Article by Nicola Solomon published in The Author of Summer 2001. 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.
It is ten years since I wrote an article on publishers' insolvency. Since then, there does not seem to have been any let-up in letters from Receivers, Liquidators or Administrators claiming to have taken over the affairs of publishing companies. 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:
Company Takeover
A company is a distinct legal person or entity. While it exists, contractual rights and obligations continue, even if all the shareholders or employees change or if the company becomes part of a group. Thus if your publishing company is bought by someone else but remains in existence it will still have to pay you all royalties due. It is hard luck if you do not like the new parent company or editors and do not wish 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 it only continues while the publisher employs a particular person or is owned by a particular group, or so long as your work is published under a certain imprint.
Receivership (also known as Administrative Receivership)
A 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. An Administrative Receiver is a Receiver or Manager of the company's property and is appointed by the holders of the most common type of loan ('debenture') secured by a charge on the company's assets. 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 you would a director of the company. The Administrative Receiver will be trying to raise money to pay off the appointer's charge and will have the appointer's interests, not yours, at heart. The only duty the Administrative Receiver owes you is to act as a reasonably competent receiver. 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 the appointer probably has a prior claim on all the assets. You can also apply for a Winding-up Order (see below).
When a company owes you royalties, there are unfortunately no statutory or other obligations on them to hold your royalties specifically for you. Royalty money due to authors is not held within specially designated accounts, and publishers use it as if it were their own - therefore paying authors (and printers, etc) short, late or not at all when cash-flow is tight. Once a company gets into financial difficulties there is probably going to be nothing left for you.
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 controls all the company's property and is given wide statutory powers to manage its affairs, business and property. Within three months of the Order the Administrator must send all creditors a statement of proposals for achieving the purposes specified in the Order and calling a meeting of creditors at which they can vote on the proposals. If a majority in value of creditors vote in favour of the Administration Order, the Administrator can implement the plan. While an Administration Order is in force, any creditor may apply to the Court if their 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. Unfortunately, they are unlikely to do so.
Corporate Voluntary Arrangements
The company may also enter into a form of Corporate Voluntary Arrangement. This is a form of statutory contract whereby if 75 percent of the creditors in value who attend and vote either by proxy or in person approve a scheme of voluntary arrangement which has been circulated previously, the company is protected from its creditors. If it does not obtain the 75 percent vote then it is vulnerable to a winding-up petition. If you receive notification of such a creditors' meeting, or indeed any other creditors' meeting, you should contact your solicitor or accountant as soon as possible.
Liquidation or Winding-up
The shareholders may voluntarily wind up a company if it has sufficient money to pay off all its debts. They sometimes do so to reorganise the company. This is known as a Members' Voluntary Liquidation. 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 (Creditors' Voluntary Liquidation) 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 permission. 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 all the assets of the company and arrange to pay them out to creditors in the prescribed order. The money will first be paid to secured creditors, that is those who have a charge over the company: 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 and including most authors) come at the bottom of the list and often there is no money available for them.
Who will publish my book?
The publishing contract will usually terminate automatically on the granting of a Winding-up Order; the publishing contract is deemed to be essentially personal so cannot be assigned - the rights granted 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. You should understand that if your contract does contain a right to assign then the insolvent company is entitled to sell your contract to someone else without assigning the royalties due to you. That is, it can obtain money for your valuable contract and you will be able to claim future royalties from the new publishers, from the date of the assignment, but they will not usually be responsible for the past royalties. If there is no such clause then the rights will usually revert to you and you are free to enter into a contract with another publisher (but see below re sub-licences).
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 on 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 buy remainder stock. This will still apply after a Liquidation.
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 agreement; if this applies or if sub-licences were entered into with your consent, 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 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. Therefore as soon as you know that your main publishing company has gone into liquidation, you should write to all sub-licensees and ask that money be paid direct to you in future. Obviously the difficulty with this is that you may not know who the sub-licensees are, as publishers do not always give you this information.
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 book, such compensation can only be by way of money damages in respect of which you would be an unsecured creditor. If the company has no assets, this right is about as useful as trying to obtain blood from a stone.
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 only 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 difficult to prove fraudulent or wrongful trading as opposed to mismanagement. Also, any monies recovered are distributed among all creditors. In reality your only claim is likely to be against the insolvent company.
What about any material which is being held by the company?
Original artwork and manuscripts probably belong to you rather than the company but it is not unusual for Receivers to try to sell them. It is therefore extremely important that you ask for return of that material as soon as possible and also that you always clearly label all valuable artwork and material as your own. If it goes missing it will be very hard to prove that a new company was responsible for holding it safely on your behalf.
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 way to protect yourself is through your publishing contract. Try to ensure that the company has assets and is creditworthy. If you are unsure about this and if the company is desperate to publish your book, 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 say that all rights revert to you not only on the publisher going into liquidation but also if a Receiver, Administrator or Supervisor is appointed. Include a clause giving you the first option to buy remainder copies of your work. If you are particularly worried about the identity of your publisher, include a clause stating that your work must be published under a particular imprint or edited by a named editor or that rights will revert if the company goes out of the ownership of a particular set of shareholders. Check which company you are signing with. Some groups of companies tend to sign you under a smaller company associated with an imprint; others sign you under the main company. It is probably better if your contract is with the main group as they will be likely to have more assets and also they will then be unable to sell the smaller company as a going concern with your contract.
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 and, if necessary, terminate the publishing agreement. Failure to pay royalties is a fundamental breach of contract. Late payment of royalties may well be a sign that a company is getting into financial difficulties. As soon as you learn that a Liquidator, Supervisor, Receiver or Administrator has been appointed put them on notice of your rights, in particular:
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 with an experienced professional - they may be prepared to give their services for free. 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 a reversion of your rights and the return of your materials.
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