Retention of Title – How does company insolvency affect this?

What you need to know about Retention of Title

When a company gives items to customers on credit, there’s a chance they might not get paid on time. This can be a big problem for suppliers, affecting their cash flow, especially if the customer is in financial trouble.

If a company has to go into liquidation, the supplier becomes an unsecured creditor and ends up at the bottom of the payment list. In most cases of insolvency, unsecured creditors unfortunately receive only a small portion, if any, of the money they are owed.

Suppliers can reduce this risk by adding a retention of title (ROT) clause to the sales contract. It’s important to seek professional advice when creating such a clause because retention of title can be tricky, especially considering the various situations that might arise.

What do we mean by retention of title clause?

Simply, a retention of title clause in a sales contract means the supplier keeps ownership of the goods until the customer pays in full.

With a well-defined clause, acknowledged by both parties in a signed contract, it serves as evidence that the goods with the insolvent company rightfully belong to the supplier. This allows the supplier to present their case to the appointed liquidator and seek recovery of the items specified in the retention of title clause.

Why is a retention of title agreement important?

Insolvency is a danger for numerous businesses, yet for suppliers, the insolvency of a key customer poses a substantial risk to their continued existence. 

Suppliers can employ retention of title clauses to reduce the risk of not receiving payment for delivered goods, but it’s crucial that the wording is clear and straightforward.

Customers must be informed of any retention of the title clause before or at the time of the contract agreement for it to be enforceable. It’s recommended to incorporate these clauses into the general terms and conditions of trade rather than solely on an invoice.

If included in an invoice, the customer must sign it before goods are delivered, indicating acceptance of the terms by the purchaser.

Exploring different types of retention of title clause

There are several types of retention of title clauses that can be included in contracts:

1. ‘All monies’ clause

A valid ‘all monies’ clause extends further, enabling retention of title for all goods supplied until all debts owed by the debtor are settled to the supplier.

 Unlike the per-order basis of a simple retention of title clause, an ‘all monies’ clause encompasses broader terms. It’s often included alongside a ‘simple’ retention of title clause in a contract.

2. ‘Proceeds of sale’ clause

This kind of ROT clause deals with the situation where goods have been resold, potentially allowing the original supplier to claim the proceeds from the sale.

3. ‘Simple’ ROT clause

This simple retention of title clause indicates that the supplier retains ownership of particular goods until full payment has been received solely for those specific goods.

4. ‘Mixed goods’ clause

If the supplied goods were integrated into the manufacturing process and mixed with other materials, a ‘mixed goods’ clause might enable the supplier to assert ownership over the initial raw materials. 

This situation can be challenging, especially if separating the goods could harm the third-party materials.

Possible Limitations on the Efficiency of ROT Clauses in Commercial Law

• In the usual business dealings, if the seller knows their goods will be used in the buyer’s regular business operations and sold before payment, then a clause regarding retention of title (ROT) may not be effective.
• Retention of Title cannot be enforced if the goods have undergone a change in form, like through manufacturing, or if they are not easily separable from a product that has already been made.
• Goods can only be subject to retention of title if they are delivered after the buyer’s account shows no debt or a credit balance.

• Perishable items naturally render an ROT clause unenforceable due to their tendency to spoil.

Effective Enforcement of Retention of Title Clause: Legal  Criteria, and Expert Guidance with Vanguard Insolvency

To avoid the liquidation of goods covered by a retention of title clause, the Official Receiver or appointed insolvency practitioner must be informed promptly of its presence.

The office-holder might request the supplier to fill out a retention of title questionnaire to gain a clearer understanding of the situation and determine if the clause meets the required criteria. The supplier must also submit documentary evidence to support their claim letter.

Continual changes in the retention of title case law imply that suppliers should frequently assess ROT clauses and their potential effectiveness in specific cases. Our specialists at Vanguard Insolvency can offer professional guidance on whether a clause has been properly drafted and the probability of its successful enforcement in commercial law.

Vanguard Insolvency possesses expertise in the retention of title matters and boasts extensive experience in handling claims and disputes related to the retention of titles. Contact one of our team members to schedule a free consultation on the same day.