in s 29(2) of the 1986 Act, s 44(1)(a) of that Act. By use of the agency mechanism, the mortgagee can remove from the company control of the property that had been charged to him without incurring personal liability for any loss that occurs while the receiver holds office. The agency mechanism is extremely effective. For instance a receiver, appointed as agent of the mortgagor may choose not to perform contracts which the mortgagor had entered into before the receivership provided that non-performance does not adversely affect the realisation of assets or seriously affect the trading prospects of the mortgagor (Airlines Airspares Ltd v Handley Page Ltd [1970] 1 All ER 29,

[1996] 1 BCLC 446 at 453

[1970] Ch 193). The liability in damages for non-performance of a pre-receivership contract ranks as an unsecured liability and so it does not diminish the assets available to meet the claims of the mortgagee who appointed the receiver. Parliament has intervened so that a receiver is now personally liable on post-receivership contracts entered into by him (unless the contract otherwise provides), and also on pre-receivership employment contracts made before his appointment which he adopts in the course of carrying out his functions. (The relevant provisions are now in ss 37 and 44 of the 1986 Act. Section 44 was amended by the Insolvency Act 1994. It was considered in its unamended form by the House of Lords in Powdrill v Watson, Re Leyland DAF Ltd (No 2), Re Ferranti International plc [1995] 1 BCLC 386, [1995] 2 AC 394.)

It is noteworthy that Parliament has not abolished the agency status of the receiver but has merely imposed personal liability on the receiver for acts done by him as receiver in specified cases (see the 1986 Act, ss 37 and 44, as amended). (Indeed it is arguable that the 1986 Act has enhanced the agency status of receivers). This would suggest that the policy of the legislature is to retain the immunity which the receiver enjoys as an agent except in those specified cases. One reason for this may be that the institution of receivership as traditionally structured provides benefits to lenders (as well as, in some cases, other parties) and thus may make commercial borrowing easier. The law attaches some importance to the position of the secured creditors and to their ability to forecast with certainty the manner in which assets will be distributed in insolvency.

A receiver appointed under a floating charge is liable to pay certain debts incurred by the mortgagor before he was appointed receiver in priority to any payment due to his appointor (see the 1986 Act, s 40). Rates used to carry priority in this way. In fact in the present case the charges were fixed charges so that no preferential debts were payable by the receivers. Moreover preferential status was given only to rates which accrued in the year prior to the appointment of the receiver and not to rates accruing during the receivership itself. However the preferential status of rates was abolished by the Insolvency Act 1985 following a recommendation in the Report of the Review Committee set up to review insolvency law under the chairmanship of Sir Kenneth Cork (see Insolvency Law and Practice - Report of the Review Committee (1982) (Cmnd 8558)).

Counsel's submissions

I now turn to counsel's submissions. Since the receivers are seeking directions as to whether they should pay the rates, I will set out the submissions of the council on each issue before those of the receivers. In some respects Miss Gloster in her opening sought to meet arguments which were not in the event made, and I have not sought to summarise her submissions on the points.

Issue (1): Are the receivers persons entitled to possession?

The council's primary submission was that the receivers are persons 'entitled to the possession of the' properties for the purposes of s 65(1) of the 1988 Act.

An analogous question has recently been fully considered by the Court of Appeal in Ratford v Northavon DC [1986] BCLC 397, [1987] QB 357 and

[1996] 1 BCLC 446 at 454

I propose to start by summarising the relevant parts of that case. In Ratford's case, the question was whether receivers appointed by debenture holders were in rateable occupation of premises used by the company in receivership for the purpose of carrying on its business. The earlier authorities were reviewed. Slade LJ, with whom the other members of the court (Ralph Gibson LJ and Sir John Megaw) agreed, began the relevant part of his judgment by pointing out that in general a receiver appointed by a debenture holder incurred no personal liability if he carried out his duties properly because ordinarily the debenture would provide for him to be the agent of the company (see [1986] BCLC 397 at 410, [1987] QB 357 at 371). On the basis of the earlier authorities, including Re Marriage Neave & Co, North of England Trustee Debenture and Assets Corp v Marriage Neave & Co [1896] 2 Ch 663, [1895-9] All ER Rep 393, Slade LJ held that--

'the mere fact that a receiver has entered upon the company's premises for the purpose of managing and carrying on its business does not necessarily mean that the company has been dispossessed or has ceased to occupy the premises for rating purposes. If it is to be shown that a change of rateable occupation has occurred, this conclusion must be derived from the terms of the receiver's appointment or from what he has actually done, or from both together.' (See [1986] BCLC 397 at 414, [1987] QB 357 at 376.)

It was possible therefore for receivers to be appointed on terms that involve a change of rateable occupation, and accordingly on the facts of the case before him, Slade LJ held that the council had been justified in bringing proceedings against the receivers. Slade LJ held that, once a proper demand and non-payment by the receivers was shown, the onus shifted to the receivers to show sufficient cause for not having paid the sum in question. He continued ([1986] BCLC 397 at 416-417, [1987] QB 357 at 378-379):

'(3) In my judgment, however, the receivers prima facie discharged this burden by showing that they had been appointed on terms which, though empowering them to take possession of the company's premises and to carry on and manage its business, did not oblige them to take possession and further provided that in carrying out their activities they should be deemed to be the agents of the company.

(4) This much having been shown, the onus, in my opinion, shifted to the council to show that the receivers had dispossessed the company, or, to put it another way, to show that the quality of any possession of the premises which the receivers might have enjoyed was not that of mere agents. For possession held by a person in his capacity as agent is in law the possession of his principal.

(5) The agreed statement of facts placed before the justices did no more than show that the receivers had had representatives on the property from time to time during their receivership, that they had managed the company's business and authorised the payment of various outgoings, that the company had at their direction disposed of the company's assets, including, eventually, the leasehold interest in the premises, and that during the receivership they had had control of those

[1996] 1 BCLC 446 at 455

of the company's assets covered by the debenture. However, in my opinion, the decisions in Re Marriage Neave & Co [1896] 2 Ch 663 (a decision of this court) and in National Provincial Bank of England Ltd v United Electric Theatres Ltd [1916] 1 Ch 132, 85 LJ Ch 106 and in Gyton v Palmour [1944] 2 All ER 540, [1945] KB 426 show that these facts are quite consistent with the company remaining in legal possession and rateable occupation of the premises.

In my opinion, therefore, there was no sufficient evidence before the justices to justify a finding that the receivers had dispossessed the company, which had unquestionably been in possession and rateable occupation of the premises up to the date of their appointment. The justices appear to have arrived at the conclusion expressed in para 9 of their decision from the presumption that the receivers by virtue of their appointment had assumed personal liability in general for the liabilities of the company, and in particular for the rates payable in respect of the premises. Having regard to the terms of the appointment of the receivers, no such presumptions, in my opinion, arose, save in so far as statute (eg the Companies Acts) imposed them. No reliance has been placed on statute in argument before us. With respect to all concerned, I think that, as is submitted in the notice of appeal, the judge ought to have held that the justices reached their conclusion set out in para 9 of their decision by a process of reasoning which was wrong in law in that they failed to state the acts of the receivers referred to in the case stated were in law the acts of the company, they wrongly held that the receivers had undertaken the liabilities of the company, and erred in stating that there was no authority in law why the receivers could escape liability for the rates. On the authorities the position is, in my opinion, rather the reverse. Save for those cases such as Richards v Overseers of Kidderminster [1896] 2 Ch 212, where the terms of the receiver's appointment have effected or required dispossession of the company, I think that no case has been cited to us in which a receiver has ever been held to be in rateable occupation of occupied premises. The reason, I infer, is not far to seek. Any occupation of the relevant premises enjoyed by a receiver will normally be enjoyed by him solely in his capacity as agent for some other party. Though it is possible for him to take independent possession of the premises as principal, such cases I suspect may be comparatively rare. Counsel for the receivers submitted that the agreed facts in this case did not indicate or establish any action on the part of the receivers in relation to the premises beyond management of the company's business and control of its assets, as in any typical receivership where the receiver decides to continue the business as a going concern. I accept this submission.'

Accordingly, while receivers can be occupiers, normally they will be in occupation as agents for the company in receivership and this is not sufficient to make them occupiers for rating purposes.

For the council, Mr Lewsley made the following submissions:

1. Under Clause 14.04 of the debentures (set out above), the receivers have power to take possession and to do so on their own behalf, and therefore they are entitled to possession for the purposes of s 65(1) of the

[1996] 1 BCLC 446 at 456

1988 Act. They have power to take possession as principals, and therefore the fact that the debentures make them agents for the companies is irrelevant.

2. In any event, a receiver can always displace his appointor (see Ratford's case) and therefore s 65(1) is for that reason also satisfied. The receivers have the ability to exclude others from the properties, which is the test for possession (see R v St Pancras Assessment Committee (1877) 2 QBD 581).

3. In the earlier case of Banister v Islington London BC (1972) 71 LGR 239, which concerned unoccupied rates, the Divisional Court rejected the argument that a receiver could avoid liability by showing that he was an agent of the company.

In the crucial part of his judgment, Lord Widgery CJ, with whom Ashworth and Willis JJ agreed, having referred to Richards v Overseers of Kidderminster [1896] 2 Ch 212, held as follows:

'I am satisfied from that reference to authority that under the old law there was no obstacle to a receiver who actually put himself into rateable occupation, being chargeable as such, and I see no reason why the plain words of Schedule 1 to the General Rate Act, 1967, should not have the same effect. In other words I am not deterred from giving the words their plain meaning, and in my judgment the receiver is and has at all material times been the person entitled to possession within the schedule, and accordingly I think that the Justices were right in making the order they did' (See 71 LGR 239 at 246.)

Mr Lewsley submitted that it follows from the Banister case that a receiver is liable for unoccupied property rates whenever he has power to put himself into rateable occupation and that this is so even though the receiver is stated to be the agent of the company. Mr Lewsley submitted that the Banister case is not inconsistent with the Ratford case because the Court of Appeal in that case accepted that there could be circumstances in which a receiver went into rateable occupation. Mr Lewsley further submitted that a receiver is in an analogous position to a trustee, who can also be liable for unoccupied property rates even though he does not have beneficial ownership of the property in question: Marshall v Camden London BC [1981] RVR 94. Certain representative parties, including a liquidator in whom property of the company has been vested under s 145 of the 1986 Act (but not including receivers), are exempt from liability for unoccupied property rates by virtue of the 1989 Regulations. This shows that representative parties are not exempt from such liability merely because they represent others. The position of a receiver is similar to that of a representative party.

4. Westminster City Council v Haymarket Publishing Ltd [1981] 2 All ER 555 at 558, [1981] 1 WLR 677 at 680 is authority for the proposition that the person 'entitled to possession' for rating purposes is the person who really has control of letting - in this case, the receivers. In that case, a charge over land registered by the rating authority to secure unpaid rates in pursuance of its statutory right to do so was held to take priority over a pre-existing all moneys fixed charge. As part of its reasoning the Court of Appeal held that the rating authority's rights could not be circumvented by the creation of security in support of intra-group debt.

[1996] 1 BCLC 446 at 457

Miss Gloster for the applicants submitted:

1. As respects the definition of 'owner' in s 65(1) of the 1988 Act:

(i) 'Possession' is necessarily a word of ambiguous meaning which depends on its context. It can mean actual physical possession, control or occupation, manifested by some outward act, or legal possession, ie a right, recognised by the law, which yields physical possession (see Heath v Drown [1972] 2 All ER 561 at 568-569, [1973] AC 498 at 511). In contrast with the word 'occupation', the word 'possession' conveys the notion of exclusive entitlement to occupy.

(ii) The definition of 'owner' in s 65(1) of the 1988 Act refers to 'the person entitled to possession' of the hereditament and this requires one to identify the person who has the immediate legal right to actual physical possession, albeit that such person ex hypothesi will not be in actual physical occupation of the property. In contrast with the word 'occupation', the word 'possession' conveys the notion of exclusive entitlement to occupy. Possession could not be vested in the receivers and the companies jointly: see Westminster City Council v Haymarket Publishing Ltd, and see Refuge Assurance Co Ltd v Pearlberg [1938] 3 All ER 231 at 233, [1938] Ch 687 at 692 where the Court of Appeal described a possible conclusion that a mortgagee in possession and a receiver appointed by it were both in possession at the same time as 'quite fantastic'.

(iii) Thus in the present case: (a) prior to 21 November 1993 BP was the 'owner', because as tenant it had the immediate right to actual physical possession, notwithstanding that it was not in actual physical occupation; (b) from 21 November 1993, after BP's surrender of its lease to its landlords, the freehold registered proprietors of the properties, namely the companies, were the owners, because they had the immediate right to physical possession; (c) the receivers were not the owners because under the debentures they acted as agents of the owners, the companies.

2. The appointment of the receivers and the performance of their functions as agents of the companies did not displace the companies' entitlement to possession (see the Ratford case [1986] BCLC 397 at 412, 414, [1987] QB 357 at 374, 376). The Ratford case was applied in McKillop, Petrs [1994] 2 BCLC 550, 1995 SLT 216, a decision of the Outer House of the Court of Session (Lord Maclean) to the case of an administrative receiver appointed under the provisions of the 1986 Act which enable such a receiver to be appointed in Scotland, and expressly provide that such a receiver is to be deemed to be the company's agent.

3. 'It is a general principle of rating law that where an agent is required to occupy a hereditament in order to secure the better performance of his duties, as agent, his occupation is for rating purposes ordinarily treated as that of the principal' (see the Ratford case [1986] BCLC 397 at 409-410, [1987] QB 357 at 371 per Slade LJ). (In support of this proposition Miss Gloster also cited 39 Halsbury's Laws (4th edn) para 21, but the citation from the Ratford case is sufficient for my purposes.) The same principle should be applied to liability for unoccupied property rates, where a receiver as agent obtains an entitlement to possession (see Tolley's Corporate Insolvency by S Rajani (1994 edn) p 506, para D811).

4. The Banister case should not be applied because (a) most writers are of the view that the Banister case was either wrong, or at least would not be

[1996] 1 BCLC 446 at 458

decided the same way after the Ratford case: see Ryde on Rating and the Council Tax p G120, para 270; Lightman & Moss The Law of Receivers and Managers (2nd edn, 1994) p 311; (b) the decision was based on the premise that a receiver in physical occupation was in rateable occupation, but the decision in the Ratford case shows that the agency of receivers is a real one (see also Rhodes v Allied Dunbar Pension Services Ltd, Re Offshore Ventilation Ltd [1989] BCLC 318 at 325, [1989] 1 WLR 800 at 807 where the Court of Appeal relied on this part of its earlier decision in the Ratford case in determining the right of landlords serving notices in lieu of distress to receive rent from subtenants, notwithstanding the appointment of receivers to the tenant); (c) the Banister case was decided on its own special facts and concessions and was therefore distinguishable. It was conceded that the receiver was in rateable occupation and that the receiver had in fact properly paid rates as occupier when he was in occupation. When the receiver left the property, the keys were held to the order of the debenture holders (which may have suggested that the latter was entitled to possession of the property).

5. The ongoing liability of the companies to pay rates is equivalent to the liability of a company, accruing during the post-receivership period, on a contract entered into by the company prior to receivership, as to which see Airlines Airspares v Handley Page Ltd [1970] 1 All ER 29, [1970] Ch 193, applied in Lathia v Dronsfield Bros Ltd [1987] BCLC 321 and in Astor Chemicals Ltd v Synthetic Technology Ltd [1990] BCLC 1 at 11; Kerr on Receivers (17th edn) pp 375-376; Lightman & Moss The Law of Receivers of Companies (2nd edn) pp 129-130, 139-140, 255, 324-325.

6. The receivers' submission does not mean that 'person entitled to possession' means 'person in possession' as counsel for the council had suggested in argument. One has to identify who, at the relevant time, had the immediate entitlement to possession; ie the immediate legal right to possession. It is not relevant to inquire who, if they exercised a particular right or power, would have such entitlement, in circumstances where they have not yet done so. (Indeed if this were right every mortgagee would be an 'owner' for rating purposes even before default, a situation for which the council did not contend.)

7. Neither cl 14.03(a) (receiver given powers of mortgagee in possession), nor cl 14.04, of the debentures, requires the receivers to take possession in such a way as to dispossess the companies. The words 'on his own behalf' in cl 14.04(p) are commonly found in this sort of provision. They probably simply mean 'in his own name'. If they mean anything more than 'in his own name', they are directed at the position after liquidation, when, at least for some purposes, it may be that the receiver is no longer the agent of the chargor.

My conclusions on issue (1)

I do not need to define possession because the issue is not whether the receivers and the companies had possession but whether, after the appointment of the receivers, entitlement to the possession of the properties, which (subject to the rights of BP) the companies had previously had, was now vested in the receivers. (It is not said that the receivers had by their actions displaced the companies.) The issue turns on the efficacy of the

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agency provision in cl 14.07 of the debentures, and as to that the only questions which (as I see it) I have to decide are (1) whether the Ratford case applies and (2) whether the Banister case is distinguishable. In my judgment, the answer to both questions is 'Yes'. It is clear from the Ratford case that the Court of Appeal regarded the Banister case as turning on the special fact that 'Following his appointment [the receiver] undoubtedly went into actual possession (see per Lord Widgery CJ (at 243))' (see the Ratford case [1986] BCLC 397 at 415, [1987] QB 357 at 377 per Slade LJ). (Indeed in the Banister case the parties did not dispute that the receiver was properly rated as occupier while he was in possession (see 71 LGR 239 at 243). Furthermore, the decision in the Banister case was founded on Richards v Overseers of Kidderminster, which has now been explained and distinguished in the Ratford case. The Court of Appeal there clearly rejected the wider proposition that can be extracted from the Banister case that a receiver appointed as agent of the company can be entitled to possession merely as a result of his appointment as receiver.

The Banister case, by reason of its special facts, represents a departure from the general principle of rating law to which Slade LJ referred in the Ratford case, namely that the possession of an agent is to be attributed to that of his principal. On the basis of that general principle, entitlement to possession, the touchstone of liability for unoccupied property rates, must likewise be attributed to the principal. Following the Ratford case, therefore, I hold that a receiver is not, by reason only of his appointment as such, liable for unoccupied property rates where he is appointed on terms that he is the agent of the company. The fact that he has power to act 'on his own behalf' (cl 14.04(p)) has no effect, even if such provision has the meaning for which Mr Lewsley contends, until he exercises that power. The council does not suggest that the receivers have in fact taken possession so as to displace the possession of the companies.

There is an alternative approach which leads to the same conclusion. As there cannot in general at least be two persons in different capacities in possession at the same time (Westminster City Council v Haymarket Publishing Ltd), it must follow, as Miss Gloster submitted, that a person is entitled to possession for the purposes of s 65(1) of the 1988 Act only if he is immediately entitled to possession. It is not enough that a person has a right which if exercised would result in his having possession. Accordingly the fact that the receivers could have displaced the possession of the company, or exercised their power under cl 14.04(p) of the debentures, is not enough to make them 'owners' for the purposes of s 65(1) of the 1988 Act.

In the result, on issue (1), I accept Miss Gloster's submissions 1(ii), (iii), 2, 3, 5, and 6. (I have not found it necessary to deal with her submission 1(i) and, as respects her submission 4, in my judgment the Banister case is distinguishable for the reason given above.) I reject Mr Lewsley's submissions.

Issue (2): Are the receivers under an obligation to pay the rates by virtue of cl 14.06(c) of the debentures and s 109(8) of the Law of Property Act 1925?

This submission proceeds on the basis that the receivers have been held not liable as a result of issue (1).

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Clause 14.06(c) of the debentures is set out above. Section 109(8) of the Law of Property Act 1925 provides:

'Subject to the provisions of this Act as to the application of insurance money, the receiver shall apply all money received by him as follows, namely: (i) In discharge of all rents, taxes, rates, and outgoings whatever affecting the mortgaged property . . .'

It is common ground that a failure to observe the provisions of s 109(8) would not give rise to any cause of action at the instance of the council (Liverpool Corp v Hope [1938] 1 All ER 492, [1938] 1 KB 751). It is not suggested that the receivers have not received funds to enable them to discharge the rates.

For the council Mr Lewsley made the following submissions:

1. Under s 35(2) of the 1986 Act, the court is to give such directions as it thinks fit.

2. If the companies are liable to pay the post-receivership rates to the council, then the receivers, faced with a choice between protecting the companies against the potentially serious consequences of non-payment of post-receivership rates and paying an uncovenanted bonus to the bank, could not properly exercise their powers by taking the latter course.

In support of this submission Mr Lewsley relied on Sargent v Customs and Excise Comrs [1995] 2 BCLC 34, [1995] 1 WLR 821. In that case the receiver received value added tax on rent and the question was whether they should pay this value added tax to the Customs and Excise. The receiver was not himself a taxable person under value added tax regulations; the liability remained with the company over whose assets he had been appointed pursuant to specific charges. However, the Court of Appeal held that the discretion which the receiver had by virtue of s 109(8) of the Law of Property Act 1925, could only be exercised in favour of payment:

'Faced with a choice between protecting the company against the potentially serious consequences to it of a failure to account to the commissioners and paying an uncovenanted bonus to the bank, the receiver could not properly exercise his discretion by taking the latter course. However you look at it, the receiver is bound to account for the VAT to the commissioners.' (See [1995] 2 BCLC 34 at 41-42, [1995] 1 WLR 821 at 829 per Nourse LJ, with whom Waite LJ and Sir Tasker Watkins VC agreed.)

The serious consequences included proceedings for winding up, distress and action for the recovery of debt, but there was no criminal sanction.

For the receivers and LTCB, Miss Gloster submitted that the Sargent case was distinguishable on its facts because: (a) the receiver collected money which he was only entitled to receive because value added tax was chargeable; (b) the value added tax was paid to the receiver in the expectation that it would be remitted to the value added tax authorities; (c) receipt of the value added tax would constitute an uncovenanted windfall to the debenture holder.

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Those factors were not present in this case. Indeed, she submitted that there were also additional factors in this case which militated against the receivers exercising their discretion to pay the rates: (i) even in the case of receivers appointed by floating charges, rates were no longer preferential debts; (ii) the council will be entitled to claim the rates from the companies even if the receivers do not pay them; (iii) if the receivers pay the rates, the companies will have to find more funds to pay the banks.

My conclusions on issue (2)

The question which arose in the Sargent case had arisen previously in Re John Willment (Ashford) Ltd [1979] 2 All ER 615, [1980] 1 WLR 73 at a time when non-payment by a receiver of value added tax would result in a criminal offence. Brightman J held that it could not possibly be right for the receiver to exercise his discretion under s 109(8) of the Law of Property Act 1925 in such a way as to cause the company to commit a criminal offence (see [1979] 2 All ER 615 at 618, [1980] 1 WLR 73 at 77-78). The Court of Appeal in the Sargent case saw this decision as based generally on public policy. The public policy consideration in the Sargent case was that identified as (B) in the summary of Miss Gloster's submissions. The Court of Appeal held:

'It cannot possibly be right for the holder of a discretion to exercise it in such a way as to defeat the expectation of the tenants in circumstances such as these. The law does not allow the holder of a discretion to act so dishonourably.' (See [1995] 2 BCLC 34 at 41, [1995] 1 WLR 821 at 829 per Nourse LJ.)

In the present case, the council has provided services of value to the companies and the banks by (for example) maintaining a fire brigade and police force. The rates which the council collects are, however, (so I was told) paid into a national non-domestic rate pool out of which the council receives less than it pays in. There is no evidence which enables me to quantify even in approximate terms the value of the benefit which the companies and the Banks have received from the council.

As against this benefit (of real but unquantified value), no funds have been paid to the receivers by third parties on the faith that the receivers would account for them to the council. Nor has the council been dissuaded by the receivers from exercising its power to petition to wind up the companies and to seek to obtain payment in that way out of other assets (if any) of the companies. On winding up, the agency of the receivers would terminate and the question would arise whether thereafter the receivers would be personally liable for unoccupied property rates (see Re Leigh Estates (UK) Ltd (1994) BCC 292). On the contrary, if the receivers' judgment as to the timing of the sale of the properties was correct, the council's position as an unsecured creditor stood to be improved. There is nothing in the circumstances or the way that the receivers have conducted themselves which would distinguish this case from Airlines Airspares Ltd v Handley Page Ltd, or the other cases where as a result of a decision of a receiver a creditor has suffered loss but been left only with an unsecured claim against the company. The law does not regard the conduct of an

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administrative receiver who does not pay rent which accrues due after his appointment as a pre-receivership lease as per se unfair or unjust as appears from the judgment of the Court of Appeal (Neill, Nicholls and Staughton LJJ) in Re Atlantic Computer Systems plc (No 1) [1991] BCLC 606 at 616, [1992] Ch 505 at 524:

'But even today an administrative receiver is not, in general, personally liable, and hence the statutory indemnity out of the assets of the company does not arise, in respect of contracts adopted by him in the course of managing the company's business, other than contracts of employment. With that one special exception, personal liability is confined, in general, to new contracts made by him. Thus he is not personally liable for the rent payable under an existing lease, or for the hire charges payable under an existing hire-purchase agreement. This is not a surprising conclusion. It does not offend against the basic conceptions of justice or fairness. The rent and hire charges were a liability undertaken by the company at the inception of the lease or hire-purchase agreement. The land or goods are being used by the company even when an administrative receiver is in office. It is to the company that, along with other creditors, the lessor and owner of goods must look for payment.'

The obligation to pay rates is similar: it arises out of the acquisition by the company of property prior to the receivership.

In those circumstances, I do not consider that there is a policy reason which requires the receivers to exercise their discretion under s 109(8) of the Law of Property Act 1925 in favour of the council. I accept Miss Gloster's submission that the Sargent case is distinguishable.

Issue (3): Are the rates payable as an expense of the receivership?

The argument here was that the receivers were bound to pay the rates as an expense of the receivership for the reasons given under issue (2), and that if the receivers did not pay the rates, the council would be subrogated to the receivers' right of indemnity against the proceeds of a sale of the properties for this purpose.

In support of this argument Mr Lewsley cited cases which show that where a liquidator has used property for the purposes of the winding up the rent accruing due after the commencement of the liquidation must be paid as an expense of the liquidation (see eg Re Blazer Fire Lighter Ltd [1895] 1 Ch 402, [1891-4] All ER Rep 1174 and cases concerning court-appointed receivers who are deemed to contract as principals: Re London United Breweries Ltd, Smith v London United Breweries Ltd [1907] 2 Ch 511). Mr Lewsley cited one case concerning receivers appointed under debentures but it was a case in which the receiver had accepted a bill of exchange drawn in his own name (see Re Rylands Glass & Engineering Co Ltd (1904) LT Jo 87). On behalf of the receivers and LTCB Miss Gloster submitted that where (as here) the receiver acts as agent, the position is governed by the following further passage in the judgment of the Court of Appeal in Re Atlantic Computer Systems plc (No 1) [1991] BCLC 606 at 616, [1992] Ch 505 at 524:

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'Nor is a lessor or owner of goods in such a case entitled to be paid his rent or hire instalments as an "expense" of the administrative receivership, even though the administrative receiver has retained and used the land or goods for the purpose of the receivership. The reason is not far to seek. The appointment of an administrative receiver does not trigger a statutory prohibition on the lessor or owner of goods such as that found in s 130 in the case of a winding-up order. If the rent or hire is not paid by the administrative receiver the lessor or owner of the goods is at liberty, as much after the appointment of the administrative receiver as before, to exercise the rights and remedies available to him under his lease or hire-purchase agreement. Faced with the prospect of proceedings, an administrative receiver may choose to pay the rent or hire charges in order to retain the land or goods. But if he decides not to do so, the lessor or owner of goods has his remedies. There is no occasion, assuming that there is jurisdiction, for the court to intervene and order the administrative receiver to pay these outgoings.'

My conclusions on issue (3)

I accept the submission of Miss Gloster that rates accruing due after the appointment of a receiver in respect of property previously acquired by the company are not payable by the receiver as an expense of the receivership. I do not consider that any distinction can be drawn for this purpose between an ongoing liability for rates and an ongoing liability for rent. The position as to the latter is governed by the decision of the Court of Appeal in Re Atlantic Computer Systems plc. In this case, the receivers did not use the properties. Had they done so (as agents of the company), the rates would still have been the liability of the company, and not theirs (Re Atlantic Computer Systems plc).

Issue (4): Should the court direct the receivers to pay the rates because otherwise they would or might incur liability for fraudulent trading?

Section 458 of the Companies Act 1985 provides:

'458.--Punishment for fraudulent trading. If any business of a company is carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, every person who was knowingly a party to the carrying on of the business in that manner is liable to imprisonment or a fine, or both. This applies whether or not the company has been, or is in the course of being, wound up.'

In a winding up there is also a civil remedy under s 213 of the 1986 Act:

'213.--Fraudulent trading. (1) If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, the following has effect.

(2) The court, on the application of the liquidator may declare that any persons who were knowingly parties to the carrying on of the

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business in the manner above-mentioned are to be liable to make such contribution (if any) to the company's assets as the court thinks proper.'

Section 213 is not available in this case on any basis because the companies are not being wound up.

In Re Leyland DAF Ltd (No 2), Re Ferranti International plc [1994] 2 BCLC 760 at 771-772, [1995] 2 AC 394 at 408, Lightman J said with reference to s 213:

'The required intent to defraud is subjective, and not objective, and accordingly it is necessary to show that there was either an intent to defraud or a reckless indifference whether or not the creditors were defrauded (see R v Lockwood [1986] Crim L R 244). But there is a sufficient intent to defraud if credit is obtained at a time when the person knows that there is no good reason for thinking that funds will become available to pay the debt when it becomes due or shortly afterwards. It is unnecessary to establish knowledge that funds will never become available (see R v Grantham [1984] BCLC 270, [1984] QB 675). A receiver carrying on the business of a company is exposed to a claim for fraudulent trading if he allows debts or liabilities to be incurred by the company (of particular relevance in this case) under continuing contracts during the receivership for which he has no personal liability and in respect of which he knows there is no good reason for thinking that they can or will be paid. Honesty requires no less. The responsibility of receivers in respect of such creditors has perhaps been insufficiently regarded in the past. Section 213 of the 1986 Act has scope for applications in situations such as that which arose in Nicoll v Cutts [1985] BCLC 322.'

For the council Mr Lewsley submitted:

1. The receivers on appointment undertook the conduct of that part of the companies' business which was the management of the property. Re Sarflax [1979] 1 All ER 529 at 534-535, [1979] 1 Ch 592 at 598-599 shows that the collection and distribution of assets can constitute the carrying on of business, and this is particularly so where (as here) the companies were property companies whose business was the management of property.

2. The receivers cannot conduct the receivership so as to allow debts and liabilities to be incurred by the companies in respect of which there is no good reason for thinking the companies can pay.

3. The receivers as agents of the companies cannot conduct themselves so as to leave the companies open to the potentially serious consequences of incurring debts and liabilities which there is no good reason for thinking the companies can pay.

4. The receivers protected their position by obtaining from the banks an indemnity that the banks would pay any rates (and other outgoings due). Had they not obtained such an indemnity they would have been acting contrary to s 458 of the Companies Act 1985, and would have incurred a personal liability.

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5. Accordingly it is just that the receivers should be ordered to pay the rates.

For the receivers and LTCB, Miss Gloster submitted:

1. The receivers have not carried on the business of the company with 'intent to defraud creditors' or for 'any other fraudulent purpose'. The receivers did not do anything which caused the liability to the council to be incurred. Indeed the receivers could not stop the liability being incurred, let alone do anything to cause the liability to be incurred.

2. It is not fraudulent trading for the receivers to discharge some of the companies' liabilities but not others (see Re Sarflax Ltd).

3. There is no dishonesty on the part of the receivers in deciding not to pay the council. Whatever decision the receivers make, either LTCB or the council will suffer a loss. There is no dishonesty on the part of the receivers in deciding that loss should fall on the council. Liability under either section requires 'actual dishonesty involving, according to current notions of fair trading amongst commercial men, real moral blame' (see Re Patrick and Lyon Ltd [1933] Ch 786 at 790, [1933] All ER Rep 590 at 593 per Maugham J).

4. The receivers could not pay unsecured liabilities before that due to LTCB.

My conclusions on issue (4)

Fraudulent trading is a serious matter involving dishonesty. The receivers decided to postpone the sale of the properties in the performance of their duties to the banks. As a result of their decision, the companies have become indebted to the council for the rates. I assume that the companies cannot pay the rates and that the receivers at all times knew this. If I am correct in the conclusions on issues (1) to (3), the indebtedness of the companies to the council is unsecured indebtedness. The receivers have no authority to pay unsecured debts.

In my judgment, there was no intent to defraud or fraudulent purpose and therefore no liability under s 458 of the Companies Act 1985. In this case when the liability to pay the rates was incurred, it was an unsecured claim to which only assets of the companies not required to pay the banks were applicable. The receivers' decision to postpone sale did not deprive the council of its right to have recourse against those assets and did not prejudice it. There is no suggestion that the receivers by postponing the sale did not act in the proper performance of their duties or dishonestly took a risk which they were not entitled to take. The situation in this case is different from that in which a person, in pursuance of a pre-receivership contract and in ignorance of the receiver's appointment, supplies goods or services after the receiver's appointment, thereby losing his ability not to perform the contract unless paid by the receiver. I do not consider that the passage from the judgment of Lightman J in Re Leyland DAF Ltd (No 2) which I have set out is directed to the situation with which I am dealing. The situation with which Lightman J was concerned is beyond the scope of this judgment and I express no view on it.

It is not necessary for me to consider whether the other requirements of s 458 are satisfied.

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Conclusion

The order which I propose to make is that the receivers are not liable to pay the rates.

Order that the receivers are not liable to pay the rates.

Carolyn Toulmin Barrister