Gallery closures – protecting artists

Gallery sector structural change in London and New York

The gallery sector is going through a structural change both in London and in New York. High profile dealers have shuttered their galleries opting out of the daily grind, and others, including global galleries such as Pace, have sought to restructure by axing staff and artists and shedding real estate commitments.  There have been distressed closures too. Earlier this year, it was announced that Stephen Friedman Gallery had entered administration in London, owing nearly £8 million to its creditors.  This is the latest in a series of high-profile gallery insolvencies in recent years.

Outsized impact on artists

The closure of art galleries can have a particularly outsized impact on artists. Planned shows (a major source of assumed future income for artists) may disappear in a puff of smoke.  Artist may not have contracts or current consignment agreements with their galleries, making it hard to enforce rights and prove ownership of artworks.  It is commonplace for most primary galleries to be storing artworks (sometimes with third party storage providers) on behalf of their consigning artists, making it difficult and often expensive to obtain the return of the works that they believe are rightfully theirs. On occasion galleries have not communicated with artists to tell them that certain works have been sold, leading to complex title disputes.  

However, typically the greatest potential issue for artists can be that art galleries may owe their artists considerable sums of money when insolvency strikes.  It would not be unheard of for galleries to use artists' sales proceeds to fund cash flow, even if – strictly speaking – they are not permitted to do so.  As unsecured creditors in an insolvency, artists may struggle to recover the sale proceeds owed to them, as secured creditors will be working to maximise their recovery over gallery funds and assets.  

Moreover, rather shockingly, sometimes artists or other consignors who have been paid in the run up to the insolvency might face a claim by an insolvency practitioner for 'clawback' of those payments received. In short, in addition to the emotional strain, an insolvency can give rise to significant practical and financial challenges for artists.  These challenges can be exacerbated where the appointed insolvency practitioners are unfamiliar with the nuances of the art market, and the mechanics of consignment relationships and gallery sales arrangements. It is therefore critical for artists to take good advice and understand their position, and to take steps as soon as possible to protect their interests.  

Artists - be proactive

However, artists should not wait until there is a known liquidity crisis or, even, rumours of distress - this is often too late to improve their position. Indeed, seeking to maximise their leverage at or after the point of insolvency might be exactly what leads to a clawback claim.  Artists should take legal advice over the course of their relationship with a gallery which is sensitive to insolvency risks and proactive about managing them.

Insolvency

There follows in this article some common aspects of insolvency relevant to English law.  There are various different types of insolvency processes in England (including administration and liquidation) and not all forms or aspects are covered here. Moreover, this article picks up some points which are unique to each, so individual fact-specific advice should be sought in all circumstances.

Competing interests

In an insolvency, there are different classes of stakeholders, each with distinct competing interests and priorities.  Broadly, under English law, those with a 'money' interest typically include secured creditors (such as banks or lenders with security over the gallery's real estate, bank accounts and assets) and unsecured creditors (which may include artists who are owed sale proceeds, and unpaid suppliers such as framers and storage providers). Artists and consignors often also have a proprietary claim in relation to their artworks in the possession of the gallery.  Under English law, each group is treated differently in an insolvency.

Money claims

Broadly speaking, a secured creditor (with a 'floating charge' over the company's assets) will have an interest in ensuring that the administrators take steps to realise the gallery's property at a price which is sufficient to repay the secured debt (or as much of it as possible), and as quickly as reasonably practicable. 

By contrast, unsecured creditors will typically only receive a meaningful distribution of realisations if the floating charge holder has been paid in full.  (UK insolvency law does provide for a small portion of the proceeds of realised property subject to a floating charge to be made available to unsecured creditors.  However, this would usually result in a payment of mere pennies on the pound of what creditors are owed.  Indeed, this appears to be the likely fate of unsecured creditors of Stephen Friedman Gallery whose unsecured creditors (it is currently estimated) will receive 8 or 9 pence for every pound they are owed.)

If it is clear that the gallery has insufficient assets to pay the floating charge holder in full, unsecured creditors will be particularly exposed. Unsecured creditors will therefore have a keen interest in identifying claims to property which will maximise the pool of assets available for distribution.

Trust property

An artist may seek to argue that any sale proceeds held by the gallery on behalf of the artist are held on trust for the artist.  Any property or money which the company holds on trust for someone else, will fall outside of the Company's general pool of assets and will not be shared with the general pool of creditors. However, this is likely to be a hard argument to run in England where funds have been comingled with other monies in the gallery's bank account, and particularly where it is unclear whether the gallery was acting as a true agent or a reseller. Even if the gallery was contractually obliged to hold those sale proceeds in a separate trust account for the artist, a claim for breach of contract against the insolvent gallery that failed to use a segregated account may be of little value.  

Such has been the issue for artists that, since the 1970s, the New York Arts & Cultural Affairs Law has stated that artist-consigned art is to be held in trust by consignee art dealers, and that proceeds from the sale of that art are to be held in trust.  This law was amended in 2012 to further strengthen it.  Those amendments hold art dealers to a somewhat higher fiduciary standard than that they were previously held to. The 2012 law also permits artists to recover their attorneys’ fees in a lawsuit if they prevail.   The same law also makes it mandatory for galleries in New York to hold artists sale proceeds in a segregated account; albeit in practice galleries may not always do so.  Although New York was the earliest US state to adopt such laws, other US states, such as California and Massachusetts, have somewhat similar laws (although in some states the provisions can be dramatically different). 

Proprietary claims 

Proprietary claims in respect of specific identifiable tangible property, such as a specific artwork are likely to be much easier to prove than claims to money on trust, which is likely to have been co-mingled. 

Artists whose consigned artworks remain in the gallery's possession at the point of insolvency will usually want to assert title promptly and arrange to take possession of their property.  However, this process can be complicated by the 'moratorium' which takes effect automatically in an administration process (one of the forms of insolvency procedure under English law) and which prevents any legal process against a company without permission from the administrator or the Court (and/or the stay on proceedings in a compulsory winding up (another form of insolvency process)).  It is important that these issues are considered and navigated carefully to avoid delays or disputes.  

Additional complications may also arise where works are held by third-party storage providers who are themselves owed money by the gallery. These storage providers may have terms in place with the insolvent gallery that allows them to assert a lien (i.e. a right to retain possession of goods pending payment) over the artworks in storage even though the artworks are still owned by the artists. In such cases, storage providers may seek to retain possession of the artworks until outstanding fees are paid.  

Consignor creditors with proprietary claims may seek to assert personal claims in conversion against an administrator, liquidator or other officeholder who sells goods that were identifiably that creditor's property.

Managing the risk of clawback claims of monies paid

Artists consigning to London galleries may also be concerned about the risk of clawback claims following a high-profile gallery insolvency which led to a large number of clawback claims being made in 2024 against artists and other consignors who had received money from the gallery in the period prior to its insolvency.  

This risk will arise automatically if a party receives money from the gallery after a 'winding up petition' has been presented and the court later orders a compulsory liquidation.  Additionally, payments made in the six months to two years prior to the commencement of insolvency proceedings may still be challenged as 'preferences', depending on whether the recipient is legally 'connected' to the gallery (e.g. via common shareholders and/or directors).  Broadly, a payment may be challenged if it places the recipient in a better position than they would otherwise have been in in a winding up; that the payment was "influenced by a desire" to put the recipient in a better position. Where there is a close personal relationship, the officeholder (administrator or liquidator) may be more likely to argue that there was a preference.

How Withers can assist

Insolvency can be complex and difficult, but our lawyers can alleviate some of the stress by advocating on behalf of our artist clients, protecting them, and helping them to navigate the insolvency process more confidently.  We can also fight our clients' corner when clawback claims are made or payments are challenged.

Our seasoned art lawyers can also advise in relation to title disputes involving consignment agreements, terms of sale, liens and/or storage terms.  

Artists should not wait until there is a known or rumoured liquidity crisis. Artists should take legal advice over the course of their relationship with a gallery to manage insolvency risks.  We can advise on pre-emptive planning, including drafting and negotiating consignment agreements designed to better protect artists in the event of a future gallery insolvency or closure.