Tony Griffiths of Nicholson Graham & Jones (Solicitors) explains what happens when an auction house ceases trading.
A subsidiary of one of London's oldest auction houses, Coys, which specialises in the sale of classic cars, had ceased trading with debts of £1.65m and proposed a Company Voluntary Arrangement (CVA), a process whereby a company enters into a binding arrangement with its creditors so that the company can survive and avoid administration or liquidation.
The subsidiary in question has 33 creditors, most of whom are private individual vendors whose cars were sold at auction but who have not yet received the sale proceeds.
When an auction house is insolvent, like any other company, one of the main objectives of the liquidator or administrator [see note 1] will be to protect the interests of creditors generally. To this end, the liquidator or administrator will seek to:
(a) preserve a company's assets (to ensure that as much value as possible is eventually available for distribution to creditors)
(b) further the principle of pari passu distribution (that is, the principle that all creditors of the same class should rank equally in a winding up)
Generally, vendors who have parted with their goods and seen them sold on at auction who then claim the proceeds of sale from an insolvent auction house are in an unenviable position since they will rank equally with all the other unsecured creditors of that auction house.
This may mean that they are not reimbursed in full. The Coys CVA proposal estimates the creditors will receive just 23.98 pence for every pound they are owed.
Vendors should ensure that, as far as possible, the proceeds from the sale of their good(s) are not treated as part of the assets of the insolvent company's estate.
One way to do this is for the vendor and the auction house to enter into an express trust arrangement whereby the auction house agrees to hold monies received by it on the sale of goods on trust on behalf of the vendor. Such arrangements are popular within the construction industry. Trust assets form no part of the insolvency estate and are therefore not available for distribution to all creditors generally [2].
An even better scenario, from the vendor's viewpoint, is where an auction house enters into a trust arrangement and operates a designated client account (separate from its business account), into which the proceeds of sale are deposited. Monies in a client account fall outside the pool of assets of the company available for distribution to unsecured creditors, since they are not company assets.
Some case law suggests that evidence of an intention to constitute oneself as trustee (by words or conduct) is crucial and it is not sufficient to merely deposit monies into a separate client account without words or conduct to indicate a trust [3].
Such trust arrangements conflict with the liquidator's objectives to preserve company assets and further the principle of pari passu distribution and it may follow that, post presentation of a winding up petition, any payments by an insolvent auction house to an unsecured creditor pursuant to a trust arrangement will require court sanction under section 127 of the Insolvency Act 1986.
What about those purchasers who have purchased goods at auction, only for the auction house to become insolvent and cease trading? If the purchaser has paid for the goods, those goods are his property and should be delivered to him by the liquidator since they are not company assets.
The biggest risk when an auction house becomes insolvent and ceases to trade lies with the vendors. They would be wise to use, wherever possible, an auction house with at least one chartered surveyor partner/director since they will be bound by RICS bye-laws and regulations which require client monies must be held in a client bank account.
They must also have a clients' money protection scheme to cover the situation where a member is unable to repay clients money in full. Subject to the policy conditions, the protection scheme will meet a claim up to a maximum of £35 000.
[1] As introduced by the Enterprise Act 2002 and now stated in Paragraph 65 of Schedule B1 of the Insolvency Act 1986.
[2] However, some doubts exist about the extent to which trusts can be established without constituting registrable charges.
[3] See Re Challenor Club, Times Law Reports, 4 November 1997, Lloyd J; contrast to Re South West Car Sales Limited [1998] BCC 163 where it was held sufficient to merely operate a designated separate client account.
tony.griffiths@ngj.co.uk
