Foreign suppliers are often not familiar with the legal framework applying in an insolvency of their German customers. That lack of familiarity may leave them ill-prepared to deal with distressed customers. In many cases, the foreign suppliers have not taken the measures necessary to protect themselves.

I plan to provide readers throughout the following months, with information that suppliers may find helpful to better protect their position in case of an insolvency of their German customer. Questions and comments are welcome!

Let’s start with an obvious observation: a supplier will not get into problems with an insolvent customer if it has delivered goods only after having received a prepayment or has received payment upon delivery. However, business reality in many cases does not allow this procedure. The customer may require payment terms of one or even several months to allow the customer to resell the goods and pay the supplier out of the proceeds, or to use the goods in a production process. In each of these cases, the customer may become insolvent before the supplier has been paid. And this is exactly the situation where from the perspective of German law the crucial question is: who is the owner of these goods at the time the customer becomes insolvent?

The German customer is in possession of the goods, and under the German civil code there is a general assumption that the person in possession of a movable asset also is its owner, but this is not necessarily the case. If the supplier can prove that although it has delivered the goods to its customer, it has not yet transferred ownership but merely possession of the goods, then the supplier is in a much better legal position. How does the supplier prevent the transfer of ownership? By a so called “Retention of Title” (ROT) agreement!

The following questions, among others, will be addressed in subsequent posts:

  • What forms of ROT are available?
  • How is ROT legally established?
  • How does ROT work to protect the supplier in the customer insolvency?
  • What does the supplier who is protected by ROT still need to do in the customer insolvency?