Received wisdom
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When a customer goes into receivership should you continue to trade with the receiver? If the business is salvaged, it could be your best bet for getting paid.
Ttie recent events at Leyland Daf and he subsequent case vs Automotive Products Limited, have highlighted the issue of creditors continuing to supply or trade with Receivers.
On appointment the receivers will view all existing debts and liabilities of the insolvent company ("pre-receivership debts") as unsecured liabilities. The receivers have the power, in very limited circumstances, to pay some pre-receivership debts but will almost certainly refuse to do so. Creditors owed a pre-receivership debt are then sometimes requested to continue supplying or to trade with the company in receivership.
TITLE CLAIM
In the case of Leyland Daf, Automotive Products (AP) was owed £759,000 at the time of the receiver's appointment. AP advanced a retention of title claim and declined to continue to supply goods to the receivers, unless the pre-receivership debt of /759,000 was paid by the receivers. The receivers were unwilling to pay this pre-receivership debt. As the absence of continued supplies from AP threatened continued production at Leyland Daf the receivers applied to the court for an order requiring AP to continue to supply. The receivers accepted that, under common law, a seller of goods could not be forced in the absence of payment to continue deliveries to an insolvent purchaser, in circumstances where an outstanding debt was already due from that customer. However, the receivers claimed that AP's refusal to deliver, unless the pre-receivership debt was paid, was in breach of Article 86 of the Treaty of Rome. The court and later, the Court of Appeal, rejected the receivers' claim.
A creditor is ofte.n faced with this dilemma. A refusal to make further supplies or deliveries leaves them as an unsecured creditor for its pre-receivership debt—hoping fora dividend in any liquidation. The creditor could decide the best chance of minimising his loss is to generate some profit from continuing to supply or trade with the receiver in the short term.
The creditor could take the view that its long-term interests are best served by supplying or trading with the receivers, as there is a reasonable prospect of the business of the insolvent company being salvaged and sold on to a third party. The rationale is that future business with that third party is likely to be the best chance of minimising an existing loss. This dilemma for the creditor can be further complicated if he is seeking to recover or reduce his prereceivership debt by claiming retention of title or lien.
Liens (CM 1_,ega! Bulletin 22-28 April) can be general or particular. For example, there may be a contractual lien giving the creditor a power to sell the goods elsewhere, or the creditor may have to rely upon common law liens. The strength of the creditor's position is determined by the terms and conditions of the existing contract, as at date of the receiver's appointment, and the extent to which the creditor protected their position when he negotiated that contract.
Most but not all receivers are, to use their correct title, administrative receivers and their appointment appears to be the death knell for the company over which they are appointed. However, the effect of their appointment is simply to place the company into the hands of, and under the management of the receivers, as with Leyland Daf. The company remains in existence and its business and trade can continue.
Before, or at the outset of their appointment, the receivers have to decide whether to continue the trade or business of the company. That decision will be influenced by estimated realisations of the assets. Receivers may attempt to continue to trade on in order to sell the business as a going concern— such a! being anticipated to realise more than of assets on a break-up basis.
Until liquidation, the receiver acts a for the insolvent company. He is free tc into new contracts and has a consider; discretion as to whether to continue, a away from, contracts in existence at ti of his appointment. The Insolvency A! stipulates that if the receiver enters int contracts then he will be personally ha such contracts unless he seeks, and oh the other party's agreement excluding personal liability.
Consequently a receiver can face a daunting task if he wishes to continue business of the insolvent company. WI imposing personal liability upon the receivers, unless otherwise agreed, the Insolvency Act does give the receiver ; statutory indemnity from the assets oi insolvent company.
Trading with the receiver is down tc negotiation. [ía contract exists betwet creditor and the insolvent company at time of the receiver's appointment, it c advisable to continue to trade under it But it could be in the creditor's interest terminate that contract (if entitled to d normally a contract will give a right tc terminate in the event of the other par insolvency), and negotiate fresh terms conditions of trading with the receiver case is different and has to be viewed c individual facts.
Four points should be borne in minc trading with receivers: • All orders and contracts made with creditor should carry the signature of receivers or their authorised represent • The receivers will almost certainly! the creditor's agreement that no set-of be applied between post-receivership contracts and pre-receivership debts.
• When negotiating with the receiver! creditors should pay particular attenti payment provisions. The receivers wiI normally exclude their personal I iabili under the contract, and in such cases payment to the creditor should be mac expense of the receivership.
• Difficulties are sometimes experieru creditors in circumstances where they advancing Retention of Title or lien cl; and, simultaneously, negotiating conti trading with the very people against v those claims are being advanced. Care to be taken to ensure that the terms of continued trading with the Receivers c prejudice or affect those claims.
C by Julian Horrocks Julian Horrocks is head of the Ins olven at commercial law Jirrn Eversheds Hep &Chadwick.