Www.charlesrussell.co.uk Roger Elford Partner, Restructuring and Recovery, Charles Russell LLP 25 September 2014 When brands go bust.

www.charlesrussell.co.uk

Roger Elford

Partner, Restructuring and Recovery, Charles Russell LLP

25 September 2014

When brands go bust

Brands going bust……..where are they now?

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Overview of insolvency

When is a company insolvent?

Balance sheet insolvency –v- inability to pay debts as they fall due (s123 Insolvency At 1986) (“IA1986”)

Overview of the main UK insolvency regimes:

•Administration

•Liquidation (compulsory and voluntary)

•Company Voluntary Arrangements (CVA’s)

•Fixed Charge/LPA receivership

•Bankruptcy

Overview of Insolvency regimes

Administration

Must be pursued with the objective of:

•rescuing the company as a going concern; •making a better realisation for creditors than if the company went straight into liquidation; or •in order to make a distribution to one or more secured creditors.

Administrator can be appointed: •out of court by the directors or by the company (para 22 Sch B1 IA1986) •out of court by the holder of a qualifying floating charge (para 14 Sch B1 IA1986)•by the court upon an application for an administration order by directors, the company or by creditor(s) (para 12 Sch B1 IA1986)

Advantages of Administration: •Company benefits from moratorium (para 43 Sch B1 IA1986) •Business can be sold quickly with a view to preserving business continuity and goodwill. •Businesses often sold by way of “pre-packaged” sale.•Administrators must justify their decision to sell by way of pre-pack by reference to Statement of Insolvency Practice 16 (“SIP16”).

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Overview of insolvency regimes

Liquidation

Insolvent Liquidation

Compulsory liquidation – company wound up by the court on the petition of a creditor, the company or a contributory.

Creditors Voluntary Liquidation – Company passes a special resolution to wind up the company and calls a meeting of creditors to ratify (or vary) the company’s choice of liquidator.

Insolvent liquidation is more cumbersome than administration and so is not usually an effective business rescue tool – it takes at least 7 days to get a company into CVL and petitions for winding up often impact on goodwill and the company’s ability to continue trading whilst the petition is pending.

Solvent Liquidation

Members voluntary liquidation – Company passes a resolution to wind up company’s affairs supported by statutory declaration by the company’s directors that the company will be able to pay its debts and expenses in full within 12 months.

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Overview of insolvency regimes

Company Voluntary Arrangements

 •Proposal made by company to its creditors.

 •Contract between the company and its creditors (can also be proposed by an Administrator as a means of exiting an administration and returning the company to solvency).

 •75% of the company’s unsecured creditors who vote at the meeting required to approve a CVA (of whom at least 50% must not be connected with the company).

 •50% of the company’s members in attendance must also vote to approve CVA.

 •The terms are entirely flexible but the purpose of the CVA is (usually) to enable the company to continue trading and to ensure that creditors receive a better return than they would in a liquidation.

 •Individuals can enter Individual Voluntary Arrangements (“IVA’s”) as a means of avoiding bankruptcy.

Fixed Charge/LPA receivership•Receiver appointed by a secured creditor over a specific asset (or class of assets).

 •Receiver’s role is to realise the asset for the benefit of the chargeholder.

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Overview of insolvency regimes

Bankruptcy

 •Insolvency regime applicable to individuals.

 •Individuals adjudged bankrupt on a petition based on non-payment of a liquidated sum of £750+ or on evidence that the debtor is unable to pay his debts as they fall due.

 •Save in respect of limited asset classes, the entirety of the bankrupt’s estate will vest in his trustee in bankruptcy automatically upon his appointment (s.306 IA1986).

 •Bankruptcy lasts 1 year (save where extended by order of the court or in the case of serial bankrupts). At the end of the bankruptcy the assets remain vested in the trustee in bankruptcy, to be realised for the benefit of the bankrupt’s creditors.

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Licensor Insolvency

Insolvency of Licensor

 •Administrator will wish to realise value for creditors, and where possible will wish to sell the business as going concern.

•Administrator has no special statutory powers to override or abandon established IP rights.

 •Administrator may seek to sell trademarks to someone who is unaware that they have been licensed.

•Administrator will offer no warranties and will only purport to sell such right and title as the company may have in the assets (including any IPR)

 •s.25(3)(a) Trademarks Act 1994 – no protection for unregistered licensees.

 •Administrator cannot sell IPR that has been mortgaged in favour of a lender without the lender’s consent or the leave of court (para 71 Sch. B1 IA1986).

 •s.234 IA1986 – limited protection for officeholder who sells IPR that does not belong to company.

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Licensor Insolvency continued

Practical steps for the Licensee:

•Check whether licence is terminable in the event of the Licensor’s insolvency;

•Upon learning of insolvency event, licensee should notify Administrator of its interest immediately;

•Consider offering to pay upcoming fees normally paid by the licensor in order to preserve trademark;

•Express an interest in purchasing the IPR from the administrator, which should assist in ensuring that the licensee is kept informed.

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Liquidator’s power to disclaim

• Where IPR not readily saleable and subject to licenses.

 • Liquidator’s power of disclaimer (s.178 IA1986)

 • Not a mechanism to terminate licences in order to make IPR more readily saleable/valuable (see

Capital Prime –v- Worthgate [2000] BCC525).

 • A liquidator could disclaim the licensor’s obligations under the licence of a trademark if he can

categorise it as being:

a. an unprofitable contract; or

b. property of the company which is unsaleable or not readily saleable or is such that it may give rise to a liability to pay money or perform any other onerous act (s.178(3) IA1986).

 • Disclaimer does not affect the rights of the licensee to exercise the licensed rights, merely the onerous

obligations on the part of the licensor (s.178(4) IA1986) - e.g. a licensor’s indemnity for infringement by third party of intellectual property rights.

 • Licensee can apply for a vesting order (s.181 IA1986) to have the disclaimed IPR vested in it.

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Licensee Insolvency

Termination of Licences

 •Most licenses terminable on insolvency (and/or in the event of non-payment of licence fees in any event).

 •Such clauses are usually lawful but consider possible effect of anti-deprivation principle:

"….there cannot be a valid contract that a man's property shall remain his until his bankruptcy, and on the happening of that eventuality go over to someone else, and be taken away from his creditors"…..

(Money Markets International Stock Brokers v London's Stock Exchange Limited [2002] 1WLR1150)

 •Licensors will take comfort from recent dicta of Lord Collins in the Supreme Court;

“So also licenses of intellectual property expressed to determine (or to be determinable on notice) on bankruptcy of the licensee are valid”.

(at 87, Belmont Park Investments PTY Limited –v- BNY Corporate Trustee Services Limited, Lehman Brothers Special Financing Inc. [2011] UKSC38).

 •Position relating to exclusive licences granted in consideration for single one-off licence fee payment may be different.

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Licensee Insolvency continued

Assignment of licence

 •Officeholder has no special power to assign trademark licences in circumstances where licence prohibits assignment.

However…..

Licensors with insolvent licensees should be wary of accepting payments from a purported assignee – could be construed as an implied consent to assign (see Lawson –v- Donald Macpherson & Co Ltd (1897) R.P.C. 696).

 •Be wary of pre-pack purchasers!

 •Administrators who retain licenses with a view to selling them as part of the business of the insolvent company should pay ongoing royalties as an expense of the administration (rule 2.67 Insolvency Rules 1986) and may also pay any arrears as an expense as a mechanism to avoid termination of the licence.

 •Liquidator has power to disclaim onerous licences, leaving licensor with an unsecured damages claim in the liquidation for loss of future income stream.

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Company Voluntary Arrangements (CVA’s)

 •Licensors - Review proposal in detail – it may purport to vary future royalty payments as well as dealing with how arrears will be dealt with.

 •Limited right of challenge (s.6 IA1986) on grounds that:

 • the CVA is unfairly prejudicial to a creditor or class of creditors; or

 • that there was some material irregularity at or in relation to the creditors or member meetings.

 •Strict 28 day time limit for challenge (see Re Bournemouth & Boscombe AFC Co Ltd [1998] BPIR 1998).

 •A proposal that purports to vary future royalty payments may be susceptible to challenge for unfair prejudice by a licensor (see Thomas –v- Ken Thomas [2006] EWCA Civ 1504) but a licensor who does not challenge the arrangement within 28 days will be bound by it as if he had consented to it.

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Cross-border issues

 •IPR often held by foreign parent or SPV companies.

 •UK entity may have bare licence only – not readily saleable by UK administrator and easily revoked. May leave administrator with very little to sell.

 •Whilst UK insolvency law largely leaves the contractual rights of the parties in tact, some foreign regimes (e.g. US Bankruptcy Code) prohibit termination of licences in the event of the licensee insolvency whilst the licensee remains in control of the company (in the US, in so-called “Debtor in possession” proceedings under Chapter XI of the US Code).

 •Interaction between cross-border insolvencies governed by:

i. United Nations Commission on International Trade Law (UNCITraL)

ii. Cross-Border Insolvency Regulations 2006 (SI2006/1030)

iii. EU Regulation on Insolvency Proceedings (1346/2000)

iv. Assistance of certain foreign courts

v. Common law – reciprocity is key

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S.216 IA1986 – Restriction on re-use of Company name

Where a company enters insolvent liquidation, any person who was a director of that company in the preceding 12 months may not:•be a director of any other company that is known by a prohibited name;•in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of any such company, or •in any way, whether directly or indirectly, be concerned or take part in the carrying on of a business carried on (otherwise by than by a company) under a prohibited name.

“Prohibited name” means:

 •a) a name by which the liquidating company was known at any time in the period of 12 months preceding the commencement of liquidation, or

 •b) it is a name which is so similar to a name falling within paragraph (a) as to suggest an association with that company.

Applies equally to trade names as well as to the company’s registered name.

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S.216 continued

Exceptions:

1. The leave of the Court is obtained (s.216(3) IA1986 and R. 4.229 Insolvency Rules 1986).

2. the business that the director wishes to be part of has acquired the whole or substantially the whole of the liquidating company’s business from its liquidator or administrator, and he gives notice to all known creditors of the liquidating company (and in the London Gazette) that he intends to be involved in the business going forward. (R.4.228 Insolvency Rules 1986).

3. Where the company in question has already been known by that name for at least 12 months prior to the liquidating company’s entry into liquidation (R.4.230 Insolvency Rules 1986).

Proceedings instigated by the Secretary of State for Business Innovation and Skills

The sanctions:

 •Criminal: Breach of s.216 is a criminal offence, punishable by imprisonment or a fine.

 •Civil: Under s.217 IA1986, a person acting in contravention of s.216 is personally liable for the debts of the (new) company for the period during which he has been involved in the management, as is a person who has acted on the instructions of such a person with knowledge that the instructing party was acting in contravention of s.216.

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A hypothetical breach of s.216…………

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Any Questions?

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information.

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