This is an area of insolvency that leaves even experienced hands wringing.
Common issues in an insolvency situation include:
- Can distraint be restrained or undone?
- When is the right to distrain lost?
- Does any action lie against the landlord who has distrained?
- How does the court approach these questions?
Distress is put in force by taking possession of goods whether by seizure (preferably) or under a walking possession agreement. If the goods have been lawfully seized then there is no hindrance on the right to sell such goods, but establishing whether goods have been lawfully seized can be a thorny issue! In any case, distress is not available against residential tenants without the court’s leave. Added to the uncertainty is the fact that the right to distrain during insolvency depends upon whether the insolvent tenant is bankrupt, under an IVA, or a company in voluntary or compulsory liquidation, and even how long the tenant has been insolvent! The law of distress has been subject to some recent legislation, known as “CRAR” (“Commercial Rent Arrears Recovery), but this legislation is not yet in force – watch this space!
These different situations are considered below:
Individuals
Where the tenant is an individual seeking approval of a voluntary arrangement, the landlord cannot commence or continue with distress without the leave of the court. Somewhat paradoxically, a landlord is free to distrain against a bankrupt tenant, however the amount for which the landlord can distrain is limited to 6 months rent.
Company Voluntary Liquidation (CVL)
If a corporate tenant is in CVL, there is no immediate bar on the right of distraint. However, it is a good idea to keep in mind that a liquidator or any contributory or creditor may apply to the court to determine any question arising in the liquidation and, in this circumstance, the court has available to it the same powers as with a compulsory winding up.
The position on such an application is:
1) a landlord commencing distress pre liquidation is likely to be granted permission to complete by the court; so if a creditor gets notice of a meeting at which a resolution for a CVL is proposed, the creditor cannot lawfully “rush through” his execution before the date of the meeting. It appears, however, that the levying of a distress by a landlord is not an execution or attachment for these purposes; in these cases the court considers whether there are special circumstances that justify restraining the distress;
2) distress begun after the liquidation but in respect of rent due before it, is unlikely to be permitted;
3) distress begun after the liquidation in respect of amounts falling due whilst the liquidator has the property, will probably be permitted.
Compulsory Liquidation
Where a company registered in England and Wales is being wound up by the court, any attachment, sequestration, distress or execution put in force against the estate or effects of the company after presentation of the petition is void, unless the leave of the court has been obtained.
Where a creditor has issued, but not completed, execution against the goods or land of the company or attached any debt due to it at the date of the commencement of the winding up, he is not entitled to any benefit from his uncompleted execution process.
Where distress has been completed very soon before the presentation of the petition, the basic principle is that the court should exercise its discretion to intervene and restrain a distress levied by a landlord before the commencement of a winding up only where there are “special circumstances” justifying a stay of proceedings, such asa fraud or unfair dealing which would render it unfairfor the distress to proceed. The fact that a sale under the distress would produce less for the creditors than, say, a sale in a liquidation would not comprise “special circumstances”. It should be noted that if a creditor who levies distress also submits a proof of debt that fails to give details of the distress levied, he is deemed to have surrendered the benefits of the distress for the general benefit of the creditors. The creditor may retain the benefits of distress which is put in force before the commencement of the winding up whether or not it is completed at that time.
Administration
In respect of administrations, no distress may be levied without the consent of the court or the leave of the administrator. Furthermore, where distress for rent is levied after the date of an administration order, it is not available for rent payable in respect of any period subsequent to the date when the distress was levied, but the landlord may prove in the administration for the surplus due for which the distress may not have been available.
As we have seen above distress can provide a veritable minefield for the unwary. The consequences of wrongful distress are an action for damages by the tenant for illegal distress, irregular distress or excessive distress. The remedies for each differ slightly, but they all involve the possible return of the tenants’ goods (or their value) plus payment for other damages due to the wrongful distress. For example, a landlord who levies excessive distress may be forced to account for not only the proceeds of sale but also for damages for inconvenience and loss of business.
For further information on this or any other insolvency issue, please contact Stuart Evans by emailing Stuart or by calling him on 08450 990045, or speak to your usual contact in the Commercial Disputes Team.
This document is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from taking any action as a result of the contents of this document.