The Lessor’s Position Against an Administrator

The problem for a Lessor where a Lessee goes into Administration is that under the Insolvency Act, once a Petition for an Administration Order is presented or notice of intention to appoint is filed, no steps may be taken to repossess goods in the Company’s possession under any Hire Purchase, Lease, Conditional Sale or retention of title Agreement except with leave of the Court and subject to such terms as the Court may impose.

If an Administration Order is made, the prohibition on repossession continues but leave may be given by the Administrator as well as by the Court.

The Administrator has the power to pay both arrears and current rentals for goods used for the purpose of the Administration but he has no personal liability to do so nor do they form expenses of the Administration.

Cases will therefore arise such as Re Atlantic Computer Systems plc where the Administrator may refuse to allow you to recover your equipment but may be unwilling or unable to pay the full rentals otherwise due for its use.

Administrators should make decisions whether or not to use goods as speedily as possible and may be able, at least, to agree to pay current rentals for the time being. However, in the Atlantic Computer Systems case the Court rejected an argument that owners should be entitled to repossession if the Administrators have not decided within a reasonable time. It was also acknowledged that there may be cases in which Administrators are entitled to use goods belonging to another without payment in full of current hire charges. If goods are retained then Administrators should give succinct reasons why and should give a full explanation if they are not to pay rental arrears or current rentals.

Briefly, the case of Re Atlantic Computer Systems plc involved the leasing of computers, many of which were held on hire purchase or long lease from banks and other financial institutions and which Atlantic Computers in turn sub-leased to end users.

The proposal of the Administrator was to reduce the Company’s involvement by encouraging end users to pay the owners direct but it was accepted that this would lead to significant losses for the owners. On the other hand if the owners were allowed leave to repossess the equipment that would mean the collapse of the Administrator’s proposal.

When the Company went into Administration, two owners applied to the Court contending that the Administrators, having received payment from the sub-lessees, were obliged to pay rentals due under the Head Leases and alternatively the owners sought leave to recover possession of their computers.

The Court decided to allow the owners to repossess because, as the Court put it, “the prohibitions in Sections 11(3)(c) and (d) were not intended to be a means of strengthening an Administrator’s position if he should seek to negotiate a modification of existing property rights of the owner”. Nor was it possible to allow the Administrator continued possession on condition that full rentals were paid under the Head Lease because the rents from the sub-leases were insufficient for that purpose.

Whilst it is always a matter of discretion and each case will be different and turn on its own facts, the Court of Appeal in the Atlantic Computers case laid down guidelines as to the circumstances under which leave to repossess should be granted under Section 11 and those guidelines are summarised below;

(1) The onus of proof is on the party seeking leave.

(2) The purpose of the prohibition is to help achieve the purpose for which the Administration Order was made. Therefore, if allowing repossession is unlikely to impede that purpose, leave will be granted.

(3) In other cases the Court balances the legitimate interests of a Lessor against the legitimate interests of other Creditors.

(4) An Administration for the benefit of unsecured Creditors should not be conducted at the expense of those who have proprietary rights which they are seeking to exercise, save to the extent that this may be unavoidable and even then this will usually be acceptable only to a strictly limited extent.

(5)-(7) It is necessary to balance the respective losses and guidance is given as to what factors to consider in assessing losses and how probable they are.

(8) The conduct of the parties.

(9)-(10) These considerations are also relevant in deciding to impose terms whether or not leave is granted. For example, if leave is refused it may be on terms that current rental is paid to the Lessor, which should be possible where the making of the Administration Order presupposes there is a viable business.

(11) If a secured Creditor is fully secured, leave will be refused as delaying enforcement is likely to be less prejudicial.

(12) Applications for leave will not normally be appropriate proceedings in which to resolve disputes over the existence, validity or nature of the security to be enforced.

Whilst the Leasing Companies were successful the Atlantic Computers case, the real danger for Lessors was illustrated by the decision made in Re David Meek Access Limited.

In that case two Companies, whose business was hiring out equipment (e.g. forklift trucks) to the construction industry went into Administration. Much of the equipment was held by the Companies under Hire Purchase Agreements and then hired out by them to end users.

The Finance Companies claimed repossession of the equipment and the Judge carried out the balancing exercise recommended in the Atlantic Computers guidelines.

The loss to individual Finance Companies in not being allowed to repossess their equipment was, in this case, outweighed firstly by the fact that if any repossessions were allowed it would be hard to resist the claims of other Finance Companies and it would almost certainly make the Administration abortive and mean that no proposals could be put to the Creditor’s Meeting. Secondly, the abrupt termination of trading would have endangered the collection of substantial outstanding book debts. Accordingly the Judge rejected the Finance Company’s Applications save that he made an exception in the case of two Finance Companies which had sought to recover their equipment the day before the Petition for the Administration Order was presented, but had been prevented from doing so.

Potentially an even more serious problem for Lessors lies in the power of the Administrator of a Company, with the Court’s agreement, to dispose of goods in the possession of the Company under a Hire Purchase Agreement “as if all the rights of owner under the Hire Purchase Agreement were vested in the Company”. Hire Purchase Agreement includes Conditional Sale and Leasing (i.e. any hiring of goods capable of subsisting for more than three months). Before giving consent the Court must be satisfied;

(a) that the disposal (with or without other assets) would be likely to promote the purpose or one or more of the purposes for which the Administration Order was made; and

(b) any consent must also be conditional on the net proceeds of disposal or, if higher, the open market value determined by the Court being applied to discharge the sums payable under the Agreement.

Clearly it is possible that under, for example, an Operating Lease the outstanding sums payable under the Agreement will be far less than the full value of the Lessor’s interest in the goods but it seems it is only the former sum which must be accounted for under Section 15(5). The Lessor may have only an unsecured claim for the balance.

There are presently no reported cases illustrating how this provision might be applied but it may be that as a condition of giving its consent the Court will require the Administrator to undertake to pay the full value of the Lessor’s interest. It might also assist the Lessor to include a provision in the Lease making the Lessee accountable to the owner for the net proceeds of sale or open market value, whichever is higher, in the event of a disposal by an Administrator.

More comfort for Lessors can be gained from consideration of the case of Barclays Mercantile Business Finance Ltd v Sibec Developments Ltd .

Barclays and various others had goods on Lease and Hire Purchase to a Company which went into Administration. Rental payments were in arrears and the Hire Purchase Agreements were terminated, either automatically on the making of the Administration Order or shortly afterwards by letter. Barclays, by a letter of the same date, requested the Administrators to consent to their repossessing the goods immediately, but the Administrators refused and Barclays applied to the Court under Section 11(3)(c) and (d) Insolvency Act 1986 for leave to repossess the goods, or alternatively for leave to commence proceedings in the High Court against the Company or the Administrators for delivery up of the goods and/or damages for wrongful interference or in the further alternative payment of hire or lease charges in respect of the goods as an expense of the Administration.

Subsequently the Administrators allowed Barclays and the other Applicants to repossess their goods and the various alternative claims were adjourned generally with the Applicants having liberty to restore them.

The purposes for which the Administration Order had been made were ultimately found to be incapable of achievement and the Administration Order was discharged, being replaced by a compulsory Winding Up Order which appointed the same firm of Insolvency Practitioners as Liquidators rather than Administrators. The Order also provided for the release of the Administrators at the end of a specified period after they had filed their receipts and payments accounts.

Barclays and the other Applicants applied for the Administrators’ release to be postponed until after the hearing of the various alternative claims which had been adjourned.

The Court held that Section 11(3)(c) and (d) Insolvency Act 1986 did not destroy a Lessor’s legal right to immediate possession of its goods even though it did impose a moratorium on the enforcement of those rights. It followed that the Company or the Administrators could be liable in damages for conversion, having wrongfully refused leave to the owners to retake their goods. The Court decided that the Administrators should not be released while there was a proper claim against them outstanding which ought to be tried and, therefore, postponed the Administrators’ release pending determination of the Applicants’ claims for rental and loss by reason of the Administrators’ delay in consenting to their retaking of the goods.

Although it is not reported, we have been told by Solicitors who acted for Barclays that their clients’ claims were settled without need for any further hearing although they would not disclose the precise terms.

NB. The goods concerned were motor vehicles which had been used by the Company’s employees, many of whom had been made redundant and most of those vehicles had been placed in storage. They therefore did not appear to be required for the purpose of the Administration.

(1) At the time of underwriting, consider the nature of the transaction and the equipment itself to assess whether, in the event of an Administration Order being made, your equipment is likely to be essential to the continuation of the business or might have some substantial value in excess of the sums payable under the Lease which might encourage the Administrator to apply to the Court for leave to dispose of the equipment.

(2) If you become aware of the Lessee getting into financial difficulty and you have grounds (e.g. unpaid rentals) for termination, then you should endeavour to terminate and repossess your goods before steps are taken for the making of an Administration Order.

(3) If you find that steps are being taken to obtain an Administration Order, but before the Order is made, you can invite the Company to voluntarily surrender your equipment as long as your actions do not amount to the taking of any steps to repossess.

(4) Once the Order has been made, you should take a tough stance with the Administrator. Do not lead him to believe that you consent to the continued use of your goods or that you acquiesce in the Administrator’s plans. You should make formal demand for the return of your goods and should not sit on the fence as any delay will be prejudicial to your prospects of succeeding in any Application for leave to repossess.

(5) On the other hand do not be too tough! For example, in a case involving Birmingham Airport the Lessors nearly got themselves into trouble by physically blocking an aircraft before making an Application to the Court for leave. At first instance, Mr Justice Harman took the view that this was a serious contempt of Court. Whilst the Court of Appeal did not agree with him, it is clear that such conduct may seriously prejudice your position and at the very least put the Court’s sympathy at risk.

(6) If the Administrator is seeking to retain your equipment, you should be looking to him for confirmation that full rentals will be paid and that all other key obligations such as insurance and repair will be undertaken.

(7) Where full rentals cannot be afforded from the available resources, the Administrator may propose to pay a “fair” proportion. For example, he could make an offer calculated by reference to your cost of carrying the value of the asset, or by reference to the rental which you could obtain on a new letting, or the interest which you could earn on the likely sale proceeds. In most cases the Court will expect the Administrator to be able to pay full rentals but where he believes unusual factors would justify his retention on less attractive terms, you will need to give careful consideration to his reasons and measure his proposals against the guidelines laid down in the Atlantic Computers case. If you consider his proposals are unreasonable and particularly if you do not consider your equipment to be vital to the purpose of the Administration, threaten him with the consequences of the Barclays v Sibec case.

(8) In any event, you should not allow negotiations with the Administrator to be protracted and should make prompt Application to the Court if an acceptable agreement with him cannot be reached. You can always compromise or withdraw the Application before the hearing. In some cases it may well be that you will find an Administrator will only respond in positive terms once an Application has been issued.

(9) It should be noted that the Courts make considerable efforts to deal with Section 11 Applications promptly and the first hearing can often take place within a week or so of being issued. Whilst that first hearing will usually be limited to the giving of Directions, some comfort can be gained from the fact that the Applicants in the Atlantic Computers case obtained their result in just over ten weeks from start to finish.