When goods are delivered to a professional storage operator (“Warehouseman”) for safe keeping or storage, it is usual practice that the parties will enter into express terms which often contain a right of lien in favour of the Warehouseman. The benefit of having an express right of lien is that the terms are clear and unequivocal, especially those relating to enforcement of the lien and sale of the assets.

However, in the absence of express terms the goods may still become subject to a lien at common law. A common law lien, created by operation of law as opposed to contractual terms, is deemed to have been ‘perfected’ by the giving of possession to the Warehouseman and may be enforceable in priority to holders of certain registered security interests.

Under section 248(1)(b)(i) of the Insolvency Act 1986, a creditor with a valid, enforceable lien is deemed to be a secured creditor in the insolvency of a debtor. Whilst this may assist in the case of an administration (where exercise of the lien would require the consent of the administrators or the court under paragraph 43(2) of Schedule B1 because of the existence of the moratorium), there are no such restrictions on the exercise of a lien in the event of a liquidation. In respect of bankruptcy, a lien is only exercisable on goods passed to the Warehouseman before the estate vests in the trustee. If goods are passed to the Warehouseman after a trustee has been appointed, there will be no lien over the goods unless the Warehouseman can prove that he was unaware of the bankruptcy at the time of taking possession.

There are two forms of common law lien:

1.Particular lien – If a creditor has a particular lien he has a right to retain possession of the debtor’s goods, which are legitimately in his possession, until the debt referable to those particular goods is paid.

A particular lien will arise where a creditor has improved the goods in their possession and the lien is required to secure payment of the improvements or where a creditor must receive the goods (such as a haulier or warehouse owner) and the lien is required to secure payments of costs in relation to them (such as transportation or storage).

2.General lien – If a creditor has a general lien over a debtor’s goods, then he may retain possession of the debtor’s goods until the debtor repays all of the monies it owes to that creditor whether those amounts relate to the goods in the creditor’s possession or not.

General liens usually arise as a result of customary dealings in a particular business which doesn’t usually apply to a Warehouseman.

It is important to note that a common law lien does not give the Warehouseman the right to sell the debtor’s goods (unless they are perishable and he applies for a court order to do so). The right to retain the goods is simply a form of legal “arm twisting”, which can be used to persuade a debtor to pay up.

This may create difficulties for an insolvency practitioner where the Warehouseman has a lien over the goods of an insolvent debtor. If the insolvency practitioner requires the debtor’s goods as part of the insolvency process, the Warehouseman may be in a strong position as a ‘ransom creditor’ and not release the goods until they have been paid for their services.

Given the above, it is likely that a deal will need to be reached with the Warehouseman. If the potential level of realisations from the goods is unclear, it may be advisable for an insolvency practitioner to agree a ratcheted payment with the Warehouseman, so that his return is linked to the level of realisation achieved.