This article, written by Michael Frisby and Oliver Lawson, first featured in the 5 February 2010 issue of the New Law Journal.
In the current economic environment, more clients are experiencing customer payment default. When a debtor company fails to pay or becomes insolvent, questions often arise such as: "What can we do?"; “They must have known they could not pay”; or "This happened before with their old company. Can they get away with this?"
Clients want to know what actions they can take themselves in order to mitigate losses, rather than simply claiming as an unsecured creditor in a liquidation.
The options available will depend on the circumstances of the case but it may be possible to recover goods and in certain circumstances directors of the debtor company may be personally liable for the debt.
“What can we do?”
Where goods have been supplied under a contract containing a retention of title (“RoT”) clause, an unpaid seller can recover goods in the event of non - payment.
It is essential that you act quickly in pursuing an RoT claim. A written demand should be made to the debtor (or usually the administrator, liquidator or receiver of the debtor) notifying them that you are exercising your right to recover your goods and demanding that they be made available for collection.
You should also make immediate arrangements to inspect the goods and attend to take an inventory of all remaining goods over which claim is made, noting details of the goods and any identifying marks showing they are the goods you supplied.
In our experience, arguments can arise over issues such as:
- Proving that the RoT clause was in fact a term of the contract. Including an RoT clause in your terms and conditions will not be enough if the contract did not actually incorporate your terms and conditions;
- The terms of the RoT clause. An all monies clause will generally be effective to entitle you to recover all remaining goods, not just those that have not been paid for;
- Identifying your goods as having been supplied by you and not a third party;
- Supplied goods that have been used in a manufacturing process may not be recoverable if they have lost their original identity;
- The goods have been sold on and now belong to a third party. It will depend on the terms and circumstances of sale as to whether your RoT clause will be effective. There are often difficulties in tracing through to the proceeds of sale.
The key to making a successful recovery under an RoT clause is to act quickly and to take advice. We would normally obtain undertakings from the insolvency practitioner in order to preserve the goods or any proceeds of sale and where necessary an injunction can be obtained from the court.
Exercising an RoT clause can be very useful in salvaging something from the wreckage of an insolvency.
Lien/stoppage in transit
It should also be borne in mind that where goods are supplied under a contract to which the Sale of Goods Act applies, an unpaid seller has a lien over goods in its possession and also has the right to stop goods in transit.
“They must have known they could not pay.”
A written representation made on behalf of a debtor company that the company will satisfy its debts can, if demonstrably untrue at the time it was made, give a creditor that relies on it a claim against the individual making the representation personally for damages incurred as a result of relying on that representation. Those damages would usually equate to the amount of the unpaid invoices.
In a recent case, a director of a debtor company entered into a framework agreement governing the terms upon which it would purchase goods from the seller in future. The court held that in doing so, the director that signed the contract had impliedly represented that the debtor company had the capacity to pay for the goods to be ordered under the agreement. The court found that the director knew at the time that he signed the contract that the company did not have any capacity to pay for the goods to be supplied and accordingly he was held personally liable in the tort of deceit.
When a debtor fails to pay it is worth considering whether or not there was an actionable misrepresentation which might give rise to personal liability for the individual who made it. Entering into an agreement as in the case referred to above or even a statement made in a letter (and possibly just in an email) may suffice. The important thing is that the document is signed or authenticated by someone who knew the true financial position (usually the controlling mind in an owner managed business) and that at the time of making the statement they knew it to be untrue. It will be necessary to prove the actual financial position of the Debtor company at the time the representation was made, a matter that may ultimately require expert evidence. Information and records on the debtor company’s true position may be available from the liquidator to prove the true financial position.
A misrepresentation claim can be pursued by a creditor for its own benefit as compared to claims available only to a liquidator such as fraudulent or wrongful trading (which might arise out of the same factual situation). Leaving claims to be pursued by a liquidator will not necessarily be in the creditor’s own best interest. First, because a liquidator may not be inclined to pursue the matter or will only do so if funded by the creditors and secondly, any action brought by a liquidator would be for the benefit of all creditors and therefore any proceeds would be shared amongst all of the creditors in the liquidation.
"This happened before with their old company. Can they get away with this?"
If the debtor company uses the same or a similar name to a predecessor company that itself went into insolvent liquidation, then anyone involved in the management of the debtor company who had been a director or shadow director of the previous company within 12 months of its becoming insolvent may be personally liable for the debts of the debtor company. Personal liability will also extend to anyone involved in the management of the debtor who acts on instructions of a director or shadow director of the predecessor company.
The liability arises under sections 216 and 217 Insolvency Act 1986. In addition to imposing a personal liability for the debts of the debtor company, it also imposes a criminal sanction.
Personal liability will not arise where:
- the debtor company had acquired the whole or substantially the whole of the business of the predecessor company from an insolvency practitioner and notice in the prescribed form was given to the predecessor company’s creditors within 28 days of the acquisition;
- the director obtained permission from the court to act as a director in the debtor company;
- the debtor company had been known by the same or similar name as the predecessor company for a period of 12 months prior to the liquidation of the predecessor company; or where
- the director of the predecessor company only became involved in the running of the debtor company 5 years after the liquidation of the predecessor company.
Liability for the debts of the new company is strict and the personal liability attaches to all of the debts of the debtor company; not just to debts arising with customers that dealt with the predecessor company.
The question of similarity in name of the debtor to the predecessor company is a matter for the court. For example, in one case where the predecessor company was known as MPJ Construction Limited and the successor company was known as MPJ Contractors Limited the court held that the test was satisfied. It was also satisfied in another case where the predecessor company John Nash Specialist Services Limited traded as Alpine Specialist Services or Alpine Specialist Drilling or Alpine Diamond Drilling and the successor company was known as Alpine Specialist Services Limited.
A phoenix claim can provide a valuable option for an unsecured creditor facing a substantial loss as a result of non payment by the debtor company, regardless of whether or not the debtor company itself is the subject of any formal insolvency proceedings.