Trading in difficult times
IN THESE uncertain economic times, there are regular reports of companies and individuals becoming insolvent. Earlier this year, for example, Laurel Pub Company went into administration, and there are record numbers of individuals being made bankrupt.
What is insolvency?In a nutshell, a party is insolvent when it is unable to pay its debts. The remedies available to creditors depend on whether the insolvent party is a limited company or an individual.
Insolvent companiesYou will often hear reference to companies going into administration or going into liquidation. Here is a description of what these terms mean.
Companies in administrationAn insolvent company may be placed into administration as a way of trying to rescue it. The company itself can apply to the court for an administrator to be appointed, or any creditor can make an application to the court.
Once appointed, the court will give the administrator a reasonable period of time to try to get the company back on track, and ensure its survival as a going concern. The administrator may try to trade the company out of difficulties. This is good news for creditors if it means that debts will be paid.
What happens if you are a landlord of premises where the tenant is a limited company which goes into administration and there are historic rent arrears? Your options are limited.
Once the company is placed into administration you will not be able to exercise your usual remedies of levying distress or forfeiting the lease without first obtaining the permission of the court. The court has to perform a balancing act, weighing up the rights of the landlord against the rights of other creditors.
Companies in liquidationSometimes a company will be placed into compulsory liquidation by one or more of its creditors, in cases where the company clearly has no future. To achieve this, the creditor has to present a winding-up petition to the court, arguing that the company is unable to pay its debts. The court does have the discretion whether or not to make a winding-up order. If it is clear at the court hearing that the company has no assets then the order is likely to be made.
From the moment the winding-up order is granted, no parties can take action against the company without permission of the court.
This can cause landlords problems: they cannot continue with any action by bailiffs which have been commenced prior to the order being made.
If the company owed rent before the liquidation, the landlord is unlikely to recover anything and will simply rank alongside all other creditors. Equally, the landlord will have problems recovering any rent accruing after the date the winding-up order is made.
The landlord would be well advised to serve notice on the liquidator, giving the liquidator 28 days to decide whether or not it wishes to hold on to the lease or whether it wishes to disclaim it and also see if there are any previous tenants on the hook, or any guarantors, before trying to forfeit the lease of a company in liquidation.
Insolvent individualsNext we look at what happens if an individual is insolvent. This may lead to an individual entering into what is called an individual voluntary arrangement, or being made bankrupt.
Individual Voluntary ArrangementsAn individual may realise that he is struggling to pay his debts. To avoid being made bankrupt he may try to enter into a voluntary arrangement with all his creditors. He will usually seek advice from an insolvency practitioner, who will then put forward a proposal to all the creditors.
If 75 per cent of the creditors (according to the value of the debt) agree to the proposal then the Individual Voluntary Arrangement (IVA) will be approved. The IVA will then bind the remaining 25 per cent of creditors.
Landlords of an individual tenant subject to an IVA do not have priority over any other creditor, but if the IVA would affect future payment of rent, the landlord can demand that its vote be weighted accordingly to take account of such future rent. The thinking behind an IVA is to try to give individuals the opportunity to trade their way out of difficulty for the benefit of the creditors. This means that, once the IVA has been made, a landlord will not be able to forfeit the lease or levy distress without permission of the court.
BankruptcyIf an individual is not paying his debts and is not subject to an IVA, any creditor has the right to present a bankruptcy petition if it is owed more than £750. The court has the discretion of whether or not to make a bankruptcy order, and will look at whether there is any realistic prospect of the individual paying his debts.
From the moment the petition is presented, the court has the ability to stay any action which the landlord may be bringing against the tenant, but any attempt by the tenant in this interim period to dispose of his assets can be challenged.
Once the bankruptcy order has been made the court will appoint an Official Receiver to manage the tenant's property until a trustee in bankruptcy is appointed.
They are entitled to sell perishable goods, but otherwise they will preserve the bankrupt's assets rather than dispose of them. A meeting of all creditors will be called, and ultimately the bankrupt's assets will be sold and payment made to creditors according to the value of their debt.
The lease will vest in the trustee. A landlord of a bankrupt individual does not have priority over any other creditor and if the trustee does not disclaim the lease, the landlord will have to commence forfeiture proceedings for arrears of rent.
Other points to noteThe effect of a company or an individual becoming insolvent is that the ability to sue them for the debt (or, in the case of a landlord and tenant relationship, the ability to levy distress or forfeit the lease) can be limited.
Increasing your chances of recovering arrearsAlways look to see if there are any other parties to take action against besides the insolvent entity, such as any former tenants or guarantors.
If there are a number of different parties to whom you can look for payment, make sure you do not inadvertently take any steps which release those third parties from ongoing liability.
A landlord does not have any obligation to call on the rent deposit before turning to third parties.
Landlords can call on former tenants to pay arrears of rent by serving notices on them under Section 17 of the Landlord and Tenant Covenants Act 1995.
If you receive such a notice it is always worthwhile running this past your solicitor, to check it is valid.
Q&ACan landlord send in the bailiffs?
Q My landlord has threatened to send in bailiffs to take possession of goods on the premises in lieu of outstanding rent, arising from a dispute I have with him. I have heard that there is a change in the law - so can he do this?
A Under an ancient remedy known as 'distress', a landlord who is owed rent is able to send in bailiffs to take possession of goods on the tenant's premises.
At the current time this is still legal, so your landlord is able to do as he threatens. However, looking into the future, a new Act was passed last July which will abolish this right and replace it with a new regime called Commercial Rent Arrears Recovery (CRAR).
This is expected to come into force later this year.
File under: 1 In court.
August 25, 2008
What will happen under CRAR?
Q Will CRAR be any different?
A Yes. When CRAR takes effect, landlords will no longer be able to send in bailiffs if anyone resides on the premises. So in your case, if you or any of your staff live above the pub, the landlord will not be able to seize goo
