It can be difficult for business owners to know what to do when an important customer is in trouble
The media regularly reports on businesses in difficulty and ones that are about to go, or which have already gone, into administration. Indeed, most recently, BDN reported that the Completely Motoring Group was looking for a buyer after falling into administration in October last year. At the same time it was also reported that administrators had taken control of Pidcock Motorcycles. Both instances will have left some out of pocket.
What is the purpose of administration? What does an administrator do? Most importantly, how should suppliers deal with an administrator? And what does administration mean for a company’s creditors?
A company that is under threat of insolvency can initiate the process of administration. This enables the company to be rescued or reorganised, or more likely its assets sold, under the protection of a statutory moratorium. Most of the time, administration results in a better outcome for a company’s creditors than it going insolvent or being wound up.
What an administrator does
In overview, an administrator takes custody and control of all of the property to which the company is entitled, and sells or disposes of it, or otherwise takes any steps necessary to realise – turn into cash – these assets for its creditors.
This can include tangible property, such as stock, and intangible assets, such as trademarks and book debts owned by the company.
Once these assets have been realised so far as possible, the administrator must distribute the cash proceeds in order of priority to the different categories of creditors of the company.
Notably, an administrator can look back at historic transactions and scrutinise whether or not payments made by the company were above board in light of the company’s current financial position. In doing so, the administrator may identify transactions at an undervalue – an unreasonably low value, preferential payments, extortionate credit transactions and transactions defrauding creditors, and can apply to the court for an order to have such transactions set aside.
In exercising its powers, the administrator can be expected to take advantage of the statutory moratorium, which applies when a company goes into administration.
Moratorium
When a company is in administration, a full moratorium on insolvency proceedings and other legal processes applies. This is effectively a freeze on a company’s creditors taking action against the company and allows the administrator to get on with restoring the company to profitability – without having to deal continuously with the attempts of secured (and often, disgruntled) competing creditors trying to enforce their rights. The moratorium is sufficiently broad to give the company breathing space so that it has the best possible chance of being rescued or having its assets realised for the benefit of its creditors as a whole.
The moratorium suspends a number of creditor rights, namely, the ability of creditors to commence insolvency proceedings against the company, the right of a secured creditor to enforce security over the company’s assets; the right of a creditor to repossess assets in the company’s possession including those subject to retention of title claims; and a landlord’s right to forfeit the lease of property in which the company is a tenant.
Advice for suppliers dealing with an administrator
As noted earlier, the administrator takes custody and control of all of the company’s property. This property must be sold so as to realise as much value from the assets as possible. However, there are exceptions.
In essence, assets which are subject to a valid retention of title (ROT) claim, where there is a contract for the supply of goods to the company which stipulates that title to the goods does not pass from the supplier to the company until the supplier has been paid in full, or property held by the company on trust for a third party, will not constitute the company’s property for this purpose. They cannot be sold to realise cash to be distributed to the company’s creditors.
Most ROT clauses will include a right for the supplier to repossess the supplied goods in the event of non-payment. However, once a company is under the administration moratorium – including the interim moratorium period immediately following an administrator’s appointment – no action can be taken to recover supplied goods without the permission of the administrator or the court, thus severely limiting the options available to a supplier. Furthermore, in some circumstances, the court may even allow the administrator to sell or otherwise dispose of assets that are subject to a retention of title clause if the court thinks it will support the rescue of the company as a going concern.
In determining what property the company owns or is entitled to, the administrator should make enquiries of the company’s directors to determine whether or not such assets are subject to a ROT clause, as well as looking at any underlying contractual documentation between the company and its suppliers.
It is important to understand that only where these enquiries do not reveal any ROT clauses, and the administrator has no reason to suspect that an ROT clause might exist, the administrator can assume that the goods are the company’s property and so can be disposed of as they see fit.
However, if having made the enquiries, the administrator becomes aware of a possible ROT claim, they should not sell the goods before determining whether or not the claim is valid. If the supplied goods are subject to a valid ROT claim and are sold, the administrator could be liable for damages to the supplier.
And where the administrator becomes aware of a ROT clause after the supplied goods have been sold, then, once totally satisfied that the ROT claim is valid, they should pass the net proceeds from the sale of the supplied goods to the supplier.
It is critical that a supplier that believes that they have a valid ROT claim over certain assets of the company establish their title to the supplied goods in order to gain possession of the goods.
The administrator may also seek the views of the company’s directors as to whether the supplier has a valid claim to the supplied goods, including confirmation of when the supplier informed the company of the ROT clause, whether the directors accepted the clause and the date the supplied goods were received.
Similarly, the administrator may require the supplier to provide conclusive evidence of having provided the supplied goods to the company, for example, invoices, delivery notes and transport records.
Administrator’s duties to all creditors
Lastly, it needs to be noted that the administrator owes duties to all of the company’s creditors, not to a single creditor. Furthermore, regardless of who has appointed them, the administrator is an officer of the court and acts as an agent for the company. This means that they do not assume personal liability for any contracts they enter into while acting as administrators; most contracts they do enter will include wording which specifically excludes any personal liability of the administrators.
Summary
Administration is rarely easy for companies involved in the process as well as their suppliers. But properly drafted ROT clauses which are correctly incorporated into contracts with customers will allow suppliers to pursue the recovery of the goods which they have delivered.
ROT clauses aside, suppliers caught up in an administration process need to take expert advice.