Do controlled goods agreements (“CGA”s) create security which a creditor can rely on against an insolvent debtor?

CGAs are relatively new instruments which have replaced the practice of walking possession agreements.  A CGA is defined under paragraph 13(4) of Schedule 12 of The Taking Control of Goods Regulations 2013 as “an agreement under which the debtor -:

(a)     is permitted to retain custody of the goods,

(b)     acknowledges that the enforcement agent is taking control of them, and

(c)     agrees not to remove or dispose of them, nor to permit anyone else to, before the debt is paid.”

CGAs still retain the characteristic of “walking possession” whereby a creditor takes a tour of the debtor’s property and notes all assets worth noting down.  If the debtor defaults, the creditor with the benefit of the CGA can enter the debtor’s property and seize the goods listed in the inventory of the CGA to sell at auction and recoup some of his losses. 

CGAs provide a form of enforceable guarantee to a creditor so long as the debtor company remains solvent. However, if the debtor becomes insolvent, it is questionable how useful CGAs will be because it is questionable whether CGAs actually create a security; they certainly cannot be relied on the way creditors may rely on a fixed or floating charge over an asset. 

If the debtor company becomes insolvent and enters liquidation, a creditor with the benefit of a CGA over the debtor’s goods will most likely lose that benefit.  The liquidator need not have regard to a CGA because under section 183(1) of the Insolvency Act 1986 (the “Act”) the beneficiary of the CGA “is not entitled to retain the benefit of the execution .. against the liquidator”:

183(1) Where a creditor has issued execution against the goods or land of a company or has attached any debt due to it, and the company is subsequently wound up, he is not entitled to retain the benefit of the execution or attachment against the liquidator unless he has completed the execution or attachment before the commencement of the winding up.

In Re Modern Jet Support Centre Ltd [2005], Revenue and Customs from could not take control of goods under a walking possession agreement because the court held that “execution” in section 183 of the Act could not include “distress” and “distrain” under s.61 of the Tax Management Act 1970.  The court held that the walking possession agreement could not be said to have been executed since Revenue and Customs had only distressed and distrained the debtor rather than seizing the goods.  Because the goods had not been seized and sold by the time the debtor company entered liquidation, the benefit of executing the walking possession agreement was lost. While this case concerned walking possession agreements, it seems highly likely the same would apply to CGAs.

If the debtor company becomes insolvent and enters administration, the question of whether the administrator need have regard to a CGA remains untested.  The ability of a creditor to rely on a CGA over the goods of a debtor in administration appears at best uncertain.

Under paragraph 71(1) of Schedule B1 of the Act, the administrator may only dispose of a property which is subject to a security (other than a floating charge) as if it were not subject to the security with a court order.  Failure to comply is an offence which could lead to the administrator being fined daily for each day in default (paragraph 106 of Schedule B1, of the Act).  The question therefore is: does a CGA create a security?

The statutory definition of “security” pursuant to s.248(1)(b)(i) of the Act  is “any mortgage, charge, lien or other security”.

In Bristol Airport v Powdrill [1990] the court considered the right of an airport to detain an aircraft for failure of the operating company to pay a debt.  Security was defined to give the word its natural meaning: 

“Security is created where a person ('the creditor') to whom an obligation is owed by another ('the debtor') by statute or contract, in addition to the personal promise of the debtor to discharge the obligation, obtains rights exercisable against some property in which the debtor has an interest in order to enforce the discharge of the debtor's obligation to the creditor. Whilst not holding that that is a comprehensive definition of 'security,' in my judgment it is certainly no wider than the ordinary meaning of the word.”

On the basis of the Act and Powdrill, one could argue that a CGA does create a security, and therefore an administrator will need a court order to dispose of goods subject to the CGA.  

But even if a CGA is capable of creating a security, an administrator could nevertheless refer to Re Modern Jet Support Centre Ltd to argue that distraining a debtor’s goods without seizing them is a failure to execute a CGA, and although Jet deals with a walking possession agreement over goods of a company in liquidation as opposed to a CGA over goods of a company in administration, a court may be persuaded that an administrator need have no regard to a CGA.  

In any event, even if the administrator is not entitled to dispose of the goods listed in a CGA, it is also the case that the beneficiary of the CGA can no longer execute its CGA without either the administrator’s consent or a court order, pursuant to moratorium under paragraphs 43(2) and 43(6) of Schedule B1 of the Act:

43(2) No step may be taken to enforce security over the company’s property except—

(a)with the consent of the administrator, or

(b)with the permission of the court.

43 (6)No legal process (including legal proceedings, execution, distress and diligence) may be instituted or continued against the company or property of the company except—

(a)with the consent of the administrator, or

(b)with the permission of the court.

In short, CGAs are a new instrument which remains untested as means of providing security to creditors when the debtor becomes insolvent.  The only case law evidence we have concerns the old regime of walking possession agreements, but it would appear that liquidators can almost certainly dispose of a debtor’s property without regard to a CGA.  Administrators should perhaps approach CGAs with more caution.  Nevertheless, it is clear that a creditor looking to create security over goods should not expect to rely on a CGA for security if the debtor becomes insolvent.