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Joint Committee on Legislation debate -
Friday, 29 Mar 1985

SECTION 49.

Question proposed: "That section 49 stand part of the Bill."

Section 49 is a new provision which enacts that a covenant which provides for forfeiture of a lease on the bankruptcy of the lessee or a clause in a hire purchase agreement purporting to terminate the agreement on the bankruptcy of the hirer will be void as against the Official Assignee. The committee recommended this section because in their view the effect of the enforcement of such covenants or clauses was to give preference to the lessor or the hirer who acquires the property to the detriment of the bankrupt's creditors. Furthermore they considered these covenants or clauses to be undesirable because the consequences of adjudication arise by operation of law and not from any act of the bankrupt. The bankruptcy of a party to a contract does not automatically discharge that contract. The Official Assignee has the right to decide whether he will adopt the contract or disclaim it according to his opinion as to its potential value from a creditors point of view.

Section 56 deals with disclaimer of onerous property. Where the Official Assignee exercises his right to call for the performance of a contract originally made by the bankrupt he must undertake the bankrupt's part of the contract. For example, by paying the outstanding price of goods sold to the bankrupt. The Official Assignee stands in the shoes of the bankrupt in relation to the lessor or the hirer and he is subject to the same rights and liabilities as either of them would have been. For example, the Official Assignee is still liable for rent and is bound by any covenants in the lease.

My opposition to this has had very serious consequences elsewhere and it is considered to be of vital importance in Irish law in future. If you oppose section 49 you are liable to be severely disciplined——

Conduct unbecoming.

Well, it is nearly conduct unbecoming.

One of the 20th century forty-niners.

I oppose the section because I could not draft an adequate amendment. I would like to pursue with the Minister a little further the question of what rights and duties continue, or does the Official Assignee take over in a situation where the lease is not forfeited. What I have in mind is a situation where somebody is adjudicated bankrupt and the property, including the benefit of the lease, vests in the Official Assignee. Is the Official Assignee thereby under an obligation forthwith to pay the continuing rent?

Subject to the disclaimer provisions he is obliged to pay the rent.

As you will appreciate, very often these leases have the payment of rent as a covenant under the lease which means that if you do not pay it you can actually terminate the relationship between the landlord and the tenant. Under the operation of what law is the Official Assignee under that obligation? I would have thought he was not under that obligation. If he is, I am very pleased to hear it and I have no objection to the inclusion of this section.

With respect to Senator O'Leary, his remarks are more appropriate to section 56 than section 49.

No, they are not. Section 56 deals with the disclaimer of onerous property and I understand that. Any onerous property can be disclaimed. What we are now considering is whether or not it should be open to the parties to agree that in the event of bankruptcy a lease should be terminated. I am speculating that if we are removing that option from them what will take its place automatically. That is what I am trying to find out. I want to make sure that it will not be forfeited. In respect of existing leases where they have attempted to do this, and which now will be void, is the Minister happy that the obligations under the lease will continue and must be immediately fulfilled by the Official Assignee?

Could I add a question? Take the situation where prior to the bankruptcy petition the lessee had incurred eight, nine or ten months arrears in payment of rent and those arrears existed at the date when he was adjudicated a bankrupt, what is the position? Are those arrears going to be paid out of the assets? How does it operate in that context? The arrears are there, the lessor has not brought proceedings to take possession or has not completed doing so and the Official Assignee says he wants to retain the lease. For him to do that would he have to pay off the arrears in full? How will that operate? In the timescale for the lessor could he be held up for an indefinite period of time neither getting rent, not knowing what proportion of the arrears he is going to get nor having the freedom to relet his premises?

I should like to put on record some further information of a general nature that I have. The property of a bankrupt vests in the Official Assignee subject to any rights or liabilities attaching to it. In the case of leasehold property the Official Assignee stands in the bankrupt's shoes and is therefore subject to whatever obligations attach to it, such as to pay rent and to comply with covenants to repair, etc. The effect of section 49 will be that a forfeiture clause in a lease which would otherwise operate to give the Official Assignee a year in which to decide what to do with the lease will no longer operate. Therefore, the lease will vest in the Official Assignee subject to whatever conditions attach to it.

To protect the Official Assignee from personal liability under a bankrupt's lease the doctrine of disclaimer was created. This is now provided for in section 56 of the Bill, to which Deputy Taylor referred. It displaces the old doctrine of election whereby the Official Assignee might become liable if he had elected to take the property and it brings disclaimer in bankruptcy and company law into line. The disclaimer provisions will be dealt with when we come to section 56 and we can discuss them in detail at that point. It is not necessary to do so here.

Briefly, section 56 contains provisions for the release of the Official Assignee personally and also for the alleviation of the position of a landlord or other person who by virtue of the disclaimer may be deprived of their rights in contract against the bankrupt. The section imposes strict conditions on the Official Assignee and mitigates any hardship which its operation might cause to the other party to the lease, or to other persons having an interest.

The effect of section 49 will not permit the Official Assignee to avoid obligations which would otherwise have belonged to the bankrupt had he not been adjudicated. Whatever benefits the bankrupt would have enjoyed will pass to the Official Assignee. Whatever burdens fall on the bankrupt will now fall on the Official Assignee. In regard to a lease, the Official Assignee will be able to decide whether to adopt it or dispose of it for the benefit of the creditors or to disclaim it if it is burdened with onerous covenants. He will not be able to do nothing. The new section places a time limit on the exercise of the right to disclaim. It also gives the court much wider powers as to the imposition of conditions on granting leave to disclaim, and disentitles the Official Assignee from disclaiming in circumstances where he is required to decide whether he will disclaim or not and he neglects to do so.

The question of the position of a hirer under the Hire Purchase Acts is that the effects of section 49 will be that his interest will vest in the Official Assignee who will be subject to whatever obligations arise under the contract if it is a hire purchase agreement. The owner will retain his rights under the contract in the event of non-performance. If the Official Assignee disclaims, the respective rights of the parties will be governed by section 56 of the Bill. That is the general position.

With regard to these two provisions, the committee felt that forfeiture clauses in leases, and terms which terminated hire purchase agreements on the bankruptcy of the lessee or the hirer, were inequitable vis-�-vis other creditors. The effect of the section, as mentioned already, is that this is another example of the property which will vest in the Official Assignee subject to equities. Leasehold property creates complex situations. It is dealt with under section 56 in more detail because the committee decided to abolish the doctrine of election whereby the Official Assignee could elect to take or not to take leasehold property. They pointed out in the report that the fact that the property will now vest automatically in the official assignee on the date of adjudication made the election and disclaimer doctrines incompatible. Some would argue that they are incompatible under the present law because when 19th century legislation in another jurisdiction was updated the disclaimer provisions were intended to replace the doctrine of election.

In the cases mentioned by the members there would be no question of the owner or lessor being prejudiced by the disclaimer provisions because as we will see when we come to section 56 the disclaimer is subject to a long list of conditions, the most important one being that court consent must be obtained. The court can decide whether or not in a particular case the lessor is entitled to compensation for non-payment of rent. For example, it will not interfere with the remedies which the lessor might have in the case of other covenants. The ordinary law of landlord and tenant would still apply.

What about the rent?

That is completely different. I could not accept or agree to Senator O'Leary's amendment to this clause. I think the clause is right and proper. If I had any complaint with it, it is that I think it does not go far enough in the sense that many of the leases have clauses providing for forfeiture not only on the bankruptcy of the lessee but they provide for forfeiture in the event of the commission by the lessee of an act of bankruptcy. Even only at the act of bankruptcy situation many of them provide for forfeiture. If that was to be effected, if a valuable lease which was held by a person who is to be adjudicated bankrupt was forfeited after an act of bankruptcy had been committed and before he was adjudicated bankrupt, it would be a very inequitable result for the creditors and would have the effect of giving a major preference to the particular creditor who might not even be a creditor at all, or the person who happened to be the owner of that land and give him a major substantial benefit for no reason whatsoever. The section is perfectly justified. I would ask the Minister to consider expanding it to provide that a clause providing for forfeiture on commission of an act of bankruptcy might also be considered void.

Again I probably did not explain myself properly or else Deputy Taylor did not listen to me. I am not objecting to section 49 (1) per se, I am trying to pursue——

I thought the Senator was opposing it.

I am, but as I explained earlier it was only because I could not draft a suitable amendment.

How can the Senator oppose it while not objecting to it?

Because I think it must be expanded. It must be either that the effect of it will be defective in law, that does not mean that I do not agree with what the Minister is trying to do. I agree with the Minister. I agree that leases should not be forfeited. I am trying to pursue what the effect of the amendment to the law as proposed would be. I will give the Minister two examples. He might tell me what the legal position in both those cases would be.

In one case the landlord is owed £5,000 in rent at the date of the vesting of the property in the Official Assignee — in both of these cases the payment of the rent is a covenant under the lease — when the Official Assignee gets the property is he under a continuing obligation to pay that rent and if he fails to pay that rent owed at the exact date and time of his appointment can the owner of the lease, the landlord, take whatever steps are necessary and are provided under the lease to declare the contract at an end, by ejectment proceedings or whatever else is provided for under the lease? That is one problem where there is an existing debt at that stage. The second problem is, what is the position where there was no rent owed at the date of the appointment, and the Official Assignee is taking the benefit of his 12 months to decide whether or not to disclaim? During that period of 12 months is he under a continuing obligation to pay the rent from the date he took over? If he fails to pay that rent can ejectment proceedings be successfully issued during that period of time?

I will take the second question first as it is the more complex one. I understand that the disclaimer provisions are so drafted as to protect the rights, interests and liabilities of the bankrupt and his property from the onerous obligations attaching to the lease, and discharges the Official Assignee from personal liability in respect of the property, disclaimed as from the date of adjudication, for example, in the case the Senator has given, the Official Assignee would not be liable for rent from the date of adjudication.

Would he be entitled to pay rent from the date of his appointment?

On a point of order, the questions raised by Senator O'Leary are very interesting questions and relevant and may well, in my submission, fall to be considered under this Bill, but with all due respect they do not arise under this section which is a specific direct point dealing with a clause in the lease which contains the provision for forfeiture on bankruptcy and whether that should be deemed to be void or not. The question of rent outstanding and the landlord's rights in that situation more appropriately fall to be dealth with under section 56.

With respect, Deputy Taylor does not know what he is talking about because he is not listening to me at all. I am not saying anything about disclaiming. I am not talking about a situation where disclaiming is ever considered. I am talking about a situation where the Official Assignee has no intention of disclaiming it because it is a valuable leasehold. I am talking about a situation where, because of the provision of section 49, the relationship cannot be terminated. I want to know whether, during the period that the Official Assignee is arranging for the sale of the lease, he remains under a continuing obligation to pay the rent. It has nothing to do with a disclaimer. Does he, from the date he takes over, remain under a continuing obligation to pay rent? Yes or no?

I do not mind if we discuss this now but it is not the point of section 49 but if the chairman feels it is appropriate to discuss it now I do not mind.

I think it is. Look at it from two perspectives. As the law stands the landlord entering into a lease can do so by inserting a forfeiture clause having the security of knowledge that in the event of someone being declared bankrupt the lease will revert to the landlord. The landlord then controls the situation in the context of looking for new tenancy and controls the situation in the context of what rent he can look for and obtain from the premises. What we are saying here is that a landlord who enters into a new lease cannot control the situation if his tenant goes bankrupt and cannot automatically create a situation where the property reverts to him. In discussing whether this is a desirable change or not this is one of the elements in it. I agree with one of the points Deputy Taylor made, that it would be inequitable to creditors — and Senator O'Leary agrees with this view as well — if someone had a valuable lease and because of this sort of clause, it automatically reverted to the landlord and deprived the Official Assignee of a valuable asset that could create funds. The principle of trying to provide protection for creditors is a desirable one. There is another principle which is to try to ensure protection for the person who owns the property and who has been unfortunate enough to let it to someone who has been declared bankrupt. He is entitled to know, firstly, what his position is if rental arrears have accrued before the property falls into the lap of the Official Assignee — is the Official Assignee liable for these or do the rental arrears have priority prior to the Official Assignee taking on the property or do they simply fall into the rest of the debts incurred by the bankrupt? After the Official Assignee has taken it over, leaving aside the whole issue of disclaimer, if the Official Assignee retains the property he may decide he is going to sell the lease and realise an asset. It may take the Official Assignee six months, 12 months, two years to sell the property and realise the asset. The landlord is entitled to know if he is entitled to his rent. If we created a situation where the landlord could not forfeit these leases and yet could be in a situation of limbo where he is getting no rent either, we have a problem then. I am presuming the landlord can bring ordinary ejectment proceedings against the Official Assignee if he is not abiding by the convenant to pay rent, or can he not? Could a landlord be held hostage for three or four years to the fortunes of the creditors because the Official Assignee does not disclaim, wants to sell a lease and cannot get the money he thinks the lease is worth? That is it in essence; that is fundamental to the desirability or otherwise of this clause from the point of view of landlords.

We have a problem. Senator O'Leary is opposed to this section but he is not really opposed to it.

No, I am opposed to the section as drafted. I said at the very start — and it is well that I said it — that I would have liked to be able to draft an amendment to it but I did not feel competent enough to do so. All I want is to extract from the Minister information in regard to the consequences of passing section 49.

I am quite happy to do that. When we operate here in a small group it helps me quite frequently if an amendment is put down or even if a section is opposed. It helps us to clarify things in a formal structure especially in the absence of the official Opposition, if I may be permitted to say that. It formalises the thing. The points raised by members are quite valid. It is quite a complex area. The difficulty arises because of the overlap between this section and the section on disclaimer. As I understand it, the law at present is that if a man goes bankrupt and his property includes leases subject to rents, the Official Assignee can elect either to take the lease or not to take it. In other words, it does not vest at all. If he elects not to take the lease, the lessor or the landlord can, as one of the members mentioned, take ejectment proceedings. If there is a forfeiture clause he can operate the forfeiture clause. If I may confine the discussion for the moment to this particular section, it simply means that under the present law regarding forfeiture and bankruptcy, as a result of the interplay of the Conveyancing Acts of 1881 and 1892, the trustee in a bankruptcy has a year in which to sell a lease. That is in a situation where a forfeiture clause is accepted in bankruptcy law.

He has to pay the rent for that year?

Under the present procedure he is asked if he is going to elect or not and if he ignores it, the lessor can then bring the appropriate proceedings to recover the property. The end result of this section is simply to state that a forfeiture clause in a lease will not determine the lease there and then. It will not be valid as against the Official Assignee. It simply means that the lease will vest in him. Under the section regarding the disclaimer — which is a very complex and detailed section — he certainly will not be liable for preadjudication rent. Whether he would be liable for rent between the date of adjudication and the disclaimer varies in the sense that if, for example, he went into occupation he would be liable. If he does not pay rent and the landlord is thereby prejudiced, the right to disclaim can be given by the court to the Official Assignee subject to conditions, one of which is the payment of compensation to the landlord. I do not know whether that answers the problems raised. In theory he would be liable for the rent because the property has vested in him subject to the equities, but the disclaimer provisions free him from personal liability.

That is the point I am trying to establish. If we could go back to the earlier point where there is a pre-adjudication liability for rent. Quite obviously the Official Assignee would be under no legal obligation to pay that forthwith. I accept that. If he decided to sell on the lease, would it be in order for the landlord to refuse to consent unless all rent arrears are paid including the arrears which arose prior to the adjudication? I do not know the answer to the question. I am not even sure what the answer to the question should be. I am merely trying to find out what the answer is. What will happen on the ground is that a fellow who goes bankrupt will owe rent. Unless it is a very nominal rent, he will not pay his rent. The adjudication will then take place. If it is a valuable lease, the Official Assignee will not decide to disclaim it under section 56. He will sell it in 12 months time. The problem will then arise. He will have to get consent to the transfer and the landlord will give his consent provided the rent is paid from the day the lease was taken over after adjudication and that the arrears prior to that date are paid also. That is what will happen on the ground. All I want to know is if he is in a position to do that or not. My feeling is that he should be under an obligation to do it from the day he took possession of the property and not under an obligation in repsect of the time prior to that. I do not think the law will operate like that.

Could I throw a spanner into the works by adding just one more question on that? As the law stands there is a standard provision in the Landlord and Tenant Act that to assign an interest you require the landlord's consent which shall not be unreasonably withheld. I think that is the phraseology of it. I could see a court deciding that a landlord is not being unreasonable in withholding a consent if he does not get the pre-bankruptcy adjudication arrears. It was suggested that the Official Assignee might be liable for rent in certain circumstances after the adjudication. I would like to have that clarified more. I would like to know the circumstances in which he would be liable. If the Official Assignee is not liable for pre-adjudication arrears of rent, what is the position of the landlord who has brought ordinary ejectment proceedings for four, five or six months arrears of rent and, before the proceedings come to court, someone is adjudicated bankrupt? If they had not got it with the bankruptcy adjudication first he may very well have succeeded in getting possession of his property. That position will have to be specifically clarified. At present you can say that a prudent landlord would have a forfeiture clause which would normally solve this problem. But what would happen in the case of the landlord who has brought ejectment proceedings, there is six months rent due and before the court hearing there is a bankruptcy adjudication? Has the landlord anybody against whom he can bring ejectment proceedings? Apparently, the Official Assignee is not going to be liable for the arrears and, possibly, the Official Assignee can even sell the lease without having to pay back arrears subject to what we are saying about the landlord's consent.

The only point which Senator O'Leary and I are trying to make arises from the policy decision in section 49, which is desirable, to stop valuable leases being sold and thereby removing an asset that could assist creditors. There are other policy decisions that have to be made as to the direct impact of that on landlords who, after all, own the property. They have some entitlement to some reimbursement for someone else having possession of it, be it either a recalcitrant tenant who is not paying rent or the Official Assignee who is sitting on it trying to make a profit out of it for the benefit of creditors.

Regarding the last point made by Deputy Shatter, we will be dealing later with provisions in the Act which are no different from the present law basically regarding the power of a landlord to distrain for rent. In the event of proceedings being in train at the time of the adjudication a bankruptcy court would no doubt be informed of it. The court would decide there and then whether these proceedings should continue.

With regard to the difficulties mentioned, there is no doubt that even under the existing bankruptcy law, as mentioned already, the Official Assignee can rely on the doctrine of election. It would appear that he can do exactly as has been outlined. He can elect not to take the property, which means that that leasehold property does not vest in him at all. The landlord's remedy, as I understand it, therefore, leaving aside the forfeiture aspect, would be to take ejectment proceedings against the bankrupt. In the Bill the whole doctrine of election, if I may use the word, is subsumed in the disclaimer sections. But, as one member mentioned, the disclaimer provisions actually are the area where a party to a lease or a hire purchase agreement would or could obtain compensation as a result of the disclaimer. If I may just anticipate section 56, there is also provision in this section to force the Official Assignee to decide whether to adopt a contract. It is a purpose of section 49 simply to abolish the right of forfeiture as against the Official Assignee. The committee seemed to be thinking on the lines that at least he should be given an opportunity once the adjudication started to decide whether or not he adopts a lease in which case the estate will be liable. The doctrine of disclaimer gives him an opportunity to disclaim the lease.

Let us forget the question of disclaimer. There is an agreement between a landlord and a tenant that the latter will pay £10 every Friday. On Monday morning or on a particular Friday he is adjudicated a bankrupt. The property thereafter vests back at that date in the Official Assignee. I want a simple answer to a simple question: the following Friday when the landlord goes to the Official Assignee and says: "You now own the lease until such time as you might want to disclaim it; that is your own business. I want my £10." Is there an obligation on the Official Assignee to give him his £10 on the following Friday before he has decided what to do with the property? I cannot explain it any simpler than that.

I would think he has an obligation to give it to him. He is liable for it unless and until he disclaims it. I can only repeat what I said before, that it arises under section 56, not under this section.

The points have been very fully and well made. We are not going to get the matter resolved just now. Perhaps the Minister and his officials might look at them between now and Report Stage. We are not going to get any further with the points made by Senator O'Leary.

There are two further points I want to comment on. First, I want to remind the Minister about my point in relation to whether this should be extended by including an act of bankruptcy forfeiture for an act of bankruptcy. Secondly, I want to know — I do not know if the Minister has answers offhand — how does this compare with the liquidation situation of a company? Is there anything in the Companies Act which says that forfeiture clauses in leases are void against the liquidator, from a point of view of achieving parity in the two situations?

With regard to the last point, section 56 which I said already, brings the disclaimer clause in bankruptcy into line with company law. I presume that covers the point. I understand the point made by Senator O'Leary. My own view is that the Official Assignee would be liable if he elects. I will clarify the position between now and Report Stage.

I am very happy——

You brought it down to the practical situation of what happens on the ground. The practicality of what happens on the ground is that the Official Assignee would make up his mind very quickly whether it was worth his while holding on or disclaiming. He might not even get to the following Friday by the time he had made up his mind.

The practicality, with respect, is otherwise.

The trouble is that when receivers or liquidators are appointed they take a long time to make up their minds because they are trying to juggle so many balls together at the same time.

I understand the net point and we will try to clarify it.

Would the Minister also try to clarify the other point about arrears of rent that arise before the date of adjudication? We are still not totally sure about that.

My policy decision on it would be that the Assignee should not be personally liable. We will establish between now and Report Stage whether or not that is what we are writing into the Bill.

Is section 49 agreed, with Senator O'Leary's opposition?

Question put and agreed to.
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