Article by Nicola Solomon published in The Author of Autumn 1991. Leading literary lawyer Nicola Solomon, a Deputy District Judge and Partner of Finers Stephens Innocent (179 Great Portland Street, London W1W 5LS, tel. 020-7344-7652) has kindly given AKME permission to reproduce this article. She can be e-mailed at nsolomon@fsilaw.co.uk.
The article is reproduced without any comment or editing by AKME.
The recession has hit the book trade hard; it is becoming more common for authors to receive letters signed by receivers, liquidators, administrators or even administrative receivers claiming to have taken over the affairs of their publishing company. What do the different terms mean? What does an author do on receiving such a letter? (This article only deals with limited companies. In the rare case in which your publisher is an individual, different provisions (bankruptcy) will apply but much of the advice given in the last section will still be relevant.)
Some or all of the following may happen if your publisher becomes insolvent:
a. Company Takeover
A company is a distinct legal person or entity. While that entity is in existence its contractual rights and obligations continue. This remains the case even if all the shareholders or employees change or if the company becomes part of a group. It is just hard luck if you do not like the new parent company or editors and would never have wished to be associated with them.
The only sure way to avoid your book being published by someone you do not know is to specify in the publishing contract that the contract only continues while the publisher employs a particular person, or to provide that your work must be published under a certain imprint.
b. Receivership
The publishing company may grant rights over certain of its assets in return for a loan. If the company fails to repay the loan when due the lender may appoint a receiver to come in and grab the secured assets. Receivership does not normally affect your publishing contract directly, the company will still remain in existence and you will be entitled to sue it for any money owed to you, but the appointment of a receiver is a warning sign that there are difficulties and that there may not be many pickings for unsecured creditors once the receivers have taken the choice parts.
c. Administrative Receivership
An administrative receiver is a receiver or manager of the company's property and is appointed by the holders of a particular type of loan ('debenture') secured by a charge on the company's assets. The difference between this and receivership is that an administrative receiver looks after substantially the whole of the company's property and has certain statutory powers including the power to carry on or even transfer the business of the company, to enter into contracts and to borrow money. You can deal with an administrative receiver as if he was a director of the company. Once the company goes into liquidation he will act as a receiver. He does not owe you a duty of care; his duty is to his appointer. He will be trying to raise money to pay off the appointer's charge. You can theoretically still sue the company for any monies due to you while an administrative receiver is acting - however there is little point in doing so because he probably has a prior claim to yours on all the assets. You can also apply for a winding up order (see below).
d. Administration
The administration order procedure was first introduced under the Insolvency Act 1986. It allows a company or its directors and creditors to apply to the Court for an order that the affairs of the company be managed by an administrator (who must be a licensed insolvency practitioner) while the order is in force. The procedure is intended to provide a company in financial difficulties with the opportunity of either surviving or, at least, enabling assets to be realised in a more advantageous manner than if the company was wound up. If an administrator is appointed any administrative receiver or receiver must vacate office. The administrator must take under his control all of the company's property and is given wide statutory powers to manage the affairs, business and property of the company. Within three months of the order he must send all creditors a statement of his proposals for achieving the purposes specified in the order and call a meeting of the creditors at which they can vote on the proposals. If a majority in value of creditors vote in favour of the administration order then the administrator can proceed to implement his plan. While an administration order is in force any creditor may apply to the Court if his affairs are being managed in an unfairly prejudicial manner. Administrators have no power to make any distribution of the company's assets to creditors although they may pay the ordinary debts of the company (such as royalties) as they fall due. They are, however, unlikely to do so.
e. Liquidation or Winding Up
The shareholders may voluntarily wind up a company if it has sufficient money to pay off all its debts and they sometimes do so to reorganise the company. Publishing contracts often provide that the contract will not come to an end if there is a voluntary winding up solely to reconstruct the company.
However, insolvent or compulsory winding up is more common. Once a winding up order has been made the legal assets are frozen. No legal proceedings may be commenced or continued against the property or the company without the Court's leave. Any orders or agreements for payment of money out of the company are void. Either the Official Receiver or a licensed insolvency practitioner will become liquidator of the company. The liquidator's job is to collect in all the assets of the company and arrange to pay them out to creditors in the prescribed order. Money will first be paid to secured creditors, that is those who have a charge over its assets (usually banks and major lenders or suppliers). The next to be paid are preferential debts which include PAYE, Social Security contributions and unpaid wages to employees for the four month period prior to the liquidation. Unsecured creditors (such as those due royalties) come at the bottom of the list and often there is no money available for them.
The questions an author is likely to ask on liquidation are:
i. Who will publish my book?
The publishing contract will usually terminate automatically on the granting of a winding up order; a publishing contract is deemed to be essentially a personal contract which cannot be assigned - the rights granted in it therefore come to an end with the demise of the corporate body. Some publishing contracts contain a right to assign the contract to another publisher without the author's consent; this should be strongly resisted. The rights are therefore likely to revert to you and you are free to enter into a contract with another publisher (subject to iv below).
ii. Who will pay my royalties?
Royalties to the date of winding up will still be due and you may claim these from the company. However, as explained above, very often there is no money available for unsecured creditors.
iii. Can the liquidator sell off or remainder existing stocks?
Although the company will no longer have the right to publish your books the liquidator will usually be entitled to sell off stocks of published books. All royalties on such sales will be due to you as an unsecured creditor but you are unlikely to see them. It is sensible to provide in your publishing contract that you will have first option to purchase remainder stock. This will still apply after a liquidation.
iv. Will sub-licences continue?
Since sub-licences derive from the main publishing agreement it can be argued that they terminate with it. Many publishing agreements provide that valid sub-licences survive the termination of the publishing agreement; if this is provided for or if the sub-licences were entered into with your consent, then it is likely that they will continue. Since the rights granted under the main publishing agreement will have reverted to you, all future royalties or other payments under the sub-licence should now be made direct to you without deduction of the publisher's share. Money due from the sub-licensee to the publisher up to the date of liquidation will have to be paid to the liquidator and as an unsecured creditor you may not see your share of these royalties.
v. Can I get damages from the publishing company for failing to fulfil its obligations?
Although it is sometimes possible to claim compensation if a publisher fails in its obligations to you or does not publish your books such compensation can only be by way of money damages. If the company has no assets this right is about as useful as trying to obtain blood from a stone.
vi. Can I claim against the directors for money due to me?
You cannot claim money owed from the directors of the company unless they have been trading fraudulently or wrongfully. In such circumstances the liquidator can take proceedings against the directors which may result in them being ordered to contribute to the company's assets from their personal money or being disqualified from acting as directors in the future. However it is not usually possible to prove fraudulent or knowingly wrongful trading as opposed to mismanagement and so your only likely claim is against the insolvent company.
vii. What can I do to protect my position?
The hard truth is that an author is unlikely to be a secured or preferential creditor and unsecured creditors have few rights. As usual the best stage to protect yourself is when you enter into the publishing contract. Try to ensure that the company you are signing the contract with has assets and is credit-worthy. If you are unsure about this and if the company is desperate to publish your work you could try asking a director to sign a personal guarantee; they are unlikely to agree! Ensure that your publishing contract does not allow for assignment and include a clause to state that all rights revert to you not only on the publisher going into liquidation but also if a receiver, administrator or administrative receiver is appointed. Include a clause giving you the first option to buy remaindered copies of your work. If you are particularly worried about the identity of your publisher include a clause to state that your work must be published under a particular imprint or edited by a named editor.
Check your royalty payments whenever they arrive and make sure that they are correct and that you are paid in full. If payments are late take action very quickly to obtain payment of your money and, if necessary, terminate the publishing agreement (as failure to pay royalties is a fundamental breach of contract). Late payment of royalties is often a sign that a company is getting into financial difficulties.
As soon as you learn that a liquidator, receiver, administrative receiver or administrator has been appointed put them on notice of your rights, in particular:
a) inform them that the publishing agreement will terminate on liquidation of the company as it is personal to the company and that they have no right to assign it;
b) demand any royalties or other money due to you;
c) ask for names and addresses of sub-licensees and details of all sub-licence contracts entered into;
d) point out your option to purchase remainders (if applicable);
e) ask for the return of artwork, original manuscripts or other items of yours held by the company.
Continue to remind them of these points until you are satisfied. If you know the identity of any sub-licensees you should write to them as soon as the company goes into liquidation informing them that they should now pay you direct.
You will be invited to a meeting of creditors and it is always useful to attend. Although you may not be able to influence the appointment of the liquidator it is always interesting to find out what assets the company has and whether you are likely to receive any money. You can also remind the company of your rights and are more likely to be able to apply them if you have met the management face to face. Other than this you can do little but wait.
Once a company is insolvent you may have to wave goodbye to any royalties owing but prompt action should ensure that you minimise your losses by obtaining the reversion of your rights and the return of your materials.
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