TT Talk - General review of rights of lien

With recent fragility in the global economy, instances of business failure, insolvency, administration or collapse are frequently high profile in the media, particularly those that affect the high street, retail industry or heavily impact workforce demographics. Invariably media interest concentrates on the direct aspects of the enterprise and its collapse.

Seldom in the news are the suppliers of products or services that support these businesses and the impact of cargo, freight or outstanding debts relative to the collapse. In each case it is likely that a number of entities involved in the supply chain will be affected, perhaps even threatening the very survival of smaller operations exposed to the collapse.

Inevitably any new organisation (phoenix enterprise) or new buyer of the going concern will seek to isolate themselves from all past debts, which leaves a significant burden on those who have served the previous company in good faith, including materials or products suppliers and other parties in the overall supply chain.

For many in logistics it may be possible to mitigate exposure by the application of a lien, although this is clearly dependent on a given jurisdiction's interpretation of the circumstances in which a lien may be exercised.

The concept of lien itself is a complex area. In the majority of instances, the forwarder or logistics party will be interested in a 'general lien' or perhaps 'contractual'. The potency of this remedy is materially dependent on timing - and generally company failures arise out of the blue and therefore present significant disadvantage to the suppliers of product and services. As a result, it is important to be alert to indicators of financial instability, such as extending credit terms, missing payment dates, difficulties in reaching the appropriate credit control teams, failure to present or surrender banking documents in good time under letters of credit, and even requests to release cargo without bills of lading.

The application of liens differs widely according to jurisdiction and law, and this article focuses on English law. Similar principles are followed in other jurisdictions - and embedded in standard trading conditions in countries such as the US, Netherlands, Singapore and Hong Kong - but it is imperative to check the finer details in the jurisdiction in which the issue arises. This article therefore presents a 'practical' view.

When faced with a debtor organisation in administration, a logistics supplier will seemingly be at the 'back of the queue' with respect to other creditors, behind customs or tax authorities, banks and other preferential stakeholders, and even the appointed administrator.

So what can be done realistically to mitigate losses? If you are in possession of cargo and money is owed, placing a lien on cargo - following appropriate legal advice - can prove to be highly sensitive and damage relationships, particularly if the client's problems are related to short term cash difficulties rather than longer term instability and its future trading position. Making that decision may be balanced on a number of commercial realities, including the level of exposure should the worst arise.

Carefully check the terms and conditions under which you are operating with the client in question. Most standard trading conditions (such as the Club's model conditions or those available from national forwarding associations) and bills of lading incorporate a lien clause, which invariably is a general 'contractual lien'. The intended effect of this is to be able to hold cargo in transit or in your possession (whether or not the goods relate specifically to the amount owed), pending settlement of the amounts due, including debts relating to prior shipments, and not just shipments in question.

If the applicable terms are non-standard, such as with broader logistics obligations, it is advisable to review the detailed terms under which the business operates. It is not uncommon for buyers of services to impose terms on the provider and specifically have elements of lien written out of the agreements. It is important to incorporate express terms which provide for lien security, and to include provisions for the refund of any charges or losses incurred for recovering the same.

Whilst no entity anticipates that the commercial relationship will fail, it is recommended that you consider the position at the outset, resisting attempts to modify standard conditions and carefully scrutinising terms being imposed by purchasing agreements.

No lien is exercisable until a related debt is payable. This is likely to impact on timing as the client faces difficulties and moves towards administration. In the UK, once in administration, there is a 'statutory moratorium', under section 43(b) of Schedule B1 of the Insolvency Act 1986, during which no steps can be taken to enforce a lien without the permission of the administrator or the court.

Nevertheless, a service provider with a valid general lien and in possession of goods belonging to its client who is in administration is in a relatively advantageous position. Firstly, under the Insolvency Act 1986, they will be a secured creditor with higher priority over the majority of people in the queue for payment out of what is left of the company's assets.

Most importantly, the administrator may take the view, or may be persuaded to take the view, that the provision of the services in question is essential to the administration, because of the value which it brings to the company. In this case, payment should be an administration expense and protected from the liquidation.

In the past doubt prevailed as to whether a court would use their discretionary powers and enforce a general lien in light of the moratorium under the act, and whether a court would in fact order delivery to the administrators without an indemnity being provided to the forwarder/ carrier from potential costs and claims from third parties arising as a consequence. The next article reviews recent English case law that brings some clarity as to the operation of liens.

Staff Author

TT Club