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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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