Death of a Gallery

Blain|Southern’s sudden closure of its three gallery operations at London, Berlin and New York in February 2020 shocked the contemporary art world (Artnotes AM434). Apart from inevitable questions raised by Ernest Hemingway’s aperçu in The Sun Always Rises – ‘“How did you go bankrupt?” Bill asked. “Two ways,” Mike said. “Gradually and then suddenly.”’ – the most immediate and practical questions for the gallery’s creditors are whether they will be paid what is owed and, if so, how.

For the scores of artists represented by the gallery when it ceased trading, most were concerned about the gallery’s obligations to pay them their cut of prices paid for sold works, and/or to return unsold works they had consigned for exhibition and sale. In other words: ‘What about my unpaid money and unsold work?’

Blain|Southern’s artists included Sean Scully, who told the Art Newspaper that he has ‘begun legal proceedings’ against the gallery, which he says owes him a substantial amount of money related to sales of his works. Several other artists disclosed that the gallery had asked artists to fund return of their own works from its warehouses, because it did not have money to cover shipments.

Such creditor-artists should by now be aware of the appointment in late February of ReSolve, a firm of licensed insolvency practitioners, as company administrators of Blain Southern Limited. ReSolve is now responsible for dealing with the gallery’s assets and liabilities, and one of its first actions was to publish a notice inviting any interest in the gallery’s ‘business and/or assets’ (including possibly acquiring the gallery as a whole); then to call a meeting of all the gallery’s creditors to explain the current financial situation and to explore next steps.

At that creditors’ meeting the administrators would have explained that a company ‘goes into administration’ when it becomes legally ‘insolvent’, meaning it is not able to pay on time money that it owes. There are two basic types of insolvency: ‘cash flow’ and ‘balance sheet’. ‘Cash-flow insolvency’ happens when a company owns or controls enough economically valuable assets/resources that can be sold to pay its debts, but does not have have enough (liquid) cash to make payments due. For example, creditors may grant the gallery time to sell artwork in stock to raise cash to pay overdue bills. Cash-flow problems are common business risks, normally resolved by short-term borrowing and/or amicable negotiations with creditors.

‘Balance-sheet insolvency’ is a far more serious problem, and happens when a company does not have enough economically valuable assets/resources that can be sold to pay all its debts. A company is in law unable to pay all its debts in one of two principal circumstances: either a creditor to whom the company is indebted in a sum exceeding £5,000 serves on it a written demand to pay the sum due and the company fails to pay or otherwise satisfy creditors; or if the economic value of all the company’s assets is less than the amount of all its liabilities, taking into account its contingent and prospective liabilities. Such a balance-sheet problem requires careful assessment and economic evaluation of all assets and liabilities by company administrators.

Such circumstances highlight an inevitable difficulty for creditor-artists and administrators of a contemporary gallery: customary reluctance of many galleries and artists to sign any representation agreement – let alone one that includes provisions dealing with the risks and consequences of the gallery’s insolvency – and continuing to base their business relationships solely on trust. A key issue for a contemporary art gallery’s company administrators is whether a gallery’s stock of artwork owned or controlled by the gallery could be sold to generate liquid cash that can be used to pay the gallery’s creditors. Artwork in stock would be owned by a gallery when it has been bought-in (say directly from an artist it represents) and paid for in full; such artwork may be re-sold/liquidated by the administrators. Artwork in stock would be controlled (not owned) by a gallery when it has been loaned to the gallery on a ‘sale or return’ or ‘consignment’ basis; in which case there should ideally be evidence in a gallery’s records showing that the work has been stored or marked as being held on consignment (not owned) by the gallery, together with a written agreement with the consignor-artist.

Company administrators should distinguish between artwork in stock bought-in, and therefore owned as a gallery asset that can be liquidated/re-sold to clear its debts, and artwork in stock owned by a consignor-artist that may not be liquidated/sold because the artwork’s consignment agreement for sale or return expressly includes a so-called ‘retention of title’ provision for the work loaned to the gallery.

A comprehensive written and signed representation agreement between a gallery and artist should ideally include a provision in terms that, for example, the artist retains title/ownership of all artwork delivered to the gallery for exhibition and sale until the gallery has received the full purchase price from its buyer-client. Subsequent delivery by the artist of artwork from time to time could then be evidenced by a detailed consignment receipt signed by the gallery. Such signed documentation should make it clear that a gallery acts as the artist’s agent – not as buyer from the artist and then re-seller to a buyer-client – when it receives artwork consigned by the artist for exhibition and sale or return.

Other provisions in a signed representation agreement should ideally deal with remittance to the artist by a gallery of the artist’s agreed share of the full purchase price paid to a gallery by its buyer-clients, and provisions for return of unsold artwork by a gallery to the artist (especially but not only in the event of a gallery’s going into insolvency administration).

Additionally, provision should ideally be made for the artist’s share of the proceeds of buyer-client primary sales (as agent of consigned work) and of secondary re-sales (as owner of bought-in artwork) being remitted immediately to the artist or being transferred into a separate artist-client bank account (to avoid such money being included as gallery assets in an insolvency administration).

Artists affected by gallery insolvency and concerned about return of their unsold consigned artwork, and/or their share of the proceeds of sold artworks, should ideally contact their gallery’s company administrator to formally notify of the existence of consigned artworks in stock, together with any documentation identifying them and evidencing contractual retention of title ownership by the artist.

In these challenging and difficult times, the sad demise of Blain|Southern highlights yet again the need for artists and gallerists to create and sign clear and mutually beneficial business agreements.

© Henry Lydiate 2020

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This article is from the Artlaw Archive of Henry Lydiate's columns published in Art Monthly since 1976, and may contain out of date material. The article is for information only, and not for the purpose of providing legal advice. Readers should consult a solicitor for legal advice on specific matters. Artists can get free online legal information from Artquest.