Following on from our blog post last week, this week’s post looks at the challenges in dealing with insolvent transport/logistics companies and for those involved in dealing with distressed logistics companies, many of the greatest challenges are often around timing.
When to appoint?
From a practical perspective, timing an appointment of administrators or liquidator over a logistics business requires careful planning. Typically, many of the company’s vehicles will be on the road at any given time and will, more often than not, be full of customers’ products. A poorly timed appointment could see the IP struggling to locate the company’s assets and leave them highly vulnerable to ransom demands from disgruntled drivers/employees.
The negative impact on debtor book realisations can also be little short of disastrous if the resultant chaos means that delivery deadlines are missed or products go astray.
A carefully timed appointment will seek to achieve a situation where the maximum possible number of vehicles are at depot or otherwise within immediate control, with the minimal number of deliveries on the road at that time. This may mean being creative about timing appointments to occur outside of court hours, at weekends, night time or public holidays.
The other key timing challenge in successfully disposing of a business that has a large vehicle fleet is the transfer of the vehicle operator licence to the buyer.
The Goods Vehicles (Licensing of Operators) Act 1995 (the Act) provides that no person may use a goods vehicle on a road for the carriage of goods for hire or reward or in connection with any trade except under a licence issued under the Act. Using vehicles in contravention of the Act is a criminal offence and the DVSA has authority to detain vehicles and their contents where they believe they are being operated without a licence.
Operators’ licences are not transferable. Attempts to operate behind a corporate façade, perhaps trying to hold the licence in a ‘clean’ company will be liable to challenge as ‘fronting’ and could give rise to liability for breaching the requirements of the Act.
All of this means that, unless the proposed buyer has sufficient ‘space’ on their own operator’s licence to enable them to immediately acquire the vehicles contained in the insolvent business, the buyer will need to apply for a fresh operator’s licence before they can complete the purchase.
Unfortunately, it takes the DVSA around 10 weeks to deal with an application for a new operator’s licence and around 6 weeks for an urgent application for an interim licence!
Under the Act, the Traffic Commissioner must consider whether the applicant is both of good repute and appropriate financial standing – i.e. there is a two-limb test that must be satisfied.
Before the Traffic Commissioner will grant an operator’s licence, they need to be satisfied that the applicant has sufficient funds available to maintain roadworthy vehicles (the ‘appropriate financial standing’ part of the test). Currently, this means proving that the applicant has £7,700 in the bank for the first vehicle and £4,200 for each successive vehicle in the fleet. It is easy to appreciate how this can quickly mount up and represent a significant capital requirement for any potential buyer.
The other impact of this requirement is that the insolvent company’s operator’s licence will be in severe jeopardy, since the operator is obliged to immediately inform the Traffic Commissioner if the financial standing requirements cannot be met. This requirement may seriously impact on an IP’s strategy for trading the business while a buyer is sought.
What then should an IP do, when looking to continue trade and agree a sale as a going concern, in circumstances where the existing operator’s licence is vulnerable and the potential buyer needs to apply for their own new licence?
Under Regulation 31 of the Goods Vehicles (Licensing of Operators) Regulations 1995, the Traffic Commissioner can issue temporary directions for the continuance of the business following the insolvency of the licence holder.
The case of Brian Hill Haulage & Plant Limited (2009) provides some guidance on how the Traffic Commissioner will exercise these powers. In that case, the IP had entered into a temporary licence with the proposed buyer, allowing them to use the assets of the insolvent company, pending the grant of a fresh operator’s licence to the buyer.
While this might have seemed a sensible way around the predicament, the Traffic Commissioner declared this arrangement unlawful, revoked the existing operator’s licence, refused to issue an interim licence and called the administrators to a public enquiry.
A strong message came down that any IP in similar circumstances should immediately inform the Traffic Commissioner about the change in the company’s financial position and, if not intending on trading the business, should take steps to immediately surrender the operator’s licence.
If he or she is intending to trade the business, then they should immediately apply for an interim licence under Regulation 31 above. Failure to do so is likely to result in the IP being summoned to a public enquiry to account for their actions. This could carry personal liability.
A possible informal solution in these difficult situations is to consider filing multiple consecutive notices of intention to appoint administrators. This will provide some protection from creditors while allowing the buyer time to apply for an interim licence and permit continued trade, thus hopefully preserving value. This is not a solution to be undertaken lightly and requires very careful consideration by all concerned as to whether it is an appropriate use of the statutory regime and in line with the directors’ obligations to creditors.
Although there are reasons for optimism in the sector, there is also a lot of continuing uncertainty. The slow, hesitant nature of the recovery and the expectation of interest rate rises in early 2015 means that business confidence is still fragile.
Businesses in the sector operate on low margins. Small increases in costs can have a significant effect on business models. Businesses will need to monitor increases in the cost of fuel, increases in wages and additional costs which are likely to be incurred as a result of greater regulation. In addition, businesses need to constantly monitor changing consumer habits to enable them to adapt to the changing market.