Asserting a lessor’s proprietary rights in administration

With corporate insolvencies increasing, a lessor may need to recover its asset from a company in administration. What challenges does this bring and how can the lessor overcome them?

Lessor’s terms and conditions

Usually, if the company fails to pay monies due under a finance agreement, the terms and conditions entitle the lessor to the asset’s immediate possession (subject to serving a prior notice of termination on the company). The lessor may then authorise its recovery agent to visit the company’s premises and uplift the asset. There is seldom a need for the lessor to obtain a court order, or seek a third party’s consent, before taking possession.

The position is different if the company enters administration, or is about to, having filed with the court notice of its intention to appoint an administrator. The terms and conditions should entitle the lessor to the asset’s immediate possession (often because the finance agreement terminates automatically; some agreements require the lessor to serve a prior notice on the company). However, the lessor cannot merely send a recovery agent to uplift the asset from the company’s premises.

Statutory regime on administration

A statutory regime under the Insolvency Act 1986 applies: a moratorium prevents all creditor action against the company. The purpose of administration is usually to allow the company breathing space, in which to explore the rescue of the company, or possible sale of the business, as a going concern. The effect of the regime is to suspend creditors’ rights to enforce the company’s obligations until the conclusion of the administration. The lessor must obtain the administrator’s consent before taking possession of the asset, or (if consent is not forthcoming) obtain a court order.

What problems may arise?

The administrator may want to retain an asset if the company needs it to continue trading, so that the business is viable as a going concern and a more attractive proposition for a buyer. For example, the lessor has financed a haulage company’s acquisition of commercial vehicles, or a construction company’s yellow goods. The administrator should offer to pay the lessor the ongoing contractual rental for such assets (but not arrears), so that the company may retain them until the company is rescued or the business sold. The buyer may then purchase them from the lessor, refinance them, or invite the lessor to take possession.

Sometimes, the administrator withholds possession of the asset. He has no reason to doubt the lessor owns a large item of plant and machinery, identified in the lessor’s purchase invoice by a corresponding serial number; however, he may be uncertain if the item is subject to a manufacturer or distributor’s retention of title clause.

A myriad of smaller items of equipment may be tricky. Issues arise if there are more (or fewer) items on site than appear on the purchase invoice, especially if there are no corresponding serial numbers or other means of identification (usage can wear away identifying marks).

Another complication arises where the asset has been affixed to another, or (in the case of smaller items, like lighting rigs or scaffolding) mixed. Mixing may be with assets belonging to the company or owned by a second lessor.

To resolve such issues, the lessor must maintain a dialogue with the administrator and seek legal advice early.

Court order

If an administrator refuses access for the lessor to collect its equipment, the lessor can apply to the court for permission to repossess. The court will balance the interests of the lessor and the company’s creditors when deciding whether to allow repossession.

Ultimately, the administrator may apply to the court for permission to sell property subject to a finance agreement, as if the company owned that asset. The lessor is protected, because, after obtaining a court order, the administrator must apply the asset’s net sale proceeds towards discharging the company’s liability under the finance agreement (and if necessary, add further monies to achieve market value).

The order protects the administrator against claims. If he sells without an order, he may incur personal liability to the lessor for conversion.

Tips for lessors

In a straightforward case, the lessor may take possession of the asset quickly, following discussions with the administrator. It is critical that the lessor’s documentation is in good order, especially its proof of title (a copy of the supplier’s invoice identifying the asset).

If the administrator questions the asset’s ownership, the lessor should maintain a dialogue with him and take advice early, with a view to achieving a negotiated resolution. However, asking the court to determine the matter can be worthwhile. Subject to advice (and provided the asset value justifies the costs of doing so), the lessor may apply for an interim injunction for the delivery-up of the asset. An injunction invariably places pressure on the administrator to come to terms quickly, before the parties must commit greater costs to the substantive claim.

If you are a lessor and have questions or concerns about your proprietary rights in administration, please contact financial services lawyer David Farnell.