UK: ROT Claims – The Rules Of The Game

Last Updated: 26 January 2015
Article by Melania Constable and Aziz Abdul

Re: Blue Monkey Gaming Limited v Hudson & Others [2014]

The above reported case provides some useful guidance in relation to the steps required to be taken by office-holders in identifying retention of title ("ROT") property and adjudicating ROT claims.

The Court held that the administrators were not obliged to identify property owned by a third party and were entitled to reject that third party's ROT claim on the basis of the incomplete evidence submitted by it.

FACTS

The case arose out of the administration of the Agora Group which was one of the largest operators in the UK Adult Gaming Industry. MDM Leisure Ltd ("MDM") supplied fruit machines to the Agora Group for its use in arcades. Each invoice contained an ROT clause which specified: "the legal ownership of goods herein is retained by the seller until full and final settlement".

When the Agora Group entered administration in December 2009, MDM claimed to be owed nearly £4,000,000 in respect of gaming machines allegedly subject to the ROT clause. MDM assigned its claims to the Claimant, Blue Monkey Gaming Limited ("BMG").

BMG subsequently pursued a claim in conversion personally against the administrators on grounds that the administrators: (a) had caused or procured the company to use MDM's machines to make money for the administration outside the terms of bailment pursuant to which they had originally been supplied; and (b) ought to have delivered up the machines to MDM after an alleged unequivocal demand for their return.

In this case, the administrators had traded the businesses (at a loss) and subsequently agreed a sale of certain of its business and assets. The sale documentation included the usual terms about title and excluded ROT assets from the sale.

The Court dismissed the claim and held the administrators were not liable for wrongful interference with the supplier's goods.

ISSUES BEFORE THE COURT

An action for wrongful interference with goods (that is to say, conversion) comes within the meaning of section 1(a) of the Torts (Interference with Goods) Act 1977. The most common way of showing a conversion by unlawful retention of property is to prove that the defendant, having the asset in his possession, refused to give it up on demand made by the party entitled to possession (Barclays Mercantile v Sibec Ltd [1992] 1WLR 1253).

In this case, the court had to consider whether the administrators were personally liable in a claim for conversion on grounds that the administrators had caused or procured to the company in administration to use certain of its gaming machines.

BMG argued that it had (by virtue of a letter and/or submission of its responses to the administrators' standard ROT questionnaire) made a genuine and unequivocal demand for the return of the machines which the administrators had not complied with. BMG also argued that the administrators were under a duty to compile a detailed inventory of assets and identify the machines that are owned by individual third parties.

In summary, the Court concluded as follows:

RESPONSIBILITY FOR IDENTIFYING ROT ASSETS

It was the duty of the alleged owner to identify its own goods and not for the administrators to do so. The Court held that the extent of the administrators' duty in relation to ROT goods was to permit supervised access to an alleged owner to enable it to identify its own goods and then adjudicate any claim that arises on the basis of all evidence supplied to the administrators. This was on the basis that the office holders came to the business as strangers.

HHJ McCahill QC (sitting as a Deputy High Court Judge) reasoned that to hold otherwise would not only be "totally unrealistic and practically unworkable but would also impose an obligation on the administrators which...the law [did] not demand".

UNEQUIVOCAL DEMAND

As indicated above, BMG argued that MDM made a genuine and unequivocal demand for the return of the machines which the administrators had not complied with.

The Court rejected this argument on the basis that MDM's conduct was one of inactivity and passivity and that, as a matter of construction, the letter was not a genuine demand but "a mere posturing rather than an expression of a genuine desire then to recover the machines". In particular, the Court noted that MDM failed to identify the property in which it alleged it had retained title.

HHJ Judge McCahill QC pointed out that the ROT questionnaire was an important document as it asked the ROT Claimant to supply the information which would be most material to identification and location of the unpaid machines. However, the information provided by MDM was inaccurate and incomplete and suggested MDM still had further information to provide.

In conclusion, the Court held that the submission of the ROT questionnaire to the administrators did not constitute an unequivocal demand for delivery up of MDM's machines. In fact, the Court considered that MDM was perfectly happy to leave the machines in situ to aid the administration without any expectation of payment for the use because it believed it would do better out of a negotiated deal with the ultimate purchaser of Agora business than it would as an unsecured creditor in the administration or by the recovery of out-of-date and depreciated stock.

FAILURE BY THE CLAIMANT TO SEEK ALTERNATIVE RELIEF UNDER THE INSOLVENCY ACT 1986

The Court further considered the failure by MDM to seek alternative relief in the administration.

In particular, it noted the failure by MDM to make an application under paragraph 43 of Schedule B1 of the Insolvency Act 1986 ("the Act") requiring the administrators to make a payment to MDM as an expense of the administration and as a condition of the continued use of the machines within the administration. The Court held that such an order could have been made under this provision.

It also considered that paragraph 74 of Schedule B1 of the Act (i.e. an application to Court by a creditor that the administrator had acted so as to unfairly harm its interests) afforded another legal remedy to MDM if it wished to complain at the time of the continued use of the machines by the administrators without payment. The Court held that the failure to pursue such other remedies undermined the Claimant's case that it did not consent to the gratuitous use of the machines for the purposes of the administration.

In conclusion, the Court held that the administrators had never converted or wrongfully interfered with MDM's machines and dismissed the claim in its entirety.

COMMENTS

This is a helpful judgment for practitioners and underpins what is reasonably to be expected of an office-holder who the court recognised often arrives to a company in financial distress as a stranger. The Court considered administrators should be afforded a reasonable opportunity to deal with ROT claims and must be accorded "a wide measure of latitude" in the way they go about the exercise of their powers so as to achieve the statutory purpose. This is particularly relevant as administrators are often confronted with incomplete books and records and are required to urgently get to grips with the business and to get in and protect the assets with a view to selling the assets and/or business (and, if at all possible, to preserve goodwill and save jobs) in circumstances where they are also faced with pressure and conflicting demands from various types of creditors (e.g. landlords, ROT suppliers and employees).

Whereas the decision in this case firmly places the responsibility of identification of goods with the party whose commercial interest it is to recover them, practitioners should still be aware of the importance of careful drafting and communications with creditors. In particular, it is advisable for office-holders to communicate their standard procedure for dealing with ROT claims to creditors as soon as possible at the outset of their appointment and to ensure that they expressly set out what they will and will not do so as to avoid any confusion as to the parties' respective responsibilities.

As an aside, it will be noted that the administrators were able to recover some of their legal costs in the case from the ultimate purchaser of the business and assets of the company pursuant to an indemnity clause in the SPA. This serves as a useful reminder to practitioners to ensure appropriate indemnities and claw-back provisions are contained within their sale agreements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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