April 15th, 2013
A recent decision of Mr Justice Mann in VLM Holdings Limited v Ravensworth Digital Services Limited  EWHC 228 (Ch) held it is possible that termination of a head licence on insolvency of the licensor does not necessarily mean a sub-licence becomes ineffective.
What was it all about?
VLM Holdings Limited (“VLM”) owned copyright in online software which was used to design printing materials. VLM granted an informal licence to its subsidiary, VLM UK Limited (“VLM UK”); this licence permitted the licensing of the software to other companies in the UK. A sub-licence was granted to the estate agent, Spicerhaart, to allow it to print property details. The reason Spicerhaart wanted the licence was to give itself some protection should supplies of printing from VLM UK be disrupted for whatever reason.
VLM UK went into liquidation which led VLM to terminate the informal licence between VLM and VLM UK. VLM then decided to grant an exclusive licence for the use of the software to Ravensworth Digital Services Limited (“Ravensworth”), which provided printing services to former clients of VLM UK. One of these clients was Spicerhaart and Ravensworth attempted to require Spicerhaart to purchase printing generated using the software licensed by VLM. However, Spicerhaart sought to rely on its continuing sub-licence and argued that it did not need authorisation from Ravensworth.
Ravensworth sought to claim that Spicerhaart’s supposed sub-licence negated its own exclusivity and claimed that this amounted to a material breach of the exclusivity agreement it had with VLM. The result was that Ravensworth stopped paying royalties and sought to terminate its licence with VLM. VLM counter-claimed that Ravensworth’s actions were in breach of contract.
The decision for the Court was whether or not Spicerhaart’s sub-licence with VLM was capable of surviving the termination of the informal head licence between VLM and VLM UK. If the sub-licence could be said to have survived, VLM would then be in breach of the terms of its exclusive licence with Ravensworth.
What was the result?
The judge did not agree with VLM’s submission that a sub-licence automatically terminates upon termination of a head licence. Mr Justice Mann said that as a licence was a permission to do something that would otherwise, in the absence of such a licence, be unlawful, the answer depended on a number of factors including the terms of the head licence, the terms of the sub-licence and consideration of what was actually terminated.
The judge was of the opinion that the implied authority of the licence between VLM and VLM UK was sufficiently wide to allow for the grant of a sub-licence to Spicerhaart which was capable of surviving any termination of the head license to VLM UK. The points which influenced his decision were that:
- VLM and VLM UK had common directors.
- VLM UK was the trading company and VLM’s directors allowed it to do what was necessary to exploit the software.
- The sub-licence with Spicerhaart was something that the directors of both VLM and VLM UK wished to have in place to exploit the software further.
- It was known to both VLM and VLM UK that the sub-licence was in place to protect Spicerhaart from disruption to its use of the software which was fundamental to its business. Immediate termination of the sub-licence would of course frustrate this intended purpose of the sub-licence.
- The terms of the sub-licence stated that VLM UK was the owner of the copyright. VLM allowed the directors of VLM UK to make this statement and were happy to do so.
What followed was an examination of the rules of agency and it was held that as Spcierhaart was unaware that VLM UK was not the owner of the copyright, VLM was to be treated as an undisclosed principal and therefore under normal agency rules the permission of the sub-licence to Spicerhaart should be treated as permission by both VLM UK and VLM.
The final conclusion of the judge was that the Spicerhaart licence could indeed survive and therefore Ravensworth’s actions could not be considered as a breach of contract as VLM had in fact breached its agreement with them by not offering them exclusivity.
Organisations need to pay special attention to any intra-group licensing agreements. More often than not these may not be recorded in writing; alternatively, insufficient care may be taken to ensure that they are effectively well-drafted. Any intra-group licence should be formalised in an agreement and should provide that sub-licences: (i) disclose the identity of the head licence and (ii) state expressly that the sub-licence will terminate upon termination of the head licence. In addition, as a licensor, when licensing a work to a publisher or distributor, care should be taken to provide expressly for what happens in the event that the head licence comes to an end or is terminated.
This issue is not restricted to English law. Some foreign courts have been more sympathetic to the obvious potential injustice in the strict application of the termination of a sub-licence upon a head licence being revoked. A notable case before the German Federal Court, ‘M2Trade’ (GRUR 2012 pg 916), determined that despite the fact a head licence was terminated due to non-payment of an agreed licence fee, the sub-licence was capable of surviving. The court took a different approach to VLM and was of the opinion that, unless there is an explicit agreement otherwise, a sub-licence should not automatically terminate upon the cancellation of a head licence. A way in which parties can protect their position is to ensure that any sub-licence agreement contains adequate provisions detailing what is to happen, should the head licence fall away for whatever reason.
Further, it is noted that sub-licences may continue to subsist despite the occurrence of an insolvency event. Insolvency advice and measures should therefore be tempered accordingly.
For further information please contact Pitmans Technology team.
January 28th, 2013
Key Changes in 2013
by Mark Symons, Employment Partner
In 2012 there was a 5% growth in new car registrations in the UK which contrasted with falling sales in the four major European markets. The Society of Motor Manufacturers and Traders (“SMMT”) predict that new car registrations will increase by 0.1% in 2013. There is a concern about increased car production and over supply which is likely to lead to major problems for French manufacturers. The sale of used cars is likely to remain steady in 2013.
Getting cash to develop new cars will continue to be difficult and will result in car manufacturers joining together to develop new models.
Ingenious automotive designers and engineers will seek to achieve a tardis effect in smaller cars with the emphasis being on real fuel efficiency, green technologies and fuel technology. Consumers are not yet ready for electric vehicles.
In-car connectivity, content and applications are likely to be a focus of 2013 with particular regard to younger consumers.
Areas of Growth in 2013
In excess of 87% of respondents to Ernst & Young’s survey (Automotive Confidence Barometer) believed the global economy is stable or improving and expect to maintain or increase their workforce over the next 12 months.
In the same period 23% expect to refinance loans or debt obligations, 22% to make an acquisition and 25% to make divestments.
Half of the respondents said growth was their company’s primary focus.
The current environment in which the major OEMs in the UK (such as Nissan, Jaguar Land Rover and General Motors) are investing heavily in their production facilities, R&D activities and supply chain provides a unique opportunity for the UK’s supply chain to expand to meet these significant opportunities for growth. The OEMs want to source more locally and can identify additional commodities that could now be produced in the UK, following the contraction after the 2008/9 crash. It has been estimated that up to 80% of the £7.4 billion automotive supply chain purchases in the UK could be sourced locally.
Legal Issues in 2013
In taking on new employees contracts should be reviewed and updated particularly with regard to protecting confidential information, intellectual property and supplier, client and employee relationships.
In respect of acquisitions and divestments if you are proceeding by way of an asset sale then care will need to be taken in relation to the obligations which arise under the Transfer of Undertakings (Protection of Employment) Regulations 2006.
by David Loosemore, Pensions Solicitor
Auto-enrolment will mean all employers in the UK must automatically enrol eligible jobholders in a pension scheme from a date after 1 October 2012 under a five-and-a-half-year staging process. Employers must enrol eligible jobholders in a qualifying pension scheme or the National Employment Savings Trust (NEST), unless they are already members of a qualifying scheme.
Larger employers are affected before smaller employers and new businesses. From the date an employer becomes subject to the new duties – referred to as its “staging date” – the employer must automatically enrol its eligible jobholders in an automatic enrolment scheme, unless a jobholder is already an active member of the employer’s qualifying scheme. An employer can use an occupational or personal scheme as an automatic enrolment scheme if it meets certain quality requirements or else enrol jobholders in, the central government-established scheme.
Broadly, employers with between 50 and 249 workers have been assigned revised staging dates running from 1 April 2014 to 1 April 2015. Employers with fewer than 50 workers have been given staging dates between 1 June 2015 and 1 April 2017.
When checking whether a scheme can be used for auto-enrolment, different quality tests apply. If an employer auto-enrols its eligible jobholders in a qualifying scheme, it must pay contributions of 3% of band earnings each year, although this requirement will be phased in over five years. For 2012/13, the qualifying earnings band runs from £5,564 to £42,475. Jobholders will be required to contribute 5% of band earnings, again to be phased in over five years.
Jobholders who have been automatically enrolled will have a statutory right to opt out of whichever scheme they have joined, within prescribed time limits. Jobholders who have opted out will be automatically re-enrolled every three years during a six-month window.
Employers will be required to provide information to jobholders (and other workers) about auto-enrolment, including details of the pension scheme that they are using and the right to opt out.
Employers will not be allowed to induce jobholders to opt out of scheme membership or make job offers conditional on opting out. These employment protection measures came into force on 30 June 2012 and apply to an employer even before it has reached its staging date.
The Pensions Regulator will police employer compliance. Employers that breach the new duties will face compliance notices and penalties that vary according to the employer’s size. Large employers that do not comply could be liable for escalating penalties of £10,000 a day. Criminal penalties could apply in the case of “wilful” failure to comply.
We are holding a free breakfast seminar entitled Pensions Auto Enrolment: are you really ready? on 13 February 2013 at The Anchorage, Reading from 8am. To register your place, visit our website. You and colleagues would be welcome.
by Sally Britton, IP Partner
Through 2012 and into 2013, automotive companies have been looking both to protect their revenue streams and create new ones by using their intellectual property. Most car manufacturers have a large portfolio of trade marks, design registrations and patents. Often, the existence of these is sufficient to dissuade third parties from copying them, however, infringements do happen and, for example, in August 2012, BMW successfully took action against a company selling wheels that were replicas of BMW’s designs.
Within motorsport, companies are increasingly looking to create extra revenue from their intellectual property rights. As the rules within Formula 1 move towards encouraging fuel efficiency and alternative power, teams are licensing their technologies to other companies, both within and outside the automotive industries. For example, Williams F1′s hybrid power technology is to be used in trams from 2014, having already been used in some London buses. This kind of diversification was quoted as being one of the main factors in Williams F1′s 57% increase in turnover for the first six months of 2012.
With new rules coming in 2014 encouraging even greater fuel efficiency, far exceeding the levels achieved by current road cars, it is likely that motorsport teams will find even more opportunities to increase revenues outside of the motorsport industry itself by using their intellectual property
Access to Finance
by Mark Metcalfe, Banking & Finance Solicitor
The Society of Motor Manufacturers and Traders (“SMMT”) held their first “Meet the Funder” event on 21 November 2012. This initiative, aimed at improving the two way dialogue between the financial sector and the UK automotive industry, is a response to recommendations outlined in a report commissioned by the SMMT entitled Give Them Some Credit (view the report here). The Report outlined the main financial and growth constraints affecting the UK automotive supply chain and in particular highlighted the issues faced by SMEs in the sector.
The Report highlights problems faced by SMEs in financing growth and in particular the difficulties in securing finance for tooling development costs. The Report identified that SMEs looking to expand and invest in their operational capacity may well have a funding gap.
If we take an automotive supplier who receives a new lifecycle product order the supplier may have to invest in (1) new factory premises, (2) new plant and machinery and (3) will also require working capital. The Report’s findings suggest that whilst some funders who are ‘open for business’ try to provide an all encompassing package of funding the reality is that a blend of finance from a number of different sources (such as property finance, a sale and leaseback arrangement for the plant and machinery, invoice discounting to assist with working capital and possibly a government backed initiative such as the EFG scheme) is often required to secure finance for growth and reduce the funding gap.
Pitmans’ experience shows that securing adequate funding for automotive suppliers is difficult in the current marketplace. Clients are often seeking funding on top of traditional invoice discounting lines which assist with cash flow but do not provide the additional working capital required to invest in growth. Whilst we would agree with the Report that there is a lack of lenders who are offering all encompassing finance packages, we are currently acting on transactions where lenders are funding working capital on top of invoice discounting lines.
That small and medium sized businesses are struggling to obtain the finance required for growth is of course not a problem which is exclusive to the automotive industry. The pace at which the UK’s automotive industry is expanding however suggests that it is an area worth focusing on. One of the important findings of the Report is that an apparent lack of understanding of the automotive supply chain among the financial institutions is responsible. The SMMT are therefore rolling out their Meet the Funder initiative in order to improve understanding and build relationships between the sectors in the hope that they can increase access to finance.
Acquisitions and Divesments
Acquisitions and consolidations continue to be a feature of the sector with smaller entities being purchased by the bigger players although that has slowed. Trade buyers are selective but we have still had transactions involving trade buyers in the last few months. Private equity has become more prevalent especially as 2012 was a good year and 2013 is looking stable in the UK. The interest from private equity has meant prices have increased.
We have also been involved in transactions where clients have looked at securing finance from different lenders, however there are practical difficulties. Whilst a lender providing an invoice discounting line will take security over the book debts, this will be secured by a debenture over all of the assets and undertaking of the borrower. If the borrower then wishes to obtain a different form of funding from another lender the security position becomes more complex with ranking arrangements required to be put in place between the lenders and an added and often unwanted layer of complex to the transaction.
by Emily Garvey, Restructuring Solicitor
Frost & Sullivan has recently predicted that 4% of all sales (the equivalent of 4.5million units) of new cars will be online purchases by 2020. This compares to 5,000 new cars sold solely online in 2011. An implication of this, should they wish to avoid a similar fate to the likes of HMV, Jessops and Blockbuster, is that car retailers are going to have to make adjustments to their selling processes in order to avoid showrooms becoming mere browsing opportunities for customers to pick and chose but purchase online. Car retailers should begin thinking about the current leases for their expansive showrooms and whether, should the trend proceed as predicted, less test drives will mean a decline or redundancy of the showroom luxury.
A common cause of business demise is supermarket giants muscling in on their trading territory. Tesco and Sainsburys have already dipped their toes into the world of online car sales, albeit second hand cars. However, Tesco Cars (created after purchasing the existing dealership Carsite) closed its doors in April 2012 after just a year of trading claiming the issue was one of supply of cars, not a lack of customers.
It is, however, not all doom, gloom and panic. There are signs emerging within the OEM sector of healthy change. Ford’s UK division already sells new cars through its website and Renault’s newly released Dacia has launched primarily in the UK market through online sales channels, with dealerships for back up. There is also talk of General Motors providing a “shop-click-drive” website in partnership with Chevrolet.
If online is the way forward, car retailers will have to work hard at enhancing the dimensions of sales consumers will fear are unattainable online – emotional connection and physical touch. However, the initial trends are encouraging and hopefully the remainder of the marketplace can quickly follow suit and learn from the collapsing models of HMV and others.
by Alex Morgan, Trainee Solicitor
2013 marks the start of a new lower-tier racing age in motorsport. Following a decline in competition numbers over recent years, and a number of high profile series drawing to a close, including the likes of the prestigious Formula Renault UK Championship (won by Kimi Raikkonen and Lewis Hamilton) and the F2 Championship, this newly structured racing tier may bring life back into the motorsport world.
Well renowned car manufacturer Caterham have targeted the grass roots of racing by introducing a low-cost yet high-value karting series aimed at drawing more youngsters into the sport. Formula Ford, which has long been the starting point for drivers making the jump to car racing, has a new car for the season hosting a raft of upgrades including front and rear wings. The evolution will bring the series back up to date and will accommodate the new talent breaking onto the car racing scene. A new Formula 4 series has also been unveiled and the championship looks set to take up the position of feeder series to the higher level championships (F3, WSR 3.5 and GP2).
In addition to the revised racing categories, a number of sponsorship initiatives have paved the way for fresh talent to progress up the motorsport ladder. Drinks company, KX energy, have announced a stable of 7 drivers it is supporting through various tin-top series under the watchful eye of Jason Plato (two-time BTCC Champion), whilst the Racing Steps Foundation continues to support several drivers from Karting all the way to GP2.
On the dawn of the 2013 season we can be sure of an action-packed year marking a sustainable motorsport resurgence from affordable lower tiers.
For further information, please contact Pitmans’ Automotive Team.
January 21st, 2013
We all know that emails offer a quick and easy method of communication and are widely used throughout the Hospitality Industry. With so many of today’s business transactions conducted by email it is important to realise that what may appear to be an informal method of communication may inadvertently bind your business into a formal contractual arrangement.
Nicholas Prestige Homes v Neal
In Nicholas Prestige Homes v Neal (2010) the Court of Appeal confirmed that a contract formed by email was binding.
The facts of this case are that after a site visit the claimant estate agents sent Mrs Neal an email which said they would be joint agents until 31 December 2006 and that from 1 January 2007 they would have sole selling rights. Two sets of terms for the different agency arrangements were attached. The claimant chased up with a phone call and Mrs Neal replied by email saying, “That’s fine, look forward to some viewings.” The Court of Appeal highlighted two issues that were crucial to the outcome:
(i) whether it mattered that Mrs Neal had not fully read the email or the attachments (the court concluded that it did not) and;
(ii) that her acceptance was a reply to the original email such that there was no possibility of arguing that her message “that’s fine” related to anything different.
Whilst this case related to a sale of property it demonstrated three key messages.
Firstly, whilst the courts bent over backwards to give Mrs Neal the benefit of the doubt, the courts concluded that she could not avoid the almost inevitable conclusion that she was bound by the terms of the contract she had made.
Secondly, that it is easy to bind yourself into an agreement by email.
Thirdly, that there is a danger of not reading things properly. In this case the court found that it was no defence to say that the emails or attachments had not been read or did not reflect what was intended. Once accepted, the terms were binding.
Prevention is always better than cure. There are a number of steps that can be taken to protect your company and prevent contractual disputes. Below are a number of top tips to prevent you from exposing your business to avoidable legal difficulties.
Creating a contract by email
Under English law, a contract is formed when the following five elements are present:
- An offer;
- Acceptance of that offer;
- Consideration (monetary or otherwise);
- An Intention to create legal relations; and
- Certainty of terms.
Therefore, a valid contract will be created if these five elements are evident in an exchange of emails. If a chain of emails clearly outlines an offer to enter into an agreement and the other side responds with an acceptance of those terms then it is very likely that a valid contract has been created, even if one party has not properly read those emails.
Agreement to the terms offered does not require formal wording and can be signified by a simple statement such as, “that’s fine.” It is very easy, therefore, to enter into a contract without either party realising it. The terms that are included within a contract are generally the result of detailed negotiations between the parties so it is crucial that when you are undertaking contractual negotiations by email you make your objectives clear. If your intention is to simply negotiate the terms of an agreement prior to entering into a formal, signed, written contract, it is important that this is stated within the text of your emails so that it is unmistakeable.
“Subject to Contract”
If you are exchanging emails with another party and wish to avoid creating a valid contract, you must make it obvious in your email that any agreement reached is non-binding until a full contract is formally entered into. The principal way of indicating that this is your purpose would be to include the phrase “Subject to Contract” in your email. This is a widely recognised phrase which signifies that negotiations are still taking place and that the parties have yet to reach a contractual agreement. In commercial agreements there is a presumption that the parties intend to create legal relations when accepting contractual terms but a disclaimer stating that the email is “Subject to Contract” is evidence which can rebut this legal intent. This disclaimer should be made PROMINENT, (for example in bold upper case and underlined) because the more prominent the disclaimer, the stronger the rebuttal against the presumption of intent to create legal relations.
It is important to be aware, however, that by using the phrase “Subject to Contract” you are only creating a strong presumption that you do not wish to be bound by the terms within the email and it is unlikely to be effective if your conduct or communication indicates otherwise.
Pitfalls of using the phrase “Subject to Contract”
Use of the phrase “Subject to Contract” within your emails will be undermined if the parties start to perform the contract before the contractual terms have been formally agreed. This is because it demonstrates an intention that is contrary to the content of the email deemed “Subject to Contract” and as a result it is highly likely that you will be deemed to have accepted and contracted upon the terms of the email. In order to avoid this situation, it is advisable to ensure that the agreement is finalised before fulfilling any obligations or commencing any work in relation to the agreement. This can be difficult in practice within commercial situations but it is a necessary step in order to protect your business from the risk of overturning the protection afforded by the “Subject to Contract” reservation.
The phrase “Subject to Contract” should be prominently included within all emails to which you wish it to apply in order to avoid uncertainty. Many businesses choose to adopt a general disclaimer that is included in emails automatically, for example, contained within the small font at the footer of an email but this should be avoided for two reasons. Firstly, should you wish to rely upon the phrase, it may not be considered sufficiently prominent within the email to demonstrate a rebuttal of the presumption that there was an intention to create legal relations. Secondly, if you do reach an agreement with another party and wish to establish a contract but have failed to remove the reservation from the email, the other party may later seek to rely upon this to deny the existence of a contract.
It is commonly believed that all contracts need to be signed if they are to become binding documents. However this is not the case; an electronic email signature is sufficient to be deemed a signature for the purpose of a contract formed by email and this could include simply adding your name to the bottom of an email. Therefore you may bind your business by simply clicking ‘send’ on an email. If the intention of your emails is to negotiate terms prior to entering into a formal, written contract you should also clearly and expressly state that the contract will only be entered into by the exchange of a formal, written document. You must state that this is to be signed by the parties, otherwise the production of a document which serves only to reflect the terms agreed may simply appear to be a formality.
It is important to realise that it is not only principals such as directors or managers of companies that can bind the company into a contract. Email contracts can be entered into by employees or third parties who may have the actual authority to do so, whether that be express or implied authority, or if they would normally be expected to be capable of acting on behalf of the business due to the nature of their employment. It would therefore be advisable to inform your staff of the dangers of clicking ‘send’ or ‘reply’ to emails without first giving thought to the fact that they may be binding the company into a contractual agreement.
Pitmans LLP is a leading law firm in the Thames Valley and London. We have a dedicated Hospitality team and understand the needs of our clients in this sector. If you would like any specific advice on any of the issues raised in this article, please do not hesitate to contact Pitmans’ Hospitality team.
T: 0118 957 0226
T: 0118 957 0235
January 18th, 2013
Non-payment for goods supplied is an ever increasing risk for business, especially in light of the recent economic downturn. The provision of goods on credit will be particularly harmful to a business if a key customer becomes insolvent so it is important to realise that there are measures that you can take in order to limit your exposure to the risk of non-payment. A validly drafted and effectively incorporated express clause providing for reservation of legal title to goods supplied is a useful method of protection for non-payment in solvent and distressed situations alike.
Purpose of a Retention of Title clause
The Sale of Goods Act 1979 permits a seller to retain ownership of goods even after they have been delivered to the buyer, provided that there is a contract specifically covering the sale of those goods and all parties to the contract agree to the inclusion of a clause to this effect. This is achieved through a retention of title clause (sometimes alternatively referred to as a ‘Romalpa’ clause following the first leading case on the subject). A valid retention of title clause will:
(i) provide quasi security in the event of the buyer’s insolvency in respect of the goods supplied; and
(ii) absent insolvency allow the seller to recover the goods supplied if they have not been paid for.
Such clauses, if enforceable, can greatly increase a creditor’s bargaining position and, as such, prospects of payment. It must be noted, however, that retention of title clauses must only be used in conjunction with other forms of credit control and should not be viewed as a replacement in this respect.
Types of Retention of Title clauses
A basic retention of title clause provides that legal title to particular goods sold (on an order-by-order basis) does not pass to the buyer until the goods have been paid for in full. There are various terms that should be included in a basic retention of title clause in order to make it an enforceable and more valuable provision. A well drafted retention of title clause should provide for the seller to gain access to the buyer’s premises to repossess the goods; unless this provision is included the seller will be liable for trespass by doing so. The seller should also require the buyer to ensure that the seller’s goods are easily identifiable and kept separate from goods belonging to third parties so that they can be reclaimed more easily if the need arises. If there is concern that these provisions will not be complied with, the clause should also allow the seller to access the buyer’s property to allow them to check that the obligations are being met.
In order to overcome the fact that the basic retention of title clause allows that retention of ownership only applies to the specific goods within that order, it is prudent to extend it to include an “all monies” clause. This does not permit title to pass in any goods supplied at any time until all sums owed – for any goods that have been supplied by the seller – have been paid in full. In practical terms this is a useful clause in that it prevents the need to identify specific unpaid invoices with the related goods. It is worth considering, however, that where it is intended that finished goods are to be supplied for the purpose of an immediate on-sale by the buyer to its customers it is possible that an “all monies clause” may be considered ineffective unless an express provision has been made for the re-sale of the goods.
It is often necessary to consider the effect of a valid retention of title clause where there is likely to be a sub-sale to an end user and, in particular, the frequently found addition of a clause which aims to attach a claim to the proceeds of sale paid on a sub-sale of the goods. This allows the seller to achieve payment for the goods through their sale to a third party. In practice, however, it may be difficult to enforce a proceeds of sale clause.
The addition of a mixed goods clause is advisable in situations where the goods supplied are to be subject to a manufacturing process (where they are combined with other goods owned by third parties) to create a new product. Such a clause is only effective in law where the goods supplied retain their identity and can be easily removed from the manufactured product without causing damage.
Contracts containing retention of title clauses should also contain severance provisions so that, should any subclauses be deemed invalid, only those provisions that are invalid will be severed and they will not cause a strike out of the whole retention of title clause. This is particularly relevant where a clause has been drafted so widely as to create a charge which may be invalid, and void against a creditor, if it is not registered as a legal charge at Companies House in accordance with the Companies Act 2006.
Limitations on the enforcement of retention of title clauses
In order to enforce a retention of title clause it is worth considering that the following limitations apply:
I. The retention of title clause needs to be properly incorporated into the terms of the contract for the sale of the goods which exists at the time of supply, otherwise it will not be enforceable.
II. The retention of title clause may be deemed invalid if it contains provisions that are inconsistent with the general commercial relationship between the parties.
III. Where the buyer is a company in administration, no steps can be taken to repossess any goods supplied without first obtaining the permission of the appointed Administrators’ or an Order of the Court.
IV. If the goods supplied to the buyer are perishable a retention of title clause may have little or no effect.
The law is evolving
The law relating to retention of title is constantly evolving and changing. It is, therefore, important that parties seeking to rely upon the terms of a retention of title clause ensure that such provisions are regularly reviewed and updated. The key is to ensure that such clauses are not drafted so widely so as to render them unenforceable in any moment of need.
Pitmans LLP is a leading law firm in the Thames Valley and London. We have a dedicated Hospitality team and understand the needs of our clients in this sector. If you would like any specific advice on any of the issues raised in this article, please do not hesitate to contact Pitmans’ Hospitality team.
January 17th, 2013
New calendar year, new resolutions. Now is an optimum time to review your aged debtors, credit control process and enhance your cashflow.
If you have any debt which needs collecting, our Effective Debt Recovery team can assist you.
We provide a comprehensive, efficient and cost effective debt recovery service where standard fixed charges apply, we tailor our service to your needs. We put your recoveries first.
The services we offer include:
- Letters before action and follow up calls
- Issue and service of court proceedings
- Entering judgment
- Enforcement of judgments
- Bankruptcy and insolvency proceedings
If you have any outstanding debts or are interested in our service, please contact Pitmans’ Effective Debt Recovery team.
January 16th, 2013
Ensuring that you get paid can be a lengthy and costly process for any business, especially in the current economic climate. If you have agreed to provide goods or services to a customer on a credit basis then it may be sensible to secure that debt. This gives you priority over other creditors in an insolvent situation. If other debt collection processes have failed then you may be faced with having to enforce action to obtain payment. This article discusses some of the ways you may obtain security and some of the enforcement options available.
Valid and Binding Security
To ensure that your security is valid and binding it is necessary to consider the following:-
- Undertake a search of the Charges Register at Companies House and at the Land Registry to see what, if any, existing security is registered.
- Ensure your security is registered within the requisite time period – charges 21 days.
- Ensure that your security is in order namely that it has been executed by the right people with the requisite authority. Documents executed by companies can now be executed by a signature of the director of the Company witnessed by a third party in accordance with Section 44 of the Companies Act 2006.
- Consider what your security is intended to secure and whether the Company’s Memorandum and Articles of Association give the Company the requisite powers to borrow, guarantee and raise money. You should also consider the articles of association to see whether there is any restriction on the powers of the director. You should also make sure that the business of the Company is one of the stated objects in its Articles of Association.
- When taking a debenture ensure that it is a “qualifying floating charge” for the purposes of appointing an administrator. It is useful to have within the body of the debenture a clause which states that it “is a qualifying floating charge for the purposes of paragraph 14.2(a) Schedule B (1) to the Insolvency Act” and that “Paragraphs 14 and Schedule B (1) to the Insolvency Act 1986 (as amended) shall apply”. With this clause in the debenture you have the power to appoint any one or more persons to be an administrator of the Company pursuant to paragraph 14 of Schedule B (1) to the Insolvency Act 1986 should the debenture become enforceable.
- Consider when the debenture becomes enforceable. Generally speaking a debenture will have enforcement events set out in the debenture which could include non-payment of monies by the Company on demand; non-remedy or a breach of the debenture obligations by the Company; the Company being unable to pay debts as they fall due and the passing of any resolution or the taking of any action for the administration of a Company or appointment of administrator.
When making a demand you should ensure that it is prepared in accordance with the security. The security will also specify how the demand is to be served. In the case of making a demand and before the appointment of administrators the security holder should ensure that a reasonable period of time has expired. In the case of Cripps (Pharmaceuticals) Limited – v- Wickenden & another; R A Cripps Limited – v- Wickenden & another  2 ALL ER 606 where money was repayable on demand, all the creditor had to do was to give the company time to get the money from some convenient place; he was not obliged to give the debtor time to negotiate a deal which might produce the money. In this case it was clear that the debtor had neither the money nor a convenient place to which they might go to get it and so could not object on the grounds that they were not given time to find the money or that the 1 hour interval between making the demand and when the receiver was appointed was too short.
In the case of Sheppard & Cooper Limited – v- TSB Bank plc & Others  2 ALL ER 654 where money was repayable on demand the debtor was entitled to a reasonable opportunity of implementing other reasonable mechanics of payment he might need to employ to discharge the debt. The requirement that sufficient time be permitted to elapse to enable the debtor to make the necessary arrangement of payments, assumed that was the period needed if the debtor had the funds available. If the debtor had made it clear to the creditors that the required funds were not available, there was no need for the creditor to allow any time to elapse before treating the debtor as in default.
It is also important to note that all of the documentation relating to the underlying debt should be in order as a creditor will only be entitled to recover (as secured creditor) monies which have been validly lent to the Company. You also need to check there is no binding agreement between the Company and the creditor restricting the creditor’s ability to exercise powers under the debenture or legal mortgage.
In the case of insolvency you need to consider those circumstances which may give rise to the avoidance of the debenture or legal mortgage or the variation of any obligations secured in the circumstances which are set out in Sections 238, 239, 245 and 423 of the Insolvency Act 1986; undervalue, preference and transaction to defraud creditors. Before taking security ensure that sufficient due diligence is undertaken and that the requisite board minutes etc are in place to justify the commercial benefit to the debtor to minimise the security being challenged at a later point.
A legal charge can be either fixed or floating. The lender has a right to resort to the asset to realise it towards the payment of the debt.
Typically, a document under which a lender takes a fixed charge will give the lender the right to:
- Prevent the charger from disposing of the asset without the lender’s consent
- Sell the asset if the charger defaults under the loan
- Require the charger to maintain the asset
- Claim the proceeds of sale of the charged asset in priority to other creditors and thereby satisfy the purpose of taking security
- Take possession of the secured assets
- Seek a court order appointing an Administrator
- Appoint a Law of Property Act receiver over land
If you have a personal guarantee from a director of a company it is important to ensure that the guarantee is enforceable and that it complies with the Statutes of Fraud. Again, you should ensure that the letter of demand is in accordance with the terms of the personal guarantee. If the guarantor is unable to make payment proceedings may have to be issued. Once judgment is obtained there are various ways in which a creditor could look to enforce judgment.
A guarantee is a promise to ensure that a third party fulfils its obligations and/or promise to fulfil those obligations if that third party fails to do so. It is a contractual agreement that creates a secondary obligation to support a primary obligation of one party to another. The primary obligation may be, for instance, to repay a loan made by a lender to a borrower. If the lender has doubts about the borrower’s ability to perform its primary obligations, it might seek a guarantee. The guarantor promises the lender that the borrower will perform its obligations and, if he does not do so for any reason, the guarantor will perform them on its behalf. The guarantor’s obligation is contingent on the borrower’s primary obligation. It will therefore never be greater than that of the borrower under the primary agreement. The obligation is usually a payment obligation, but it can also be a performance obligation (such as a guarantee to take over building works under a construction contract).
Judgments made against the guaranteed or indemnified party are not always enforceable against the guarantor or indemnifier. For example, the High Court refused to enforce an adjudicator’s decision against the guarantor of one of the parties to the adjudication, where the guarantor was not itself a party to the adjudication.
Law of Property Act Receiver
Often within security documents there will also be the ability to appoint a law or Property Act Receiver which may be relevant when the assets of the Company are property related. A Law of Property Act Receiver will be brought in to realise the assets for the benefit of the creditors.
There are many different enforcement options including:
- By Bailiff or High Court Enforcement Officer
The bailiff/officer visits the premises of the Debtor to levy execution on any assets at the premises to sell to repay the debt.
- Order for questioning
The court will produce an Order for the debtor/company director or shareholders or any of them to attend court to disclose the financial affairs of the Company. The first order to attend for questioning will contain a penal notice and must be served personally.
- Charging Order
If the Company is the owner of freehold or leasehold property a charge could be placed against the property. However, you will only receive your money if the property is sold with sufficient equity available to settle the debt. The effect of a final charging order is to convert you from an unsecured creditor to a secured creditor. Provided the final order is made before any insolvency proceedings are commenced you will be unaffected by any subsequent insolvency.
- Third Party Debt Order
If you have reason to believe the Company has a Bank or Building Society account which is in credit or you know or reasonably believe that a sum is to be credited in such account(s) and you have the details, you can apply to the court for monies to be deducted from these accounts to settle the debt due.
- Statutory Demand
If you are owed more than £750 you may serve a Statutory Demand. The Company or debtor has 21 days from the date of personal service to settle the total amount due. If the Company or debtor fails to respond you will then be in a position to proceed with a bankruptcy or Winding Up Petition. The Statutory Demand is valid for only 4 months and can only be issued on undisputed debts.
- Winding Up and Bankruptcy Petitions
If you have served a Statutory Demand or have a judgment you can petition to wind the company up or make the individual bankrupt. This may put pressure on the Company or individual to pay its debts but should not be used as “an abuse of process”. If the debt is to be paid it should be settled from third party funds otherwise the repayment may be a preferred payment. In addition, it is possible that the petition could be supported by other creditors or that the debtor does not dispute the petition and merely succumbs to it and consequently a creditor will have incurred further costs but will rank alongside all other unsecured creditors.
- Attachment of Earnings
The court will produce an order for the employer of the debtor individual to pay a percentage of their wages into court. This will depend on their income and expenditure and will be reviewed by the court. The court will then decide the amount of money paid into court.
- Mortgage in Possession
Where a mortgage or charge is by deed the mortgagee will have a power of sale. A mortgagee lawfully in possession has, generally speaking, the rights of any owner of land for the purposes of the management and preservation of the property.
In some cases a judgment creditor may be concerned that the judgment debtor is likely to dissipate its assets within the jurisdiction or remove assets from the jurisdiction, so as to defeat the judgment of the court and leave no assets within the jurisdiction for the creditor to satisfy the judgment debt. In cases such as these, the Court has the power to make a freezing order over the assets of the judgment debtor on the application of the judgment creditor. The applicant for this form of interim relief must show that there is a real risk that a judgment or award in favour of the claimants would go unsatisfied.
Before certain enforcement methods can be used the judgment debtor must have been given an opportunity to pay the judgment debt. He must have failed to pay the judgment debt when due, or failed to pay an instalment due under the terms of the judgment. You should therefore consider carefully whether payment is overdue before you start to enforce.
Pitmans LLP is a leading law firm in the Thames Valley and London. We have a dedicated Hospitality sector who understands the needs of our clients in this sector. If you would like any specific advice on any of the issues raised in the article, please do not hesitate to contact:
January 9th, 2013
Pursuing debts can be a lengthy and costly process for any business, however it is very important that debt collection is made a priority, especially in the current economic climate. For small and medium sized businesses even a small amount of debt can have a major effect on cash flow. The late payment of debts can be a difficult issue for businesses to overcome; it can affect the business’s capability of repaying its own debts as they fall due and it can affect the ability of the business to expand by preventing the employment of staff and prohibiting any refurbishment or improvements that may be required to allow the business to remain competitive.
This article provides some ways in which you may realise your debts in a more efficient and timely manner.
Before entering into a transaction it is important to establish that the other party has the ability to repay any debt which is owed to your business. This can be done by undertaking a few simple preliminary checks. When undertaking a transaction, whether it is with an individual or another business, it is very quick and easy to carry out a credit check through a company such as Experian. This will help establish whether you may face future debt collection problems. This will also help you determine whether you wish to go ahead with the transaction at all.
It may also be sensible to adopt a process of undertaking credit checks periodically throughout any ongoing business relationships. When dealing with another company it is also possible to check at Companies House in order to see whether a company has been declared insolvent and whether that company’s accounts are up to date.
With new customers or new business it is worth considering whether tighter credit controls ought to be imposed. If you are unsure about the ability of the individual or business to pay their debts, or you are uncertain as to whether they will pay them on time, it may be worth limiting the payment terms so that they have fewer days in which to provide payment. Consideration may also be given to the amount of credit that is to be allowed before demanding payment; it is advisable to maintain a tighter rein on the credit that is afforded to a new business. Once an ongoing working relationship has developed and trust regarding payment has built up, you may then wish to extend the payment period and credit allowed to those individuals or businesses.
Payment in advance
Getting money on account is particularly worth considering if you are dealing with a new client or customer or if your business cannot afford to undertake the work on a credit basis. If the customer or client does not pay in advance and is unable to pay for the goods or services once they have been provided then you may wish to consider whether you are able to do business with that client. Asking for payment up front is a means by which to protect your business against the risk of your customers defaulting on their payments. It provides protection to the business from having to write off bad debts and, most importantly, it generates immediate income which will help with cashflow and ensure that your business is able to pay its own bills as they fall due. In this way, businesses are able to minimise losses and they are better able to forecast their earnings.
Payment up front provides the customer with certainty and control over their spending; they know from the outset what it is they are being charged for and there is less chance of the customer being dissatisfied and querying their invoices, thereby taking up the supplier’s valuable time, effort and money that could be put to better use in other areas of the business. As a result, both the customer and supplier will be able to enjoy greater financial security.
How to ask for payment in advance
While buyers will generally be seeking to make payments over the longest possible period, suppliers of goods or services are aiming to receive payment at the earliest opportunity. In order to be willing to provide payment in advance the customer needs to be certain that the goods or services will be supplied and that they will be satisfied with what they have paid for. This requires an element of trust and this trust has to be earned by your business by consistently fulfilling obligations and providing goods or services of the standard expected. For this reason, your business will have to ensure that it supplies goods or services competitively because otherwise prospective buyers and clients will take their business elsewhere to a business that may offer them more favourable payment terms.
In order to make the idea of pre-payment more palatable to the customer it may be worth offering an incentive such as a 10% discount. Although this may not appear to be a particularly favourable option for the supplier, on balance you may consider that it is a small price to pay for certainty when compared with the alternative option of having to chase for payment over a period of time, following the initial outlay already involved in providing the goods or services. A worthwhile incentive may help your business gain the competitive edge it needs over other businesses that are readily willing to provide goods or services on credit.
You may be concerned that not allowing a customer to pay for the goods or services after they have been provided will cause you to lose customers but you must assess the loss of that customer against the risk of not being paid once your goods or services have already been provided.
Customers who have paid for goods and services in advance are in a precarious position if their supplier becomes insolvent. Unless the supplier has placed the pre-payment into a separate trust account, the customer will be an ordinary, unsecured creditor and they are unlikely to be repaid. For this reason, before agreeing to pre-payment of their supplier customers are likely to need reassurance that they are dealing with a business that is reputable and solvent.
A good way of securing payment and commitment to an order is to ask for a deposit from your customer. This is also a useful way to protect your assets if you hire out goods, to ensure that you can cover the cost of replacement if necessary and continue trading. If a deposit is paid and the commitment is not followed through or the full payment is not later received then your business has at least realised some money in return for their services.
Terms and conditions
You should make it clear from the outset in the terms and conditions by which the customer is bound when payment is due and how it should be paid, particularly for ongoing work during which payment may be staggered. This will ensure that there is no confusion on the customer’s part and will help prevent delays in payment. Key clauses such as retention of title clauses can prove crucial if a key customer becomes insolvent or is in a distressed situation.
It is vital that businesses establish a system to ensure that invoices are issued promptly and that they contain the correct information – including the person or address to send it to. If invoices are rejected because they need to be amended this could waste time and cause delay in getting paid. Ensure that invoices state the payment terms very clearly so that there is no ambiguity as to when the amount is due, who it is payable to or how it should be paid. For ongoing transactions ensure that invoices are sent regularly in order to maintain good cash flow and so that the debtor is regularly informed about the amount they owe. This will enable them to plan their payments and help to ensure that they are able to pay their debts without delay.
Securing a debt
If you have agreed to provide goods or services to a customer on a credit basis then it may be sensible to secure that debt. When the goods or services are supplied to the customer on a credit basis, it is possible to use the goods or an asset as collateral to secure the debt so that, should the creditor default on the payment, the creditor may take possession of that asset and sell it to recoup the sum that is owed. If the sale of the asset does not realise the sum owed then the supplier may pursue the customer for the difference.
If a customer becomes insolvent insolvency law sets out the priority with which creditors are to be paid. Secured creditors are first in line to receive what they are owed. Therefore, when a supplier agrees to deal with a customer on a credit basis, they should consider securing that debt so that, should the client or customer default on the payment or become insolvent, they will be the first to be paid.
Maintain a good relationship
Maintain a good affiliation with your debtor in order to promote a good working relationship and dialogue. By doing so it is more likely that your debtor will warn you of any financial difficulties it is facing and this may make it easier for your business to plan ahead. It is important to establish the occasions in which a more understanding approach is all that is required in order to achieve your desired result and the circumstances in which a more aggressive stance is called for. The ability to negotiate payment with debtors may produce a quicker result that will be better for your business than holding out for the full amount which could take significantly longer. Adopting an unnecessarily tough stance too early on in the debt collection process may simply serve to drive the client to take their business elsewhere or force the client into an insolvent situation.
There will occasionally be individuals and businesses from which you will never receive payment owing to the fact that they may have entered into an insolvency process. It is important to realise that it may be necessary to write off some debts as bad debts and to provide for this by maintaining contingencies within your accounting structure, thereby enabling the business to absorb any loss. By being prepared in this way, the debt is less likely to have a significant effect upon the business and it will be possible to recover more quickly.
Debt collection procedure
It is important that every company has an established procedure for dealing with debts. Unpaid invoices should be quickly identified and a policy implemented to determine the stage at which action should be taken, and what that action should be. Often accounts departments deal with chasing up debts themselves but there are some situations in which there are advantages for outsourcing the collection of debts to debt collections agencies or law firms. This is generally seen to be more suitable in circumstances in which debts have existed for prolonged periods of time.
Many businesses are put off by debt collection agencies and solicitors in the belief that their deployment will affect their reputation and that it will hinder their relationship with the debtor, thereby having a negative influence upon future business. However, sometimes only a more rigorous approach to debt collection will result in the payment of money owed. In the current financial climate it often pays to be robust.
Debts can be recovered in a number of ways including by using a bailiff, obtaining a charging order or third party debt order, issuing a winding up or bankruptcy petition, applying for an attachment of earnings order, enforcing rights as a mortgagee in possession and by way of injunction. It often pays to be aware of these processes so that they can be implemented in the most effective and strategic manner.
Pitmans LLP is a leading law firm in the Thames Valley and London. We have a dedicated Hospitality team who understand the needs of our clients in the Hospitality sector. If you would like any specific advice on any of the issues raised in this article, please do not hesitate to contact:
October 29th, 2012
Gruesome legal nightmares…
October 29th, 2012
Forget your SME’s and FTSE 100’s. The recession has created a new type company – Zombie companies, hiding in the darkness of the UK economy.
These are businesses that cannot generate sufficient funds to repay their debts and borrowings but manage to lurch from one crisis to the next through parent company hand outs, investors not yet willing to acknowledge the passing of their company and the goodwill of creditors. The Association of Business Recovery Professionals considers that there are 146,000 zombie companies in the UK equating to eight per cent of UK companies on the brink of insolvency. The problem is, no one can afford to see these companies fail. Creditors hope that they will get paid eventually, with a little bit of patience and banks can’t afford to write off huge chunks of their portfolio in circumstances where there is little chance of a purchaser finding funding to purchase the business out of Administration for a purchase price anywhere near the amount of money required to repay secured lending.
Meanwhile there are companies being strangled by their Final Salary Pension Schemes. Investment returns are stifling the growth of assets in schemes and trustees of schemes wish to reduce the risk to members of the company’s eventual demise by investing in less risky investments with little investment return. At the same time contributions that need to be made to the scheme increase in line with the decline in the business. So the company continues its business from day to day with the sole purpose of funding the scheme. Buying its way out of the scheme will cost money the company can’t afford, investors see no good reason to invest funds that will simply find their way into the black hole that is the pension deficit and trustees may have no power to wind up the pension scheme or consider that their members are better off letting the company struggle on, so long as the deficit in the scheme doesn’t worsen.
So how do you kill a Zombie? As the economy improves and funding becomes available for those with a keen eye for a bargain, the banks will feel more comfortable addressing this issue head on. With an upturn in business, creditors may feel strong enough to draw a line under their relationships with companies that don’t pay their bills or it may be possible to breathe life into the zombie such that it can regain the faith of its creditors.
If the Zombie isn’t too badly decomposed then maybe it can be saved but otherwise the fact may have to be faced that the undead have no place amongst the living.
October 29th, 2012
You are about to enter a new dimension. A world not only of law and of the Insolvency Act 1986, but of equity. You are about to enter… The Twilight Trust Zone!
Cash-flow is the life blood of a company. As a company fails the flow of this vital sustenance grows weaker. The heart stutters and fails. The company is dying. Worse, it is unable to meet its liabilities as they fall due, and so fails one of the statutory tests of insolvency.
When the company collapses, the cash flowing through the company’s veins, like all other assets, is taken by the dreaded “Insolvency Practitioners”. Is there any way in which it might avoid this fate? Come, reader, and let me show you…
Edward was a director of Cullen and Sons, coffin makers. Times were hard in the coffin making business – fewer and fewer customers wanted the bespoke top of the range items that Edward and his family specialised in. One day, Edward was contacted by Jacob, a potential customer. He wanted a bespoke coffin and was prepared to pay a fifty percent deposit up front. Edward accepted this deposit and placed it in the company’s main account.
One order was not going to change this company’s fate, however, and Edward sensibly spoke to a Turnaround Consultant before time ran out. He was given many wise words of advice. Among these, Edward was told that in order to minimise his potential personal liability as a director of a company that might become insolvent, he was obliged to do all he could to minimise losses to creditors. One way of doing this was to create a trust, in which to hold deposits from customers taken during the “Twilight” period while the company’s fate remained uncertain.
Edward took the advice and established a separate Twilight Trust account. A deposit received from another new customer, Bella, was paid straight into the account. An amount reflecting deposits paid by Jacob and others were also paid from the main account into the trust account.
And how did the tale end? Was all well? I am afraid not…
The company became insolvent. Bella’s deposit, received and held throughout on trust was returnable to her. In the case of Jacob, however, a very different fate awaited. His money had been received by the company and held as part of the company’s cash assets. As such, the transfer into a trust was an improper “preference” payment made by the company – it benefitted Jacob and other creditors like him, but depleted the assets available for the liquidator to distribute to the remaining creditors.
Using the powers they derived from the Insolvency Act, the Liquidators unravelled the preferential transaction, and the monies paid over flowed back into the reservoirs that were now within those Liquidators’ control.
Jacob never saw them again.
Will Richmond-Coggan is a director and solicitor-advocate in the Dispute Resolution department, specialising in contentious trust matters and working closely with the Insolvency and Restructuring team in cases with a trust element. He knows what you did last summer…