Following a landmark judgment at the English High Court, logistics providers have won further protection against liabilities should a shipper go bust while the provider holds the shipper’s cargo.
The case, which saw UK logistics firm Uniserve pitted against accountancy giant KPMG, centred on a freight forwarder’s – as well as a haulier’s or shipping line’s – right to enforce their lien against administrators acting on behalf of bankrupt shippers.
“The first point for logistics companies, should a customer go into bankruptcy and the administrator comes demanding the goods, is don’t panic – there is now a precedent,” Uniserve MD Iain Liddell told The Loadstar.
According to Uniserve’s lawyers, Holman Fenwick Willan: “This judgment means that freight forwarders, liner shipping companies and road hauliers can now all feel much more certain about their legal rights when faced by administrators who refuse to settle debts in full, challenge liens and demand delivery up of goods.”
2011 was a disastrous year for UK lingerie chain La Senza, and in the second half of the year it failed to pay a number of Uniserve’s invoices within the agreed credit terms. As a result, Uniserve advised La Senza in December that it was enforcing its lien on the goods currently in its possession until the unpaid invoices had been settled.
However, La Senza went into administration the following month. KPMG was appointed as administrator and demanded that those goods still held by Uniserve be handed over as it had found a buyer willing to pay 50% of their value, if the deal was finalised within a short time frame.
Uniserve agreed, on the condition that KPMG pay its outstanding invoices and storage charges, and also offer “an indemnity in relation to any costs and/or claims that may arise out of Uniserve complying with La Senza’s order to deliver up the goods”.
KPMG declined that offer and made a court application that Uniserve deliver the goods, which had an invoice value of £2.2m, and without having to pay the invoices, charges or provide the indemnity.
It further argued that Uniserve had breached Insolvency Act moratorium by holding onto the goods between December and March – when the case was heard – without a court order.
With the deadline for the sale fast approaching, the judge, Sir Andrew Morritt, chancellor of the English High Court, ordered an expedited hearing, and the following eight days were described as “chaotic”.
KPMG changed its position several times, at one point suggesting that funds from the sale of the goods be put into an escrow account from which La Senza’s suppliers be paid, and any remaining funds be split between it and Uniserve – while Uniserve argued that arrangement would still leave it vulnerable to further claims from suppliers.
KPMG tried another tack, arguing that even if the lien was enforceable, it should be limited to the amount that Uniserve itself could sell the goods for, which it fixed at 5.5% of the invoice (it is hard to understand the logic behind this argument given that it had found a buyer willing to pay almost 10 times that).
In any case, the judge ruled that Uniserve had not broken the moratorium, rejected the escrow account proposals on the grounds that the threat of claims from La Senza’s suppliers were not purely theoretical, and dismissed the 5.5% figure because it would “fetter the terms of the lien”, and he ordered La Senza to pay the outstanding fees as well as legal costs.
“It is always sad when an important customer experiences financial difficulties, and creditors like Uniserve are exposed to potentially large losses. This judgment at least gives companies like Uniserve comfort that if they contract on suitable terms they will be recognized as secured creditors in an administration,” Mr Liddell said.
HFW noted that there had previously been significant doubt over whether a lien would be enforceable against the claims of a liquidator – the 1986 Insolvency Act placed a moratorium on liens – and also “whether a court would order delivery up of goods to the administrators, without an indemnity being provided to protect the forwarder/ carrier from potential costs and/or claims from third parties, arising out of delivery,” it said in a statement.
“Individual cases do still, however, always turn on their individual facts so whilst the judgment is most welcome as general guidance, legal advice should still be sought as soon as possible if a customer goes into administration owing significant sums.”