Creditors’ Rights and Remedies Back to basics on creditors' rights Summary

Back to basics on creditors' rights
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Creditors’ Rights and Remedies
Steven Fennell
Partner, Kennedys Law LLP
Summary
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Options for creditors:
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Rights of unpaid seller
Retention of title
Liens
Distress for rent, execution against goods, walking possession
agreements
• Charging Orders, Third Party Debt Orders
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Effect in different insolvency procedures
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Risks for the office-holder
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Practical steps to take
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Rights of unpaid seller
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Sale of Goods Act 1979 sections 41-43
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An unpaid seller (irrespective of ROT)
• Has a lien over goods still in his possession
• Has the right to stop goods in transit where buyer insolvent
• Has a right of resale
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May be relevant to supply of specialist/rare items needed by
insolvent company
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Not affected by moratorium in administration – moratorium only
applies to goods in the company’s possession
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Retention of Title
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Sale of Goods default position
• Title passes on delivery, not payment
• Need express agreement for title to pass later
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Five familiar questions:
• Is the clause incorporated into the contract?
• Can the goods be identified as coming from the supplier?
• Are the goods still there or have they been incorporated into
something else?
• Is the clause “simple” or “all monies”?
• Does the clause give the supplier the right to repossess/the right to
enter the customer’s premises?
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The risk of going too far
• Attempts to claim rights over proceeds of sale and finished goods
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Retention of Title (2) - Incorporation
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Apparent reduction in number of disputes since last recession
because suppliers obtain buyers’ signed agreement to incorporation
of ROT provisions
Signing a document means that you’re bound by it, even if you
haven’t read it
Other ways to incorporate the ROT provision
• Taking steps to give reasonable notice in a pre-contractual
document
• Incorporation by a course of dealing (but when does a trading
relationship become a course of dealing?)
• Proof that the parties have adopted industry-standard terms (eg
Circle Freight International Ltd v Medeast Gulf Exports Ltd (1988) –
11 invoices referring to Institute of Freight Forwarders standard
terms)
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Special notice for unusual or onerous terms, but can ROT provisions
be seen as unusual or onerous?
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Retention of Title (3) – Who supplied the goods
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Question of fact in any particular case
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Practical issues – serial numbers, bar codes, evidence of supply from
multiple sources etc
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Risk for IP where short trading period followed by MBO –
management likely to have an economic interest in defeating ROT
claims
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Retention of Title (4) – Are the goods still
there?
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Normal rule – goods lose identity when they are incorporated into
another product, unless they can be removed without damage
• Eg leather used to make shoes loses its identity
• A gearbox fitted to a car does not
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Different outcome where goods are mixed by consent
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Possibility of co-ordinated action between suppliers relying on this
case?
• Re CKE Engineering Limited (2007)
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Simple and All Monies clauses
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Simple ROT clause
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All monies ROT clause
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Can you identify goods against unpaid invoices where there is a
simple clause?
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Has the account balance ever reached zero (in all cases)?
• These goods are mine until you pay for them
• These goods are mine until you pay everything you owe me
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Repossession/Right to enter premises/other
provisions
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When does the buyer lose the right to resell?
• Sandhu v Jet Star Retail (2010) High Court and (2011) Court of
Appeal
• Clause should automatically terminate the right to
possession/use/resale
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Rights to repossess and re-enter premises
• Suspended, not terminated, by administration moratorium
• Relevant to receivership and voluntary arrangements
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Going too far
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Three “bolt-on” sub-clauses
• Tracing clause – claiming proceeds of resale
• Mixing clause – claiming manufactured product
• Extended clause – claiming goods in third parties’ hands
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Tracing and mixing clauses normally amount to charges, not ROT (Re
Bond Worth Ltd(1980); Compaq Computers Ltd v Abercorn Group Ltd
(1991))
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Extended clauses normally only work where sub-buyer has bought on
ROT terms and has not paid
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Otherwise sub-buyer benefits from “buyer in possession” rule
(section 9 Factors Act 1889)
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Attempts to create trusts of proceeds of sale won’t work in arms’
length commercial contracts – fiduciary relationships inconsistent
with reality (cf Spectrum Plus and Brumark)
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Issues for office holders
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In administration, ROT goods are classified as hire purchase goods
(Rule 2.66 IR 1986)
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Application needed for court’s permission to sell them (para 72(1),
Sch B1)
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Risk of liability for conversion if no application made (Hachette Ltd v
Borders (UK) Ltd (2009))
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Trading on – limited protection given by s 234
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Business sale – exclusion of ROT stock and indemnity rather than
para 72 application (but don’t rule out a para 72 application)
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In receivership or liquidation, consider Leyland Daf undertakings
(from Lipe v Leyland Daf (1993) – undertaking to pay for goods if
valid ROT established)
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In a CVA or IVA, ROT suppliers’ rights cannot be affected without
consent
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Liens (1)
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A right to retain the possession of goods belonging to another until a
claim is satisfied
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May arise by operation of law or by contract
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General and Particular Liens
• Eg work done by a repairer or carrier
• General liens secure all monies due
• Exist in favour of solicitors, bankers, stockbrokers, insurance
brokers
• Particular liens secure monies due in relation to the goods in the
creditor’s possession
• Tend to apply to repairers
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Contractual liens may
• Create general liens
• Confer power of sale
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Liens (2)
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Liens are a form of security
Registration at Companies House not required
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Administration
• Not on the list of security interests in CA 1986 section 860
• Moratorium applies to enforcement of liens
• Uniserve Ltd v Croxon (2012) – freight forwarder allowed to enforce
its contractual general lien against administrators; relevant that it
would face claims from unpaid sellers who had stopped goods in
transit
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Receivership and liquidation – contractual rights apply
Voluntary arrangements – classed as security, so cannot be affected
without creditor’s consent
Liens on papers, books, records, files (but not documents giving title
to property) are unenforceable against liquidators and
administrators (section 246)
Section 236 will probably allow all office holders to see documents
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Walking possession agreements, execution,
distress etc - Liquidation
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IA 1986 section 183
• Where a creditor has issued execution against the goods or land of
a company or has attached any debt due to it, and the company is
subsequently wound up, he is not entitled to retain the benefit of
the execution or attachment against the liquidator unless he has
completed the execution or attachment before the commencement
of the winding up.
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Distinguish between “distress” and “execution”
• Distress is a self-help remedy
• Execution is the enforcement of a judgment
• Distress for taxes, and probably for rent, is not covered by section
183: Brenner v HMRC (2005)
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Walking possession agreements, execution,
distress etc - Liquidation
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Section 183(2) – if creditor has notice of CVL meeting of creditors,
the relevant date is the date of notice – ie execution must be
completed before notice is received
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Section 183(3) – execution is completed when
• Goods are sold
• Charging order is made
• Land is seized or a receiver is appointed
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Walking possession agreements, execution,
distress etc – Administration and CVA
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Walking possession agreements are security interests Peck v
Craighead (1992) – a CVA case
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Very little case law guidance on the court’s approach in
administrations
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General principle from Atlantic Computers – administrations are not
to be conducted at the cost of proprietary interests of third parties
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Creditor likely to have to be paid to the value of the goods
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Practical points – law on distress is complex and technical, but
generally pro-creditor (eg intention to create walking possession
agreement is normally sufficient, even if there are defects in the
document)
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Charging Orders and Third Party Debt Orders
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Two-stage process
• Interim order – obtained without notice
• Final order – court hears evidence and decides whether to make
order
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A formal insolvency procedure is normally a reason to refuse to make
a final order
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But the court must have evidence of the formal procedure
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Nationwide BS v Wright (2009) – Final order made while bankruptcy
petition was pending, but creditor unaware of it – creditor keeps
benefit of the order
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Hughmans Solicitors v Central Stream Services Limited (2012) –
charging order subject to prior equitable interests
• Roberts Petroleum Ltd v Bernard Kenny Ltd (1982)
• C&W Berry Ltd v Armstrong Moakes (2007)
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Don’t forget rules on antecedent transactions,
challenges to judgment debts etc
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Section 239(7) IA 1986
• The fact that something has been done in pursuance of the order
of a court does not, without more, prevent the doing or suffering
of that thing from constituting the giving of a preference.
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Re Menastar Finance Limited (2002) and International Brands USA
Ltd v Goldstein – power to look behind a judgment debt where there
is collusion/fraud/impropriety
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Questions?
Steven Fennell, Kennedys Law LLP
[email protected]
0114 253 2042
Kennedys Law LLP
Questions
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