In the absence of any other agreement, the default position under commercial law (the Sale of Goods Act) is that the ownership of and title to goods passes to the buyer the moment they are delivered, even if the supplier is not subsequently paid for them. Retention of Title (RoT) is essentially a credit risk management tool, designed to protect the supplier from bad debts. The supplier just wants to get paid and rarely has any real desire to get involved in the disruption of taking back and re-selling their goods, but RoT provides a lever with which to apply pressure for the bill to be settled.
The question is: what happens if the buyer files for insolvency?
What are the main types of Retention of Title?
A supplier’s rights depend on which of the various types of Retention of Title clause it has put in place:
A ‘basic’ clause
This is a simple clause providing that title to specific goods remains with the supplier until payment has been received in full for those specific goods only.
‘All monies’
This is wider, allowing for Retention of Title to all goods supplied until all monies due from the buyer are paid to the supplier. This gives stronger protection than a basic clause and is often included separately in commercial contracts, but in addition to the basic clause.
‘Proceeds of sale’
This clause aims to deal with the problem where goods have already been sold on to a third party before being paid for. It seeks to give the original supplier an entitlement to claim specifically against the proceeds of the onward sale.
‘Mixed goods’
This applies when goods supplied have been used in a manufacturing or assembly process and have become mixed with other goods. A ‘mixed goods’ clause may allow the supplier to claim right of ownership over the original raw materials within the altered product.
Practical issues with enforcing a Retention of Title claim in an insolvency
Incorporation
An Retention of Title clause is ineffective unless it has been notified to the buyer (usually in the Terms & Conditions) and accepted by them at the outset of the relationship. The supplier can’t unilaterally impose it either then or at a later stage.
Identification
The supplier has to be able to identify their goods and differentiate them from other similar items. In particular, this can be difficult where unmarked items have been removed from any distinctive packaging and stored with identical goods.
Mixed goods
Enforcing a mixed goods clause can be problematical, depending on whether the raw materials can be separated without causing damage. A classic example might be recovering baked beans after they have been mixed with sauce and sealed in a can.
Normal course of trade
If the supplier is aware that the buyer’s normal course of business means that their goods will routinely be sold on to third parties before they are paid for, then a proceeds of sale claim will probably fail.
Perishable goods
By their nature, these goods may not be in any condition to be repossessed, unless suppliers take very prompt action after the appointment of Insolvency Practitioners.
Speed is of the essence
Events move fast in the early stages of many insolvencies, so suppliers wanting to enforce their Retention of Title rights need to lose no time getting in touch with the relevant Liquidator or Administrator once they become aware of the insolvency. They are likely to be asked to complete an Retention 0f Title questionnaire and provide the necessary documentation to substantiate their claim, as well as physically identifying their goods.
Administrations
With the appointment of a Liquidator, an effective Retention of Title clause will give the supplier the right to take back any remaining unpaid goods. By contrast, when it is an Administration, the repossession right is frozen and can’t be used, unless the Administrator agrees or the supplier obtains a Court order allowing it to do so. However, the clause remains valid and the Administrator must respect whatever rights it gives the supplier. Administration may protect the goods from seizure, but it can’t change the supplier’s ownership rights and entitlement to be recompensed when goods are not returned.
Getting professional advice
Retention of Title clauses and rights are a complex commercial area. Suppliers are best served by taking professional advice if any dispute arises after the appointment of Insolvency Practitioners to a customer. In any case, Retention of Title clauses need to be drafted with the help of advisers experienced in such matters and need to be kept under regular review because of the ongoing development of legal precedents on the topic.
Getting this right is important to protect suppliers as far as possible from the fate of unsecured creditors, who stand to recover little or nothing in the great majority of insolvencies, particularly Liquidations.
At Opus, we have extensive experience assisting business owners and directors with concerns and challenges, and we will always work with you to find the best solution for you and your business. If you would like to speak to our Creditor Services team, one of our Partners would be more than happy to have a non-obligatory, confidential chat with you. We can be contacted at rescue@opusllp.com or call us on 0203 995 6380 and we will arrange for a call with one of our specialists.