Our article in The In-House Lawyer’s March 2010 issue (‘The effective use of liens to protect against the collapse of corporate customers’, issue 178, p41-43) dealt with the need for logistics services providers to have an effective contingency plan to cope with the prospect of their retailer customers defaulting on payments or going into administration or liquidation. Following the latest unfortunate round of high-street retailer collapses, including Comet, HMV and Blockbusters, the issues discussed in that article are now just as relevant to freight forwarders, hauliers, shipping lines and other creditors with rights of lien. Since the publication of issue178, a case on general contractual liens has come before the High Court and provides useful confirmation of the rights of holders of a contractual general lien over goods.
THE ISSUES: RE LA SENZA LTD (IN ADMINISTRATION) [2012]
A freight forwarder with a general contractual lien gave notice to its customer of its intention to exercise the lien over goods in its possession. The reason was the customer’s failure to pay the freight forwarder’s outstanding invoices. Not long after receiving that notice the customer gave notice of its intention to appoint administrators.
The main issue before the High Court was whether the contractual general lien gave the freight forwarder security for all amounts owed to it (about £850,000) over the goods in its possession (which had an original invoice value of £3.74m, reduced to about £2.26m), or whether the freight forwarder was only entitled to be paid a sum equivalent to the value of the goods on an unbranded basis (about £200,000). Another issue was whether it would be entitled to be indemnified against the claims of the suppliers of the goods, if obliged to deliver them up to the company in administration.
The administrators were appointed to La Senza Ltd in January 2012, and on the day of their appointment they signed an agreement with a third-party buyer for sale of La Senza’s business and assets. The sale was to include the goods held by the freight forwarder, Uniserve, in exercise of its lien, provided that the administrators could secure the release of those goods. Following a round of negotiations between Uniserve and the administrators, which came to nothing, the administrators applied to the High Court for an order that Uniserve should deliver up all the goods consigned to La Senza. The administrators’ application did not provide for an indemnity to Uniserve, which would face claims from the suppliers of the goods under retention of title. It proposed payment to Uniserve of a capped amount of approximately 5% of invoice value as an expense in the administration.
The administrators’ application was based on s234 Insolvency Act 1986 (the 1986 Act), which entitles administrators to apply to the court for delivery up of ‘any property… to which the company appears to be entitled…’. Uniserve quickly made a cross-application seeking the court’s permission under paragraph 43(3)(b) of Schedule B1 to the 1986 Act to rely on its contractual lien over the goods and for La Senza to pay its legal fees. Paragraph 43 of Schedule B1 of the 1986 Act provides that when a company is in administration, no step may be taken to enforce security over the company’s property except with the consent of the administrator or with the permission of the court.
THE BACKGROUND
La Senza was a retailer of lingerie, intimate apparel and nightwear under the La Senza brand, under licence from the brand owner Victoria’s Secrets International SARL. La Senza had about 11 overseas suppliers. These used standard terms subject to English law, which provided that the goods were to be delivered free on board to the delivery address. All goods were to remain at the risk of the suppliers until delivery was complete. La Senza used the Uniserve group of companies as freight forwarders, for the purpose of importing the goods from its various suppliers into the UK.
The administrators had arranged their sale of the goods to their buyer, Alshaya, at a price equivalent to 50% of the commercial invoice price. The price recognised that the administration of La Senza had the effect of terminating its licence to sell the goods as branded goods. In their evidence in support of their application, the administrators submitted that, since the licence had terminated, the goods could only be sold as unbranded goods. They argued therefore that if Uniserve were to try to sell the goods themselves they would only recover about 5% of the commercial invoice value: about £200,000.
Uniserve replied with evidence stating that it was still possible to sell the goods as branded goods in jurisdictions other than the UK, and that they had in fact identified a purchaser for the goods at a price of 50% of commercial invoice value. The administrators then modified their position, proposing that the goods should be sold to the buyer in accordance with the sale agreement they had signed and that the proceeds of sale should be put into an escrow account. There would then be a period of several months to allow suppliers of the goods claiming to have valid retention of title and stoppage rights under s44 of the Sale of Goods Act 1979 to make their claims against the funds in the escrow account. After a fixed period, the balance of the sums remaining in the account would be shared between the company in administration and Uniserve. This modified proposal was not acceptable to Uniserve and the matter went to an early trial in March 2012 before the Chancellor, Sir Andrew Morritt.
We will look at the outcome of the trial and the court’s decision and the reasons given at the end of this article. First, we look at the respective rights of the parties involved.
WHAT IS A GENERAL LIEN?
A lien is a legal right to retain possession of goods against payment of a debt due to the lien holder. To have a valid enforceable legal lien, the lien holder must be in lawful possession of the goods over which it claims the lien. In the logistics sector, the majority of service providers contract on standard terms developed by their own trade associations, eg the Road Haulage Association Conditions of Carriage 2009.
In La Senza, Uniserve’s terms and conditions incorporated the British International Freight Association Standard Trading Conditions (BIFA) 2005. Clause 8(A) of those conditions provides that Uniserve:
‘… has a general lien on all Goods and documents relating to Goods in its possession, custody or control for all sums due at any time to [Uniserve] from the customer and/or owner on any account whatsoever, whether relating to Goods belonging to, or services provided by or on behalf of [Uniserve] to the Customer or owner. Storage charges shall continue to accrue on any Goods detained under the lien.’
The clause goes on to give Uniserve the right on 28 days’ notice in writing to its customer to sell or dispose of the goods or the title documents as agent for and at the expense of the customer and to apply the proceeds of sale towards payment of outstanding sums owed to it including storage charges.
There was no dispute between the parties that the terms and conditions gave Uniserve a general lien coupled with a right of sale. There was also no dispute that Uniserve had properly incorporated its terms and conditions into the contracts between Uniserve and La Senza. The judgment referred to the fact that a few months prior to the dispute Uniserve had updated its service agreement with La Senza for their freight forwarding services on the basis of the BIFA 2005 terms and conditions.
LIENS AND INSOLVENCY: THE LEGAL POSITION
A lienholder is a secured creditor
Under s248(1)(b)(i) of the 1986 Act, a creditor with a valid enforceable lien is deemed to be a secured creditor in the insolvency of the debtor. It has long been established that a debenture holder is subject to the rights of a contractual general lien exercised when the lien holder lawfully acquired actual possession of the goods three days after the floating charge crystallised by the appointment of an administrative receiver (George Barker (Transport) Ltd v Eynon [1974]). These long-established principles were going to be helpful to Uniserve, but until the case came before the High Court, there was no reported decision confirming the rights and powers of a general lien holder against the administration moratorium.
A lien is not a registerable charge
Although a lien falls within the definition of security for the purposes of the administration moratorium, it does not constitute a registerable charge (s874(1) Companies Act 2006). Therefore, lien holders should not accept an argument that their lien is unenforceable because it is not registered at Companies House (Re Hamlet International plc, Trident International Ltd v Barlow [2000]) .
THE ADMINISTRATION MORATORIUM
The commencement of an administration triggers the statutory moratorium under paragraph 43(2) of Schedule B1 to the 1986 Act, which prohibits any steps being taken to enforce any security over the company’s property, except with the consent of the administrator or the permission of the court. If the administrator refuses to consent to the enforcement of the lien or other security, the onus is on the holder of the lien or the security to show the grounds on which it should be entitled to enforce.
The court is then required to carry out a balancing exercise between the relative rights of the security or lien holder and the general body of the creditors. This balancing exercise was referred to by the Court of Appeal in Re Atlantic Computer Systems plc [1992], which remains the leading case in regard to the effect of the administration moratorium. In that case the Court of Appeal referred to the underlying principle that an administration should not be conducted at the expense of those who have proprietary rights, except to the extent that it would be unavoidable. Given that a general lien is deemed to be a security in an insolvency situation, lawyers have long considered that the holder of a general lien is in a strong position as regards administrators.
An early case regarding the exercise of a statutory lien confirmed that the lien holder requires either the consent of the administrator or the leave of the court before taking steps to enforce the lien (Re Paramount Airways Ltd [1990]). In theory, the administrators can negotiate and offer a non-possessory lien or other security in place of the lien.
In this context it should be noted that the administration moratorium contains a specific prohibition on instituting or continuing a legal process against a company in administration (paragraph 43(6), Schedule B1 to the 1986 Act). The court has held that ‘legal process’ means a process that requires the assistance of the court. It has also been held that it does not include steps such as the serving of a contractual notice making time of the essence, or the acceptance by a counterparty of a repudiatory breach of contract (Re Olympia & York Canary Wharf Ltd, American Express Europe Ltd v Adamson [1993]).
THE FREIGHT FORWARDER’S POSITION
Uniserve argued that the suggested cap to be put on its recovery from the escrow account was misconceived. Uniserve submitted that the terms of the proposed escrow account were too uncertain and that supplier creditors could not be forced to exercise their rights against the fund rather than against Uniserve itself.
Uniserve emphasised that its concern was to preserve the economic effect of its right to a general lien over the goods of La Senza, if it was ordered to deliver them to La Senza and also to protect itself from claims for conversion advanced by supplier creditors. The court ordered an expedited hearing given the urgency in connection with the proposed sale of the goods to the administrator’s buyer.
THE COURT JUDGMENT
The Chancellor considered that there was no doubt that Uniserve was entitled to a general lien over the goods in its possession. Uniserve’s lien predated both the notice of intention to appoint and the appointment of the administrators. The terms of the lien were clear and covered all amounts due to Uniserve by La Senza on any account. Further, the Chancellor did not accept that Uniserve’s rights under the general lien could be limited in value to a particular price governed by whether they were sold as branded or unbranded goods. He held that this would be to fetter the rights conferred by the general lien.
The Chancellor considered that the unconditional nature of the order sought by the administrators under s234 of the 1986 Act would destroy Uniserve’s security for payment of the sums owed to it and was inadequate to protect the rights of Uniserve. Some of La Senza’s suppliers appeared to have possessory claims based on retention of title terms in their own contracts. The Chancellor accepted Uniserve’s evidence that supplier creditors would likely proceed against Uniserve, which was solvent and amenable to the jurisdiction of any foreign court the supplier chose to use. He also noted that Uniserve would lose its priority to the suppliers claiming on the escrow account. The Chancellor therefore rejected the administrators’ escrow account proposal.
The Chancellor indicated that if the administrators accepted Uniserve’s own settlement proposal he would be prepared to order delivery up of the goods to La Senza on terms that:
- all sums owing to Uniserve were paid; and
- the administrators set aside a sum of £1m to answer the claims of the suppliers.
He noted that the court would not impose those terms, but he gave the administrators time to consider that option. If they declined it, he granted permission to Uniserve under paragraph 43(2)(b) of Schedule B1 to the 1986 Act to enforce its lien and sell La Senza’s goods. He noted that a sale at 50% of invoice value would leave a surplus to be paid to La Senza. The administrators declined to accept Uniserve’s terms and it was therefore left to Uniserve to sell the goods in accordance with the court order.
COMMENT
La Senza provides confirmation of the rights of contractual lien holders as security holders. The court allowed Uniserve as creditor to rely on its general lien and to detain goods for non-payment despite the statutory moratorium in favour of the company in administration. Although the Chancellor had no difficulty in accepting that Uniserve’s lien was valid and enforceable to secure the sums owing to it, the balancing exercise between benefit to the creditors of La Senza and detriment to Uniserve was viewed by the court as straight forward given the very marginal benefit to La Senza’s creditors generally if the lien holder’s rights were cut down in the manner argued for by the administrators.
Creditors with security rights under contractual liens can take some comfort from this case when faced with an administrators’ challenge to their lien. Finally, it should be noted that a lien that arises after the date of the moratorium in administration will not be regarded as enforceable by the courts (London Flight Centre (Stansted) Ltd (in administration) v Osprey Aviation Ltd [2002]).