Rebecca Farrell assists landlord set aside rejection of proof of debt, raising interesting points on damages and costs

14th August 2024

3PB insolvency, commercial and property litigation barrister Rebecca Farrell assists landlord to set aside liquidator’s decision to reject proof of debt raising interesting points including (a) the appropriate measure of damages for a breach of covenant claim and (b) whether a landlord can seek its costs of proving for a debt within the proof of debt in the circumstances.

In Brown v Ulrick (as the liquidator of S.A.L. Holdings Ltd) S.A.L. Holdings Ltd (in members’ voluntary liquidation)) [2024] EWHC 2041 (Ch), the Landlord applied to have a liquidator’s decision set aside under Insolvency Rule 14.8. In slightly unusual circumstances, the Tenant was a company (“the Tenant”) and the lease was entered into to provide accommodation for a director (“the Lease”). Before the Lease terminated (and unbeknownst to the Landlord) the Tenant went into liquidation. When the lease ended by effluxion of time and the Landlord took possession, he discovered that the property had been significantly altered in breach of covenants not to alter the property without consent and to keep the garden in the same condition and style as at the commencement of the tenancy.

Since the Tenant was in liquidation, the Landlord notified the liquidator of the relevant alterations to the property, which included removing an established garden and large patio. Ultimately, after considerable correspondence between the parties, the Landlord submitted a second proof of debt based on a surveyor’s report in the sum of £277,397 (which included rectification works). The Landlord’s second proof of debt was rejected for various reasons including:

• insufficient evidence of the condition of the property at the start of the tenancy;
• insufficient evidence establishing the Tenant was responsible for any breaches; and
• challenges to the losses included in the proof of debt, including that certain costs were unreasonably high in proportion to the value of the property.

The court set aside the liquidator’s decision to reject the second proof of debt and approved over 70% of the sums in the proof claimed, with costs recoverable under the lease to be assessed at a further hearing. In its decision, the court raised three interesting points concerning:

1. the burden of proof in the application – the court analysed how to approach this Rule 14.8 application;
2. the appropriate measure of loss - the court accepted that the Landlord was entitled to the cost of restoring the property to the condition that it was in when it was first let (expectation loss), rather than only the diminution in the value of the property consequent on the alternations (reliance loss); and
3. costs - the court also found that it was entitled to award the Landlord the costs of proving for the debt under the lease, where Insolvency Rule 14.5(a) would otherwise require the creditor to bear the costs of proving for its debt.

If you wish to read Rebecca's article for LexisNexis about the case, please click here. A copy of the full judgement can be read here.

Rebecca was instructed by Paul Grundy of law firm HCR Legal LLP.