Risk & Economy » Compliance » Insolvency: what rights need to be considered?

Nathanael Young discusses the rights that need to be considered when a company goes into administration, and the options available to insolvent companies

After Monarch’s demise made the headlines, attention has now turned to the courtroom battle over their take-off and landing slots. Initially unsuccessful in the High Court, the administrators have now succeeded in overturning that judgment in the Court of Appeal. It now seems that they will be able to sell Monarch’s slots at Gatwick and Luton, which are said to be worth up to £60 million.

This decision turned on issues of aviation law, such as whether Monarch was still an ‘air carrier’ – a far cry from the issues that arise in more mundane administrations. However, it was a useful reminder that administration not only affects the ability of a company to keep trading, it can also affect the value of its assets.

There are companies where most of the assets are tangible and easily identified and dealt with, but those are the minority. Take-off and landing slots may be a special case, but many modern businesses are built entirely around intangible assets, normally in the form of contractual and intellectual property rights. Administrators cannot assume that these rights will be unaffected by insolvency.

 

 

Contractual rights

Where contracts do not contain a clause relating to what happens on insolvency, there is no simple answer to whether they will be terminated or survive. However, as a general rule, not even liquidation results in automatic termination of contracts. Administration does not automatically terminate contracts.

Of course, avoiding automatic termination is only one issue – insolvent parties may be unable to perform their obligations under the contract, which may in turn give the other party a right to terminate. However, this will normally still give the administrator breathing space, particularly given the statutory moratorium that applies when a company enters administration affects some of the remedies available to a contractual counterparty. Termination without having to show a failure to perform is another issue entirely. This may not only prevent the company being rescued, it will mean the value of the contract is completely unavailable for creditors.

In reality, most sophisticated contracts do contain provisions governing what will happen if one of the parties goes into administration or other form of insolvency process. Normally, these will give the other party the right to terminate on notice, and service of a notice in these circumstances is not caught by the moratorium. In theory, this means that the other party can decide if continuing with the contract is in its interests or not, although if the contract is onerous to the company entering administration, it is likely the administrator will simply repudiate it, which will normally leave the other party as an unsecured creditor with a damages claim.

For contracts that are advantageous to the company entering into administration, for example, ones where it has paid most of the consideration already, the loss of contractual rights will be a major issue. The existence of contracts of that type may point to other strategies, such as a pre-pack administration. In a pre-pack administration, the sale of the business as a going concern is organised in advance, and takes place immediately after the administrator is appointed. As long as the contracts in question can be assigned, the buyer (often a new company) takes the benefit of the contracts before the other party has the right to terminate.

Intellectual property rights

Intellectual property rights will usually survive even if a company enters administration, but realising their value may not be so simple.

While some intellectual property rights (such as trademarks and patents) are publically registered and title is easily shown, other rights are less clear-cut. Even where title is clear, it may not be easy to identify what rights are of value, given many businesses do not even identify, still less value, their intellectual property rights.

The administrator may also find that the goodwill of the business depends on confidential information, which is held by the directors or employees, who are more interested in exploiting it for themselves than protecting the interests of the creditors. Even where the confidential information is of value, it may not be easy for the administrator to define what exactly it is, prove ownership on behalf of the company, and enforce the company’s rights.

Other rights

Some valuable rights are neither contractual or intellectual property rights in the normal case – as in the Monarch case. Another unusual case was that of Glasgow Rangers – despite the club and its assets being sold as a going concern by administrators, its registrations with the Scottish Premier League and Scottish FA were terminated, and the club was forced to start the next season in the Scottish Third Division.

A more common scenario is where the company that is placed into administration is pursuing litigation. Unlike claims against the company, which will be caught by the moratorium, the administrator will in principle be entitled to pursue claims that arose before the administrator was appointed. In some cases, such claims are of considerable value. However, there are a number of complex issues that arise when an administrator continues with a claim, particularly if the defendant seeks security for its costs in the even the claim is unsuccessful. In some cases, it may be preferable for the administrator to transfer the right of action to a third party for them to pursue.

Conclusions

What happens when a company goes into administration is a crucial concern for insolvency practitioners advising insolvent companies on their options. However, it is often of much wider interest — as in cases such as Rangers and Monarch. Even when the administration is less high profile, it can still have a significant effect on trading partners and in their industry.

Nathanael Young is Senior Associate in the Commercial Litigation & Dispute Resolution Department at SA Law

 

 

Read more