Retention Of Title & Insolvency

Published on 17^th July 2023

Supplying goods on credit can be a risky business. In the midst of tough economic times, it is more important than ever for businesses to protect themselves against the risk of a customer becoming insolvent.

One way to do this could be the effective introduction of a retention of title clause. We’re delighted to bring you this information in conjunction with PKF. Thank you to the author and Top Service friend, Brendan Clarkson. 

So What Is Retention of Title (‘ROT’)?

A valid ROT clause allows a supplier to retain ownership over goods supplied until such time as certain conditions are met, often the payment to the supplier of all sums owed.

The clause displaces the usual position that ownership/title of goods passes to the buyer on delivery.

A ROT clause is sometimes known as a ‘Romalpa’ or reservation of title clause.

Why should I have a ROT clause?

Provided it has been carefully worded, the clause affords the supplier a further layer of protection against the buyer’s default. This means that on an insolvency, the supplier is potentially entitled to:

• retain legal title over the goods until all sums owed are paid;
• claim the proceeds of any resale of the goods; or
• claim rights over any new products manufactured from the goods supplied.

This is likely to be of greater value to the supplier than claiming for an unsecured dividend in the formal insolvency process.

How can I make sure my ROT clause works ?

It is essential that your clause is written correctly and that your systems operate in such a way as to maximise the prospects of recovering your stock. It would always be our advice to seek advice from a lawyer with regards to drafting a retention of title clause and to have the clause reviewed regularly.

There is no guarantee that an ROT clause will work, as it depends not only on the wording of the clause but how the clause operates in practice. There are three main areas that lawyers will usually investigate:

Incorporation

An ROT clause which is not effectively incorporated into the contract between the seller and insolvent buyer will ultimately fail. Incorporation is a legal term which, in this context, means that the seller’s terms and conditions of trade have been accepted by the buyer.

A simple ROT clause imposed after the contract is made – for example, terms stated on the back of a sales invoice – is likely to be rejected by a liquidator or administrator on the basis that it is a post-contractual document.

Suppliers should ensure that a contractual document – such as a carefully worded credit application form containing the conditions of trade and the ROT clause(s) – is signed by both parties before any goods are delivered.

Identification of the goods

ROT clauses are only effective if the supplier can identify which goods belong to him. This can be especially difficult where identical goods have been supplied by different sellers.

It is sensible to ensure that your product is marked in a way that is easily identifiable. High value items such as plant and machinery should always be labelled with proper specification and serial numbers and manufacturers’ name plates. Lower value items should at least have a batch number or date stamped on their packaging and this should be referenced in your invoice.

Retaining identity

If your supplies have been used in a manufacturing process which alters the goods so that they do not retain their original identity, it is unlikely that you will be able to claim ROT.

In a well-known court case, a seller’s ROT claim was defeated as the resin supplied had been incorporated by the manufacturer into chipboard, thereby losing its identity. There is much case law in this area with each claim turning on its own facts and on the terms of the particular contract.

What happens to goods & equipment held under a ROT clause?

The moratorium created by an administration means that a supplier cannot take back their stock without the permission of the court or the administrator. However, if an administrator deliberately deals with property in a manner inconsistent with another person’s rights and deprives them of possession and use, they could be liable for damages under the tort of conversion (a person without authority, does any act, which interferes with the title of goods owned by another person). 

Most ROT clauses give the buyer the ability to use the stock in the ” normal course of business”. So if the administrator continues to trade the business, it is likely that normal sales of the goods will be permitted by this part of the clause.

In practice, the administrator will usually invite the supplier to attend the site and identify their goods. Any stock used by the administrator after their appointment will then be paid for (usually at retail price which clearly benefits the supplier and avoids the need for collection and re-sale).

Quick Tips?

1. Ensure that your ROT clause is effectively incorporated into the contract with your customer .
2. Review your procedures in respect of new customers – terms and conditions of sale should be signed by both parties before the first delivery is made.
3. If your clause is some years old, it is worth reviewing the terms and conditions to ensure they are tailored to the issues that may arise in the specific market in which you operate.
4. Seek advice from your solicitor if you are in any doubt.
5. Ensure that your products can be easily identified – where appropriate, use serial numbers and name plates/labels.
6. As soon as you are aware of a customer entering any form of insolvency, contact the office holder as soon as possible. Provide details of your ROT claim and arrange to attend the customer’s premises to identify your goods. Once on site, label your goods with stickers and agree your inventory with the insolvency practitioner’s representative.

For more information please do not hesitate to contact our team on 01527 518800