EFFECT OF BANKRUPTCY, LIQUIDATION OR ADMINISTRATION

ON CONTRACTS OF THE DEBTOR

1. Where specific performance would be granted against the solvent debtor, will it be
granted against the trustee in bankruptcy or company in liquidation or
administration? (Goode (2019) paras 6.21 – 6.23 and 6.43)

In the seminar we will begin by considering three examples. On 1 February I contract to

sell you my house, my Rembrandt painting and my saucepans. Completion in each case is
due on 1 April when delivery will take place and you will pay the agreed price. However,
on 1 March I go bankrupt and on 1 April my trustee in bankruptcy breaks all three
contracts and says there will be no house, no Rembrandt and no saucepans. Will you get
specific performance of any of the contracts against my trustee?

(a) Contract for the sale of the house

*Re Scheibler (1874) Ch App 722

H & Co extended credit to S on security of deposit of title deeds to house owned by S; six
months later S went bankrupt; H & Co, now owed £11,239 by S, applied for order
directing S’s trustee in bankruptcy to assign house to them.

Re Coregrange Ltd [1984] BCLC 453 at p 457f-i

Company contracted to sell land but before completion it was put into compulsory
liquidation; purchaser sought specific performance but leave for proceedings needed under
s 130.

Re A/Wear UK Ltd [2013] EWCA Civ 1626 at [28]-[35]

Landlord contracted with tenant to accept surrender of lease in return for tenant paying one
year’s rent as a lump sum; sum paid to solicitors pending completion; before completion
tenant entered administration; landlord sought specific performance but leave for
proceedings needed under Sch B1 para 43(6).

(b) Contracts for the sale of the Rembrandt and the saucepans (See Jackson pp 65 – 67, 109)

Sale of Goods Act 1979 ss 17(1)(2) and 18 rule 1

*Re Jartay Developments Ltd (1983) 22 Building LR 134 (copy on Blackboard)

Jartay engaged sub-contractors on terms which entitled Jartay to retain an amount due to
sub-contractors until 6 months after completion but provided that “[Jartay’s] interest in
any amount so retained shall be fiduciary as trustee for the [sub-contractor].” Jartay in
liquidation having retained £23,009 but no funds appropriated or earmarked for the
purpose of the trust; before Jartay’s liquidation sub-contractors would have been entitled
to specific performance of Jartay’s obligation to set aside a trust fund: see Rayack
Construction Ltd v Lampeter Meat Co Ltd (1979) 12 Building LR 30; was sub-contractor
so entitled now Jartay was in liquidation?

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2. Security interests and the execution of security

Swiss Bank Corporation v Lloyds Bank Ltd [1982] AC 584

“The essence of any transaction by way of mortgage is that the debtor confers on his
creditor a proprietary interest in property of the debtor, or undertakes in a binding manner
to do so, by the realisation or appropriation of which the creditor can procure the discharge
of the debtor’s liability to him, and that the proprietary interest is redeemable, or the
obligation to create it is defeasible, in the event of the debtor discharging his liability. If
there has been no legal transfer of a proprietary interest but merely a binding undertaking
to confer such an interest, that obligation, if specifically enforceable, will confer a
proprietary interest in the subject matter in equity. The obligation will be specifically
enforceable if it is an obligation for the breach of which damages would be an inadequate
remedy. A contract to mortgage property, real or personal, will, normally at least, be
specifically enforceable, for a mere claim to damages or repayment is obviously less
valuable than a security in the event of the debtor’s insolvency. If it is specifically
enforceable, the obligation to confer the proprietary interest will give rise to an equitable
charge on the subject matter by way of mortgage.” Per Buckley LJ at p 595 C-F

3. Rescission (Goode (2019) paras 3.05, 6.17)

*Re Eastgate [1905] 1 KB 465

In February debtor bought goods on credit misrepresenting that he intended to pay for
them; on 22 April debtor absconded; on 27 April seller rescinded and retook possession of
goods; in May debtor adjudicated bankrupt and trustee in bankruptcy claimed goods from
seller on grounds trustee’s title related back to 22 April

4. Licences to occupy debtor’s land

*Re Sharpe [1980] 1 All ER 198

In January 1975 debtor bought property for £17,000 with the help of £12,000 lent by his
aunt under arrangement whereby aunt could live with debtor and his wife and be looked
after by them so long as £12,000 not repaid; in 1978 debtor went bankrupt and trustee
contracted to sell house with vacant possession for £17,000; aunt then claimed either a
beneficial interest in the property under a resulting trust or a licence to occupy until her
£12,000 is repaid

NB “deserted wife’s equity” was a licence to occupy family home devised to bind
husband’s trustee in bankruptcy: Bendall v McWhirter [1952] 2 QB 466; overruled in
National Provincial Bank Ltd v Ainsworth [1965] AC 1175, 1240, 1256, 1257; statutory
right of occupation introduced by Matrimonial Homes Act 1967 (now called family home
rights under Part IV of the Family Law Act 1996) since 1986 binds trustee in bankruptcy:
s 336(2)

See now handout on “Realizing Debtor’s Interest in the Family Home” (I will cover this in
a lecture)

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5. Proprietary remedies for sellers of goods where buyer insolvent

(a) Unpaid seller’s lien and right of stoppage in transit

Sale of Goods Act 1979 ss 39, 41 and 44 (right of unpaid seller to lien on goods still in
seller’s possession or to stop them in transit even where property has passed to buyer)

(b) Recovery of goods sold under retention of title

(i) buyer in bankruptcy or liquidation

No bar on seller recovering goods and if proceedings needed to recover goods

leave, under s 130(2) (liquidation) or s 285(3) (bankruptcy), will normally be
granted: Canon (Scotland) Business Machines Ltd v GA Business Systems Ltd
[1993] BCLC 1194

(ii) buyer in receivership

*Lipe Ltd v Leyland DAF Ltd [1994] 1 BCLC 84 CA

When Leyland went into receivership it held stocks of clutch parts supplied by
Lipe worth £93,000 and in which Lipe claimed to have retained title; receivers
wished to use parts and offered undertaking that, if Lipe’s retention of title claim is
upheld, Leyland will pay Lipe the value of any clutch parts used or sold by
receivers.

(iii) buyer in administration

Bar on seller recovering goods without consent of administrator or court: Sch B1

paras 42, 43 (see handout on Outline of Administration Section F)

With court’s consent administrator may dispose of goods subject to retention of

title provided:-

- court is satisfied this is likely to promote purpose of administration in respect

of company (see handout on Outline of Administration Section C), and,

- net proceeds (or market value if higher) applied to discharge sums payable
under contract: Sch B1 para 72 (see handout on Outline of Administration
Section H)

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6. Effect of insolvency on ongoing contracts of supply

(a) where buyers become insolvent do sellers have to continue supplying?

Re Edwards (1873) 8 Ch App 289

Hall agreed to sell Edwards 330 tons of bleach to be delivered at 30 tons per month,
payment 14 days after each delivery; Edwards failed to pay for November delivery and in
December declared himself insolvent; Hall refused to make December delivery; Edwards
then went bankrupt and his trustee sued Hall for not making December delivery

*Leyland DAF Ltd v Automotive Products plc [1994] 1 BCLC 245 (Read judgment of Sir
Donald Nicholls V-C which is affirmed by CA)

When Leyland went into receivership it owed AP £750,000 for clutches and brakes
already supplied; AP refused further supplies until debt paid and raised the price of any
new parts by 20%; receivers happy to pay for new supplies at increased price but not
existing debt and sought injunction compelling AP to supply (although not stated
specifically it seems to be accepted that AP had a continuing obligation to supply)

But NB as regards suppliers of essential utilities (gas, electricity, water and

communications):-

(i) common law position illustrated by Wellworth Cash & Carry (North Shields) Ltd
v North Eastern Electricity Board (1986) 2 BCC 99,265

(ii) since 1986 *ss 233 and 372 prevent such suppliers making it a condition of
further supply that outstanding arrears are paid; they may require office holder
personally to guarantee payment for further supply (for background to 1986
changes see Cork Report paras 1451-1466)

(iii) scope of essential services covered by ss 233 and 372 extended in 2015 following
consultation document “Continuity of supply of essential services to insolvent
businesses” (July 2014)

(iv) ss 233A and 372A also enacted in 2015 invalidating contract terms allowing
suppliers of essential services to terminate contract if customer enters
administration or a voluntary arrangement is approved.

The Corporate Insolvency and Governance Act 2020 s 14(1) (in force 25 June 2020)
inserts into Insolvency Act 1986 new section 233B which invalidates contract terms
allowing “suppliers of goods or services” to terminate contract if buyer enters
administration or liquidation. See separate handout setting out s 233B and its effect.

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(b) where sellers become insolvent can they hold buyers to ransom?

*Re TransTec Automotive (Campsie) Ltd [2001] BCC 403

TransTec supplied Ford with 50% of its cylinder heads; receiver appointed to TransTec
who carried on business while looking for a buyer; threatened to halt supplies to Ford
unless Ford accepted increased prices; Ford sought appointment of provisional liquidator

*Land Rover Group Ltd v UPF (UK) Ltd [2003] 2 BCLC 222

UPF and LR arranged that UPF would be sole supplier of chassis for Discovery vehicle;
receiver appointed to UPF who wished to sell business as going concern; receiver
demanded £61m from LR to secure next 12 months supply of chassis; LR applied for
injunction to secure supply for 7 months to enable it to re-source chassis supply:

- is there an ongoing contract for UPF to supply chassis? [11] - [42];

- if no contract is there any other basis for LR to claim? [43] - [50];

- concludes “there is a seriously arguable case that there is a subsisting contractual

obligation to effect supply” [51];

- does it make any difference to grant of injunction that UPF in receivership? [51] - [59];

- should injunction be granted in this case? [60] – [66]

NB New section 233B does not affect the situation where the seller becomes insolvent.

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7. Effect of insolvency on obligations to pay royalties or observe exclusive distribution
agreements

*Airlines Airspares Ltd v Handley Page Ltd [1970] Ch 193

HP Ltd promised to pay K £500 for each Jetstream aircraft it sold; K assigned his rights to
AA Ltd; receiver appointed to HP Ltd who transferred production of Jetstream aircraft to a
new subsidiary and proposed to sell subsidiary; prospective purchaser made it clear no
commission would be paid to AA Ltd which therefore sought injunction against HP Ltd to
prevent sale

*Schering Pty Ltd v Forrest Pharmaceutical Co Pty Ltd [1982] 1 NSWLR 286

FP Ltd appointed S Ltd exclusive distributor of its products in Australia; subsequently

receivers appointed to FP Ltd who decided to sell its products directly to customers; S Ltd
sought injunction to restrain such sales

*Astor Chemical Ltd v Synthetic Technology Ltd [1990] BCLC 1 at pp 8h – 12b

Syntec granted exclusive distributorship to Astor; administrator appointed to Syntec who

purported to terminate Astor’s distributorship

NB new section 233B would appear to have no effect on the outcome of any of the above
cases.