Navigating the road between regulatory compliance and business rescue

When dealing with a goods vehicle operator in an insolvency context:

  • Early engagement with the Traffic Commissioner is crucial.
  • Directors should be proactive in informing the Traffic Commissioner of a material change in circumstances (e.g. a change in the company’s financial standing, which extends to launching a company voluntary arrangement (CVA)).
  • Insolvency practitioners should engage as early as possible with the Traffic Commissioner and build such engagement into their contingency planning.

Background: Goods vehicle operators' license

In the current economic climate, companies operating a vehicle fleet – notably retailers and those in the logistics and parcel sector – are facing pressures that highlight the issues around the relationship between the operator licensing regime and distressed companies facing an insolvency process.

The operator licensing regime requires license holders to be able to demonstrate appropriate financial standing and good repute throughout the duration of the license. If sufficient financial standing cannot be evidenced, the operating license will be revoked. Essentially, these requirements are aimed at ensuring vehicle fleets are in a safe and roadworthy condition and are properly maintained so as to avoid harm to other road users.

A company in administration can continue to operate vehicles with the assistance of an appropriately qualified transport manager pending a sale of the business, but only if the administrator invokes the procedure under Regulation 31 of the Goods Vehicles (Licensing of Operators) Regulations 1995 (Regulation 31). Regulation 31 allows the Traffic Commissioner to direct that a person carrying on the trade or business of the actual holder of the license is to be treated – for the purposes of the Goods Vehicles (Licensing of Operators) Act 1995 (1995 Act) – as the holder of the license for such purpose and to such an extent as is specified in the direction.

Failure to comply with the regulatory regime could potentially lead to a criminal prosecution for unauthorized use and operation of vehicles which, it could be argued, is at odds with the rescue culture intended by the administration process. Refraining from the operation of vehicles while an interim license is sought could have severe consequences for a distressed business, preventing a sale or restructuring and resulting in employment losses and a worse result than liquidation for creditors.

Guidance for insolvency practitioners/distressed companies

The case of Brian Hill Waste Management Limited v Secretary of State for Transport Appeal 2008/41 provides guidance for insolvency practitioners and distressed companies where the business operates a vehicle fleet.

The administrators were appointed over the haulage company (OldCo) on October 12, 2008. A public inquiry then took place, six months later, on April 17, 2008, having been called on March 12, 2008.

An agreement had been entered into in early October allowing the purchaser (NewCo) to use OldCo's assets, including vehicles and an operator's license to operate the business, which effectively constituted illegal use of vehicles in contravention of section 2 of the 1995 Act and led the Traffic Commissioner to refuse NewCo’s application for its own license.

It was noted on appeal that the administrators had not made an application under Regulation 31. An employee at the firm where the administrator was a partner had been in contact with the Traffic Commissioner, who had sent a letter drawing the administrators’ attention to Regulation 31 and specifying a deadline by which to make such an application “if it was his intention (or the intention of any other person) to carry on transport operations under the authority of the license.” If it was not the intention to carry on transport operations, the administrator was directed to surrender the license and license discs. No response was given to this letter and the solicitor appearing for the administrators commented that the administrator did not believe he was acting unlawfully, that his actions were taken in good faith and with the intention of facilitating the rescue of the business in question.

Consequences of failure to notify a change in ownership or events which might affect the requirement of a licensor to be of appropriate financial standing

The Deputy Traffic Commissioner at the public hearing in the Brian Hill Waste Management case concluded that the directors of OldCo should have informed the Traffic Commissioner about the financial difficulties and the impending administration, noting that they had “ample opportunity” to so do before administrators were appointed. It also appeared that the directors had deliberately chosen not to inform the Traffic Commissioner, which not only went to financial standing but also to the undertakings concerning good repute and resulted in the license being revoked.

The agreement which purported to authorize NewCo to conduct the business of OldCo was unlawful because (i) the business was being conducted by NewCo and not by or through the administrators, who had chosen not to invoke Regulation 31, and therefore NewCo was operating vehicles in breach of section 2 of the 1995 Act; and (ii) the transfer or assignment of the license by the company in administration was itself unlawful as section 48 of the 1995 Act provides that operators’ licenses are not transferable or assignable.

Criminal liability attaches to a breach of the 1995 Act. A person using a vehicle in contravention of section 2 of the 1995 Act is guilty of an offence and liable on summary conviction to a fine. Clearly, there would also be adverse PR consequences if an insolvency practitioner or a company to which that practitioner is appointed faces public inquiry for loss of repute or prosecution for a breach of the 1995 Act. Insolvency practitioners could also face consequences from their own regulatory bodies including loss of their license to practice.

An unsuccessful argument was raised in the Brian Hill case that regulatory action was barred by virtue of the moratorium which arises upon a company entering administration, on the basis that regulatory action by the Traffic Commissioner constituted legal proceedings. The Appeal Tribunal held that a call-up letter under section 26 of the 1995 Act is not a type of legal proceedings, but instead the operation of statutory machinery to enable the authorities to examine whether the license should remain in force and if so, on what terms.

Guidance provided by the Traffic Commissioner in recently published decisions confirms that it is vital for insolvency practitioners to be alive to the issues and have an appreciation of the statutory obligations governing the holding of an operator’s license. While the company’s transport manager will have day-to-day responsibility for fleet management, the directors and an administrator in waiting also assume responsibility for regulatory compliance and therefore analysis of the position should be featured in the pre-appointment planning phase.

In considering an application to invoke Regulation 31 for a goods vehicle operator’s license, the Traffic Commissioner will need to be satisfied that there are sufficient systems in place to ensure the undertakings attendant on holding an operator’s license can be met by the administrators. In particular, that finance will be provided or set aside or accessible to ensure safe running of the fleet. Reference should be made to the 2019 financial levels for commercial vehicle operators, which apply from January 1, 2019.

The Upper Tribunal decision of P Plant Limited and PGC Skip Hire Limited [2011] UKUT 397 (AAC) highlights the importance the traffic authorities place on early engagement, as heavy criticism was levied against both the directors and the administrators as a result of their failure to respond to call-up letters and a license revocation warning letter, being ignorant of the need to make an application under Regulation 31 and continuing to operate the vehicles as part of the business post-appointment of administrators.

Practical advice/action points:

Parties involved with a financially distressed operator should consider the following points:

  • Early engagement with the Traffic Commissioner is crucial. Directors should be proactive in informing the Traffic Commissioner of a material change in circumstances (i.e. any change to the company's financial standing, which extends to launching a CVA). Insolvency practitioners are also advised to engage as early as possible with the Traffic Commissioner and build such engagement into contingency planning.
  • Check details of the group’s operating licenses and compliance history/maintenance record and identify transport managers and other employees with appropriate qualifications within the business. A change of transport manager or a change in the number of vehicles being operated is also a notifiable event.
  • Be aware of the requirements to provide evidence of ability to comply with license undertakings, in particular those concerning the immediate availability of finance. In the case of a limited company, the funds must be held within the company. For standard licenses, the Upper Tribunal has indicted that while money may be ring-fenced for maintenance, there must also be other money available to ensure the proper administration of the business.
  • Is an accelerated M&A process/pre-pack envisaged? If so, bidders will need to be alive to licensing issues if the operation of vehicles is key to operating the business, and consideration will need be given to the terms of a sale and purchase agreement.
  • Legal advice is recommended in respect of a Regulation 31 application or entering into a haulage agreement with a third party. Where the person appointed to manage the company on behalf of the administrator already holds an operator’s license it may be advisable to transfer the fleet to that license together with (if required) an application for a variation to increase the number of vehicles authorized, together with the revocation or surrender of the original license.