In certain circumstances, an administrator has the right to sell goods subject to a lease or hire-purchase agreement. In other situations, the administrator may be personally liable where they have been sold.
Right to sell under the Insolvency Act 1986
Under the Insolvency Act 1986 (IA 1986), the court may make an order enabling the administrator to dispose of goods which are in the possession of the company under a hire-purchase or lease agreement as if the company had all the rights of the owner under the agreement.
An order of this kind may only be made on the administrator’s application and where the court thinks that disposal of the goods would be likely to promote the purpose of administration (paragraph 72, Sch B1, IA 1986). Any such order is subject to the condition that:
(a) the net proceeds of disposal of the goods; and
(b) any additional money required to be added to the net proceeds so as to produce the amount determined by the court as the net amount which would be realised on a sale of the goods at market value, be applied towards discharging the sums payable under the HP or lease agreement.
Therefore, an administrator in these circumstances would be able to sell the goods notwithstanding that the company does not own them.
What about where the administrator sells the goods without a court order?
The situation may be different where the administrator sells the goods without a court order. There is a body of law known as "tort". This provides remedies for civil wrongs arising other than out of contractual obligations. One example of a tort is known as "conversion". Conversion involves someone deliberately dealing with goods in a matter that is inconsistent with, and deprives another person of their rights to use and possess those goods. In terms of someone deliberately dealing with the goods in this way, this does not mean that he must have an intention to deprive, but rather, that there must be some positive act or conduct taken. An example of converting another’s goods includes selling them. It is possible to be unaware of the other persons’ rights and yet to still be liable for conversion. This can arise, where, for example, the lessee/hirer sells goods on to a purchaser without the owner’s consent (in circumstances where the purchaser does not acquire good title) and the purchaser re-sells them.
To succeed with a claim for conversion, one of the things that the claimant must be able to show is that he had an immediate right to possession of the goods at the time of the conversion.
So how does this relate to the situation where an administrator sells goods subject to a lease or HP agreement? IA 1986 provides that when an administrator exercises the powers given to him under Schedule B1 to that Act, this is as agent of the company. In broad terms, this means that an administrator will not generally be personally liable for a contract entered into on behalf of the relevant company.
The position on the administrator not having personal liability is different in relation to the conversion of goods. There is a defence that may be available to an administrator in this situation. This is that if he sells goods which is not the company’s and at the time of sale he had reasonable grounds for believing that he was entitled to dispose of the goods, then he will not be liable for any loss or damage resulting from the sale except to the extent caused by his own negligence (s234, IA 1986). This indicates that if he does not have reasonable grounds for this belief, then he can be liable.
Let’s say that the HP agreement has been terminated and the agreement provides that upon termination, the finance company is immediately entitled to repossess the goods. As mentioned above, one of the requirements for a claimant to succeed in a claim for conversion, is demonstrating that he had an immediate right to possession of the goods.
But how is this affected by the statutory moratorium on repossession? In other words, can a finance company claim to be entitled to an immediate right to possession of the goods, when the IA 1986 provides that when a company is in administration no step may be taken to repossess goods in the company’s possession under a lease or HP agreement except with the consent of the administrator or with leave of the court? The good news for finance companies in this situation is that the case of Barclays Mercantile Business Finance Ltd v Sibec Developments Limited (1992) 1 W.L.R 1253 provides comfort that simply because the IA 1986 provides that no step may be taken to repossess the goods, this does not mean that those rights are destroyed. This will not, of itself, therefore, preclude a claim in conversion against the administrator.
This article is a general summary only. If you would like advice on any of the issues raised by it, please contact us. Please bear in mind that the law may change from time to time and this article may not be (or have been) updated to reflect those changes. © afl Solicitors
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