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Asset Finance: Administrators claim to Vehicle “misconceived”

We recently successfully represented Ferrari Financial Services GMBH in roundly defeating a claim by administrators who sought to interfere with Ferrari’s right to possession of a vehicle worth in the region of £7 Million.

Ever since the landmark Atlantic Computers case in 1991 administrators have in general recognised that they have very limited ability to interfere with the property rights of financiers, and that the statutory moratorium granted to them by the Insolvency Act 1986 normally requires them to continue to pay rentals or return equipment which is subject to finance.

In this case the administrators sought to advance a different argument. The vehicle had been acquired by Ferrari from a dealer who as part of the price had received five other vehicles in part exchange from Mr Hood, who was the controller of JD Classics Ltd (“the Company.”) Ferrari obtained a letter from Mr Hood declaring that he had the right to dispose of those vehicles, and Mr Hood entered into a Hire Purchase Agreement with Ferrari.

When the Company went into administration and Ferrari sought to repossess its vehicle, the administrators first sought to contest Ferrari’s title to the vehicle. After we had clearly demonstrated the chain of title the administrators switched their argument to say that the part exchange vehicles were owned not by Mr Hood but by the Company, and that therefore the Company had a “resulting trust” amounting to an equitable interest in the vehicle which Ferrari had acquired and supplied to Mr Hood.

We took the view that this argument was wholly misconceived, and that on normal principles the administrators had no right to interfere with Ferrari’s right to possession of the vehicle.

In Barclays Mercantile Ltd v Sibec Developments Ltd [1992] 1 WLR 1253, Millett J was concerned with a situation where administrators had refused to allow the owner of goods leased on hire purchase to the company to recover the same. He held that administrators might be liable for conversion where the owner had an immediate right to possession, had made a lawful demand for redelivery, and there had been an unreasonable refusal to re-deliver, subject to the statutory defence under s 234(3) and (4) of the 1986 Act, which is dependent upon the administrator having reasonable grounds to seize or dispose of the asset in question.

Considering the position of administrators when faced by a request by the owner for the return of a particular asset, at 1259E-1259F, Millett J said this:

“…. the administrators are officers of the court and at all times subject to the court’s direction. If they wish to make use of another party’s property for the purposes of the administration and cannot agree terms, they can seek the directions of the court. If administrators wrongly retain goods otherwise than for the proper purposes of the administration, for example, to use them as a bargaining counter, the owner can apply to the court to direct the administrators to hand over the goods without the need for action, and to pay compensation for having retain them in the meantime. Only in a case where there was a triable issue as to the ownership of the goods will the question of giving leave to take proceedings for possession arise.”

In short, in this situation, unless there is a triable issue as to the ownership of the goods in question, ie. a real prospect of the administrators showing that the Company has some proprietary right entitling it to possession as against the party seeking to recover it, it is open to the owner to apply to the Court for an order directing the administrators to hand over the goods.

For some reason the administrators and their solicitors did not agree with this clear statement of the law, and set about attacking it with various procedural hurdles and substantive arguments which eventually came down to the proposition that the Company had a beneficial interest in the ownership of the vehicle.

At first the administrators argued that they should be entitled to sell the vehicle, but eventually they recognised that the relevant expertise lay within Ferrari and that at best their arguments amounted to suggesting that a portion of the proceeds of sale should be retained pending the adjudication of their claim to a beneficial interest in the sale proceeds.

We took the view from the very beginning that the basis of the administrators’ claim was entirely misconceived, if not mischievous, but in view of the sums involved we took the precaution of instructing a Chancery Insolvency expert Mark Cawson QC.

He agreed with our view, though much more eloquently expressed it, so the continued threats and aggressive correspondence from the administrators were resisted and the matter came on for hearing before a specialist Chancery Judge in Manchester, HH Judge Eyre QC.

It is fair to say that the judge was not impressed with the administrators’ arguments, and for various reasons he held that there was “no realistic prospect of a finding that there could be a resulting trust in favour of the Company in the circumstances here”.

We were also successful in recovering all Ferrari’s costs. Having been roundly defeated on all their legal arguments, the administrators still sought to contend that there should be a reduction in the costs payable to Ferrari as the successful party, but the remarks of the judge perhaps demonstrate his overall view of the stance taken by the administrators throughout this dispute: –

“…the resulting trust argument …was one which I have concluded was simply misconceived and it should never have been mounted in the first place.

 It follows that the applicant is not to be criticised for having sought to respond to that misconceived argument. It ill lies in the mouth of a party who has put forward a misconceived argument to say it could have been resolved and remedied in a different way from that which was adopted and the applicant is not to be criticised for having adopted a fallback position as well. It follows that the applicant will recover its costs in full”.

Much of the judgment is highly technical dealing with the resulting trust point, but copies are available on request from Andrew Henderson.