The Gazette 1976

GAZETTE

JUNE/JULY 1976

BRENTFORD NYLONS Special Preference of Unsecured Creditors in case of Liquidation Brenford Nylons will make history this year on two counts. The first is that it will prove to be one of the most notable success stories in the grisly world of re- ceivership and bankruptcy. But of equal importance is the lesson that Brentford has to teach to Britain's bankers. A recent High Court decision means that in certain cases — and Brentford Nylons is the first major in- stance in the UK — apparently unsecured trade cred- itors can go to top of the list in terms of preference in the case of a bankruptcy because of a special type of terms of sale agreements which is becoming increas- ingly common in the UK under the pressure of events. In the case of Brentford Nylons, the bulk of its synthetic fibre raw material supplies came from sub- sidiaries of the Dutch company, Akzo. Of these, both British Enkalon and Enka GlanzstofE of Germany sold under a "Reservation of Title" clause, in which the ownership of goods supplied does not change until the bill had been paid in full. This applied to raw material stocks and also to finished goods containing the raw materials, regardless of whether the product contained additional supplies from other sources. So any trade supplier using a Reservation of Title selling agreement has a claim on the assets of a bank- rupt company which takes preference even over de- benture holders and secured creditors such as the banks. In practical terms, when Kenneth Cork was appoint- ed receiver/manager of Brentford Nylons on February 23, all the cash received from retail sales from the 70 High Street Stores became the property of the Akzo subsidiaries. To continue trading, Kenneth Cork had to arrange a deal in which British Enkalon and Enka Glanzstoff relinquished their prior charge. These two companies accounted for the bulk of the trade creditors, and a settlement was made on a straight cash payment of one-third of the total amount owing to them. Even- tually. Akzo should get more, should the receivership be as successful as we believe it will be. The use of trading conditions including reservation of title is widespread within the EEC, and Holland and Germany in particular. In the UK, its use is fairly new and has only been tested properly in the High Court within the last three months. The case involved an obscure company called Rom- alpa Aluminium which went into receivership in Nov- ember 1974, Romalpa had been supplied with alumin- ium by a Dutch company using reservation of title. The concept was challenged by Romalpa's receiver, who lost his case and subsequently the appeal in January 1976. The use of Reservation of Title clauses is spreading rapidly especially where the customer is of questionable viability. Brentford Nylons is believed to be the first major case of a UK company bound by these conditions going into receivership. The importance of this situation cannot be under- stated. Although effectively a floating charge on the stocks and work-in-progress, a Reservation of Title does not need to be registered. When doing a company search, a Bank now will need to enquire into the con- ditions of sale/purchase used by a company before making any loans. Inevitably, such a trading clause will reduce the collateral which may be pledged to a bank.

In the case of default the existence of a Reservation of Title clause could cause immediate closure — to the detriment of all but the supplier with its preferential claim. At Brentford, having paid the price for the support of British Enkalon and Enka Glanzstoff, Kenneth Cork has made tremendous progress at Brentford Nylons. Admittedly, he was helped by a massive buying spree which followed the collapse of the company. Immed- iately prior to the crash, Brentford's weekly sales had slumped to £250,000 per week, equivalent to an annual rate of less than £13m. Fears that the supply of cut- price bed linen might disappear altogether sent weekly sales up to £ lm. per week so clearing out most of the accumulated stocks in a very short time. Sales have now eased back to £ j m. per week, and at an annual rate of £25m. are only a little short of the level needed for the £27m turnover achieved in 1975. Last year, Brentford's pre-tax loss was around £2m. most of which was incurred in the second half of the year. In Brentford's heyday there were profits of over £ lm. In 1973 profits slumped to £356,000, a pre-tax loss of £420,000 emerged in 1974. Immediately after Kenneth Cork's appointment the upsurge in sales whisked the company back into profits, and even now Brentford is not far from break-even after a heavy reduction in overhead costs. One of the features which will help Kenneth Cork to rescue the bulk of the business is the excellence of Brentford's modern Cramlington textile factory, built at a cost of about £15m. Unfortunately, Brentford was expanded without an adequate capital base (the January 1975 balance sheet showed borrowings of £10.66m. supported by net assets of only £.07m.), making it in- capable of supporting the 1975 trading losses. Total liabilities at the time of the failure are believed to have been in the region of £17m. Although the company is basically viable a purchaser will have to be found, to pay back as much as possible to the creditors. Considerable interest has already been shown in a package containing the Cramlington factory and the retail shops; this would leave two rather smaller fact- ories and the Brentford office block (probably worth £5m.) to be sold separately. In contrast to many liquidations, this time Kenneth Cork has high quality assets for sale and the name of Brentford Nylons should continue. In the meantime, he is expanding the product range and tightening management control. TTiis is no ordinary receivership. Note: This company has since been acquired by Lonrho Investments.

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