In the first 3 months of this year, company insolvencies increased for the first time since 2014. In April, UK manufacturing activity contracted for the first time in 3 years.1 A range of explanations has been offered including
weaker domestic demand, low oil prices hitting production and uncertainty created by the EU referendum. It the circumstances, it seems timely to look at one of the remedies that can be available to manufacturers and suppliers in the event of a customer failing to pay for goods.
When an important customer fails to make payment for goods, or worse, goes into an insolvency process, the supplier faces 2 problems:
- how to replace the revenue stream, and
- getting paid for goods which have been supplied. The supplier may find themselves entitled to share rateably with other unsecured suppliers in the insolvent company. Often the dividend is nothing and even where it is a few pence in the pound, there can be a substantial delay before payment is made.
The object of a retention of title (ROT) clause is to preserve seller's ownership rights to goods so that they have priority over other creditors in the event that the buyer fails to pay them and enters into an insolvency process. In certain circumstances, this can leave the seller in a much better position than being an unsecured creditor.
- Markit/CIPS manufacturing Purchasing Manager's Index fell from to 49.2 from 50.7 in March.
At best, a well drafted clause might mean that:
- the seller retains the right to enter the buyer's property without trespassing;
- The seller can recover goods stored at the buyer's premises which they can identify, possibly to the extent that everything the seller is owed (even for other goods);
- The seller has a potential claim against an insolvency practitioner if they sell goods which were identifiably the seller's. (Although it is unlikely the insolvency practitioner would do this).
ROT clauses are however of limited use if for instance, the goods have a low resale value, or in any case where the costs of collection are disproportionate to the value of the goods.
Risk Management Strategy
Whose terms are you trading on?
Retention of title can form one part of a broader risk management strategy and should not be a replacement for it. At the heart of that strategy is really knowing your customer, not just at the start of the relationship, but throughout, since business fortunes change.
Some warning signs which might mean a buyer is in financial difficulties include fall in reputation and market perception, rebranding (if used purely to disguise underperformance), fall in staff morale, the buyer taking longer to pay or paying erratically, other suppliers refusing to deliver, the buyer becoming more contentious, changing contacts or departure of key people, buyer refinancing, calls going unanswered, inexplicable changes in a buyer's directors or registered office, late filing of accounts, poor balance sheets or profit and loss accounts, outstanding county court judgments and low credit scoring from credit checks.
If sellers are concerned about the financial viability of the buyer, they should consider:
- Reducing the amount and/or period of credit
- Taking security. Other forms of security such as a letter of credit or bank guarantee may offer better security for the seller in appropriate circumstances
- Obtaining Insurance
- It is possible for the seller to obtain credit insurance to guard against the risk of defaulting buyers. The cost vs benefit analysis of this needs to be done in each instance. Insurers are likely to want to see satisfactory terms of business in force.
- It is also possible to have a clause in your contract requiring the buyer to obtain insurance upon receipt of the goods and to have the seller's interest noted on the policy. Again, sellers need to assess in their particular circumstances whether this is practical which will depend on various factors e.g. relative bargaining power.
To be effective, the ROT clause must have been effectively incorporated into the terms of business upon which the parties are trading. An obvious example would be in a validly signed and dated contract. Many clauses fail on this ground and arguments can ensue where a party tries to incorporate its ROT clause on the back of an invoice (which would not normally work, unless perhaps there had been a course of dealing).
What types of ROT clauses can currently work?
What types of ROT clauses currently don't work?
ROT clauses come in different shapes and sizes but there are hidden pitfalls: some of the clauses that initially seem the most attractive from the seller’s perspective may not be effective. The main concern is whether the clause gives rise to a company charge. This is important because the enforceability of such charges depends upon registration. In many cases, a finding that the ROT creates a charge leads to the clause being unenforceable for non-registration under the Companies Act 2006.
Type of clause
What it does
Proceeds of sale
If the buyer sells on the goods, this sort of clause seeks to allow the seller to have an ownership claim to the proceeds of sale in the hands of the buyer. This only ever worked in one case8 which has not since been followed on this point.9
3 Bulbinder Singh Sandhu (trading as Isher Fashions UK) v Jet Star Retail Limited (trading as Mark One) (in administration) and others  EWHC
- Re Peachdart (1983) 3 WLR 878.
- Hendy Lennox (Industrial Engines) v Grahame Puttick Limited  1 WLR 485.
- Re CKE Engineering Limited (In Administration)  BCC 975.
- Re Highway Foods International Ltd (In Administrative Receivership)
 1 BCLC 209.
Mixed goods which lose their identity
If during the manufacturing process the seller's goods lose their identity, the seller will lose title.
Leather that had been partly or wholly used in the manufacturing process to make handbags10.
Resin used to make chipboard11. Cloth manufactured into dresses12
How does the buyer's Administration effect the supplier's position?
If the buyer is in Administration, then there is a statutory moratorium. This is like a protective shield put around the buyer to give it time to be rescued, if possible. Sellers will need the permission of the Administrator or a Court order to repossess their goods in this situation.
Typically, the Administrators will firstly ascertain whether the business and assets of the buyer can be sold as a going concern, or on a piecemeal basis.
If there is a potential buyer for the business, this can be an opportunity for creditors to negotiate new terms with them. If sellers are able to conclude satisfactory terms they may decide to leave existing stock in place so that the new owner can trade with it. However, if a going concern sale is not possible and the buyer is wound down, or if there is insufficient clarity or certainty about what is happening, then cautious sellers are more likely to seek recovery of their goods as quickly as possible from the Administrators. In that event, sellers should consider terminating the relevant contract, to trigger their right to repossess the goods.
Provided that the Administrators are satisfied that the buyer has title to the goods, they might agree that the buyer can collect them. This is because:
- administrators would only be able to sell the buyer's goods if they made a successful application to the Court and the Court considered that their disposal would promote the purposes of the
Administration13. In that event, the Court would determine what the
market value should be and the Administrators would have to pay this to the buyer even if they sold the goods below market value,14 and
- the Court has previously decided that in certain circumstances, Administrators remain liable at the discretion of the Court to pay not only for use of goods, but also compensation for wrongfully refusing consent to the owner to let them retake the goods and will therefore be exposed to a claim for wrongful retention (whether or not they
have committed the tort of conversion)15.
- Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd.  1 WLR 676
- There are a variety of reasons why the courts are hostile to these
clauses. In a nutshell, they lean against the idea that the buyer is obliged to account to the seller for profits.
- Re Peachdart (1983) 3 WLR 878.
- Borden (UK) Ltd v Scottish Timber Products Ltd  Ch 25. 12 Ian Chisholm Textiles Ltd v Griffiths and Others  BCC 96. 13 Paragraph 72(1) Schedule B1 Insolvency Act 1986.
- Section 72(3) Schedule B1 Insolvency Act 1986.
- Barclays Mercantile Business Finance Ltd v Sibec Developments Ltd and Others  2 ALL ER 195.
A seller may attempt to retain his title in an international sale contract. This is, in principle, perfectly acceptable but if a dispute arises it is likely to give rise to very difficult legal issues depending on the identity of the parties to the dispute, the precise nature of the disputed issue and how the principles of private international law therefore apply to the issue.
Top 10 tips for suppliers
- The burden is on the seller to establish their claim. Tell the insolvency practitioner about your ROT claim quickly – by telephone and in writing. Try to establish a good rapport – they may be dealing with many other such claims and you are likely to need their help.
- Be prepared to complete and return the insolvency practitioner's pre-printed questionnaire about ROT claims if they have one.
- Assemble the relevant paperwork, especially the evidence that proves you are trading on your terms and that shows the ROT clause. Provide this in writing to the insolvency practitioner. Ask them what timescale they envisage working to resolve. Will they undertake not to part with possession of your stock? Are they doing a stock take?
- Seriously consider terminating the contract in writing as this is likely to give you the right to collect the goods (subject to any Administration moratorium).
- Be prepared to answer how you would be able to identify your goods eg is there a unique barcode or other mark? Is it on the packaging or on the goods? Will the goods have been kept in their packaging if the unique mark is on the packaging? Can you legitimately contend that you are the only (ie unique) supplier of that particular product to the buyer?
- Be prepared to visit the premises to carry out the identification.
- Consider collaborating with other sellers. This tactic can help where individual sellers have difficulty identifying their goods from each other (e.g. if a number of businesses sell similar goods). Usually the insolvency practitioner would argue that means the seller's ROT claim fails. As long as the stock came from one or
other of the suppliers, they can defeat that argument.16
- At best, an ROT clause will allow you to collect the stock. If the insolvency practitioner is willing to agree to this, but it is not cost effective to collect it, you may wish to explore with the insolvency practitioner whether the insolvent company is prepared to buy it. If they are, then they are unlikely to wish to pay the original price. Be prepared to negotiate.
- If the insolvency practitioner sells the assets of the business, you may find yourself also having to deal with the buyer. It is unlikely that the insolvency practitioner will have purported to sell another party's stock because the standard terms of a sale by a company in insolvency provide that the buyer gets only such right, title and interest to the assets transferred as the insolvent company has at the date of completion. In that instance, your rights remain enforceable against the buyer – but it is for you to seek to enforce
- In the matter of Music Zone Services Limited  (unreported).
them. Speed is essential. The buyer may insist you talk to the insolvency practitioner and vice versa. Whilst this is happening, they may relocate your goods and this might make it harder for you to identify them.
- If you are getting nowhere, consider using the threat of a conversion claim to create commercial pressure. There are however practical difficulties with such claims, e.g. the buyer might say the particular goods were not in their possession at the date of insolvency (often records are poor) and it can be difficult to identify that specific goods belonged to the seller if they get used or moved.
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