18 months ago we discussed the administration of Wellgrain Limited, a large grain merchant based in the East of England which collapsed owing creditors in excess of £15,000,000.
Recently, the bakery chain Patisserie Valerie appointed administrators after a £40,000,000 black hole was discovered in its accounts. Unlike Wellgrain, this business survives so we take a look at some of the issues arising from this trading administration.
What is administration?
Administration is a form of insolvency procedure where a licenced insolvency practitioner is appointed with the intention of rescuing the business as a going concern. Normally this will involve a short period of trading while the business is marketed and sold. Occasionally, a sale may be negotiated before the appointment of administrators and completed immediately on their appointment in what is known as a “pre-pack” sale. Whilst the company is in administration, there is a moratorium in place preventing creditors taking action against the company without the permission of the administrators or the court.
Once assets are realised, there is a strict order of priority in which creditors are paid with unsecured creditors sitting behind the costs of the insolvency and secured creditors. This is why returns to unsecured creditors tend to be very low. In the case of Patisserie Valerie, administrators were appointed on 22 January 2019 and 70 stores and concessions in the portfolio were immediately closed. 3 weeks later, much of the business was then sold preserving the remaining 120 or so stores and securing the future of 2,000 jobs. It remains to be seen exactly what creditor returns will be.
When faced with a supplier or a customer in administration, there are several issues to think about often a short space of time.
Supplies
The first and probably most important critical, is the impact on supply. Contracts do not simply fall way because the company is in administration, nor does it excuse performance either. However, there is a serious risk of delay and disruption which needs dealing with particularly if you are relying on performance higher up a supply chain.
A well drafted contract may contain a clause which permits you to terminate if the other party appoints administrators. If it does, you should think carefully about whether you want to actually exercise that right. If your supplier has appointed an administrator, you need to know whether orders can be fulfilled or not within the timescales you need. If they can, they will be keen to supply and be paid for that supply although you have to balance that against whether they will be able to follow that through.
If you are doing the supplying, then an administrator should expect to pay for your supply as an expense of the administration above their own fees. He or she will need supplies to be able to trade and preserve the value of the business so on the whole there is usually an incentive to continue to supply for that reason.
If a decision is made to terminate, care needs to be taken to make sure this is done properly, as EE found to its cost in 2018. It exercised a right to terminate against Phones 4U for exactly this reason but the wording of the termination notice caused them to lose the ability to set-off a damages claim they might have otherwise have had against Phone 4U when their administrators later pursued sums from EE.
Pre-payments and deposits
This area is one fraught with risk. If a pre-payment is made for the goods or services which are then not supplied, the funds are normally lost if they have not been kept segregated from the general company’s fund. That means pursuing a claim in the administration or liquidation as an unsecured creditor.
Before agreeing to make pre-payments, especially large ones, it is important the risk of this is properly understood especially if the reason behind the request may by the supplier is financial difficulty.
Retention of title
It is also easy to assume a retention of title clauses will also protect against non-payment. These, in theory, allow a supplier to retain property so they can collect their unpaid goods and sell them on elsewhere.
They have some potential use, but retention of title claims are usually lost when you are dealing with perishable foodstuffs, ingredients which are then combined with others, or goods which are then supplied for the purposes of being sold on.
Onward sales
If, as has happened with Patisserie Valerie, the business is sold, it will trade through a new legal entity. That means new contracts will need to be entered into, or contracts novated as of the date of the sale and some engagement with the purchaser will be needed about future terms.
Sometimes, the impact of administration or of an onward sale might not be as obvious. What if, for example, the contract we are concerned with is not a contract for the supply of goods or services but a licence? In that case, the supplier may be provider of essential software or other IP you need to run a process, or to design and print labels on products.
Intellectual Property is an asset like any other, and a sale of the business and assets of a company in administration will normally extend to the company’s IP. That means steps need to be taken fairly early on to engage with the administrators about what is likely to happen to any IP and to liaise with a purchaser about whether that licence will continue, and if so, on what terms.
Mitigating risks
A particular feature of insolvency law in England is that it is not usually possible to improve your position once the company has become insolvent.
For that reason, having effective contract terms and credit controls are is often the best way to make sure you are not caught short. However where this is not possible being alert and moving quickly if a counterparty goes into an insolvency process will help mitigate the effect of it.
For more information on this or any other related matter please contact Lino Di Lorenzo at Mills & Reeve LLP. Tel: +(44)(0)1223 222311 (Ext 2311) Email: [email protected]
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