His business, Oxenfoord Home Farm (Pathhead) Limited, had gone into creditors voluntary liquidation in 2011, owing creditors £494,717. The reason that the Insolvency Service appears to have taken an interest was due to Mr Blackwood's handling of a tractor and trailer that had been purchased "subject to finance". Prior to the liquidation of the company, Mr Blackwood had arranged for these items to be sold on to an innocent third purchaser who, finding that the finance interest had not been released, then had to pay a further £44,717 to clear the finance debt.
From the information released to the press, we do not know whether this was truly a Hire Purchase agreement (where the company really had "purchased" the equipment subject to finance). As likely these goods were on some form of finance lease and they were not set to be the company's to "purchase" at all. In the context, the distinction does not really affect the outcome as at the time of the sale, the assets still belonged to the lease company.
Acting for a number of Asset-Based Lending (ABL) finance houses, I can attest that debtors - on receiving a letter from me - commonly ask: "What lease agreement?" To them, the agreement signed for the leased goods was just another "loan". If the director ever understood that they were taking the goods on HP or lease, and that the goods were not theirs to dispose of as they wished, it had long since been forgotten. Accordingly, when times get tough, there is a temptation for the debtor company to look over at the large pieces of plant and machinery in the corner of the factory and imagine what they could be sold for. Even if it is not to be a sale to a third party, the value of the leased goods may come into consideration when looking to restructure and set up a newco (as use of the equipment may be essential to the newco's operations). At the other end of the spectrum, the till in a pub, small shop or restaurant may be on lease, and there is often little consideration of this fact by a departing owner when selling the business on with the tills left in situ.
Unless proper consideration is made to the ownership interests in such plant at the time of a sale, the first time the leasing company knows about matters is when - pursuing default in the agreement - they find out there is someone else occupying the premises and clearly using the leased assets.
What issues arise to the different parties?
To the debtor, even if you genuinely believe that the leased goods have a value above the remaining sums due under the lease agreement, you cannot simply sell on the goods (as they are not yours). Many hire and lease agreements do however contain provisions for the lease company to consider appointing you as their agents for the purposes of selling the leased assets (subject to certain terms on price, etc.). If you think you can sell the leased assets at a good price, leaving something in it for you once the lease company is paid off, then pick up the phone to the lease company to discuss.
Even if you are in arrears to some degree, or the agreement does not contain provisions considering giving you a power to sell, and even if the finance house has taken steps to terminate the agreement, ultimately the lease company just wants to be paid in full as soon as possible. If you can propose to them a sale that will result in this, they will most likely listen to the proposal.
To the Asset-Based Lender, if payments from the debtor have stopped, what has happened to your leased asset? Is it merely that there have been some hiccups in payments or is the business shutting down? If the debtor business is shutting down, what are they going to do with your asset and is there a value in recovering that asset now? It is often better to take steps now than to find it has been sold on or that it is locked in closed premises. For assets that are easily moveable (like vehicles) you may wish to consider an interim interdict (in England, an injunction) to stop the debtor moving or selling the equipment.
If the goods are already in the hands of a third party, the economics of the situation often require to be considered. Although the third party may have no title to use the goods (as title will only pass to innocent consumer purchasers in very limited circumstances under the Hire Purchase Act 1964), an Asset-Based Lender first has to find out who the third party is and where the asset is before assessing whether there is any useful purpose in seeking recovery.
For a purchaser of equipment that may be on lease or hire (and that would thus cover the purchaser of any motor vehicle), one should always be alert to the possibility that the seller does not have title. For cars, a check of the HPI register or similar registers may be helpful but that will not assist the purchaser of other plant and machinery. You would be best advised to carry out greater investigation before agreeing to purchase. Simply asking for evidence of the purchase will often do. If the invoice is in the name of a bank or finance house (and not the seller), then this is a good sign that the goods were taken on lease or HP.
Turning finally to the Insolvency Practitioner, you may find yourself appointed to a company holding leased assets or from which leased assets have been sold pre-insolvency. Technically, if the lease is still on-going but the assets have departed, there may have been a value in keeping the lease going (and the equipment in the hands of the company). It would seem that in most cases it would be extremely difficult to unwind such a situation if the goods were now in the hands of an innocent third party, especially if the lease company is seeking to terminate the agreement.
The more likely issues that will arise for an Insolvency Practitioner is what to do about the leased assets if still with the company at the time of insolvency. If the goods have a value above and beyond the remaining sums due under the agreement, then the IP is in much the same position as the debtor pre-insolvency. They may wish to try and negotiate a quick sale, with the consent of the lease company, to try and realise value in assets (either by a sale to a third party of the asset or the sale of the whole business in general including the leased asset). If they do not, you will wish to ascertain swiftly whether the lease company wants to uplift the goods or whether you may simply dispose of them. You will wish to avoid them cluttering up the unit just as much as you wish to make sure that you do not throw them away and then find out the lease company wants them back.
Where the Insolvency Practitioner is attempting to negotiate a sale of the business assets with the lease agreement remaining in place - and the obligations, and use of the assets, being transferred to purchaser - greater difficulties may arise. It goes without saying that a lease company will wish to see a good covenant or credit rating being held by the prospective purchaser. Without that, why would they consent to such a "novation" of the agreement rather than just uplift the goods now? Furthermore, the insolvency may have triggered termination of the agreement and thus the lease company may argue that, firstly, the agreement is no longer alive and cannot be transferred, and, secondly, that the sums due are not merely the continuing payments or any arrears but immediate payment of a termination sum (which may be a sum close to the total of all remaining sums under the agreement). It is not impossible for agreement to be reached in such circumstances but an IP should expect the lease company to play harder or simply refuse altogether.
In all such cases, an Administrator has a greater hand to play than a Liquidator, as the Administrator has the benefit of the statutory moratorium. The lease company cannot therefore repossess the assets without first seeking leave of the court (and thereafter taking steps to repossess the items which may themselves require a separate Court Order). If an Administrator can provide a sufficient comfort to a lease company that there will be a swift sale at good value (or novation to a new debtor with a good covenant), then most lease companies would at least consider such proposal rather than face the additional costs and delays of proceeding to court for leave.
Mr Blackwood's disqualification
What then of the issues Mr Blackwood's case brings up in regards to director's disqualification? Five years disqualification is at the higher end of the lowest band of punishment so, though matters have been taken seriously, he has not been punished too heavily. That is unlikely to be much comfort to the third party who ended up having to pay twice for the tractor and trailer, or the lease company who had to work to unravel matters.
What is clear is that the Insolvency Service takes quite seriously circumstances where creditors are not being treated equally. Recently reported disqualification cases include those where everyone is paid except the taxman. There should be nothing special about HMRC and one should expect the Insolvency Service to take equal interest in a director's actions where a company paid everyone with the exception of, say, a landlord or an Asset-Based Lender. Even where such payments to creditors were not challengeable as unfair preferences, the Insolvency Service may yet see a flagrancy in the director's actions in favouring one or more types of creditor that brings them to consider disqualification proceedings. At heart, Mr Blackwood's actions expressly ignored one creditor's interests in property (the most fundamental interest; that of ownership) and turned the innocent purchaser into a disappointed creditor (when they found that they did not have good title to the tractor and trailer). One can see why these actions invoked the ire of the Insolvency Service.
This returns us back to the first question, what could Mr Blackwood have done better? Had he simply picked up the phone to the Lease Company and indicated that he wanted to sell on the leased assets, could he have done so with their consent and kept the "equity" that had built up in them in the company, for the benefit of all creditors? We cannot know for certain if the figures would have allowed for this. Perhaps there was little value to be realised for the company and, though he could have avoided making matters worse (as he did), there was little chance for Mr Blackwood to have made matters better. Nonetheless, the Insolvency Service has now sent a message to directors to pay better attention to leased goods and the interests that surround them.