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

Nottingham based J Tomlinson Ltd file a Notice of Intent to Appoint Administrators yesterday afternoon (10/07/2023). Reports suggest that over 400 jobs will be lost.

A Notice of intent to Appoint Administrators is a court filed document giving notice of the companies intention to go into Administration. Once filed a moratorium is created over the company for a period of 10 days. This protects the company from legal action starting or continuing by creditors (without permission from the court).

In most cases an Administrator is appointed after 10 days, unless a solution to the financial issues faced by the company is found. In some cases the 10 day period is extended, if the court is satisfied an extension would be of benefit to the creditors.

Our members are being kept up to date with the situation.

The current increase in insolvency figures, coupled with rising material costs & labour shortages, highlights the importance of taking preventative measures when taking on new customers as well as keeping cash flowing through the business with the effective collection of overdue invoices. 

By implementing effective credit management practices, you can protect your business from the risks associated with bad debt. 

Standard credit information can help you assess the level of risk when dealing with new customers and maintaining ongoing trading relationships. Obtaining an unbiased third-party opinion, which analyses financial data, public records, economic indicators, and industry pressures, can provide valuable insights into a company’s creditworthiness.

However, industry-specific credit information goes beyond a standard credit report. By leveraging a community of businesses sharing their trading experiences, you can develop a more accurate assessment of the risk to your business. 

Understanding the potential delays in receiving payments beyond the agreed terms is essential in determining whether your business can manage the associated risks. By considering the average time it takes to obtain payment under normal circumstances and the credit amount involved, you can assess if your business can sustain such delays.

Even if a standard credit report indicates a favourable financial position, relying solely on this may lead to overlooking vital information specific to your industry. For instance, other suppliers may currently face significant payment issues, which could adversely impact your business if not taken into account.

Hence, it is crucial to have access to industry-specific credit information to gain a comprehensive understanding of the creditworthiness of your customers. This way, you can mitigate the potential risks associated with delayed payments and ensure the financial stability of your business.

Assessing Risk Doesn’t Stop at The Account Opening Process

Regularly assessing the credit risk of a new customer is crucial in order to minimise the risk of bad debt and protect your business. 

While the account opening process provides initial information about the customer’s creditworthiness, it is important to continuously monitor for any changes that may impact their ability to make timely payments.

Receiving notifications about county court judgments (CCJs) and other court orders can provide valuable insights into a customer’s financial situation. However, it may already be too late to take appropriate action. Other creditors may have already taken steps to recover their debts, leaving your overdue invoice further down the line.

In addition to relying on mainstream credit information, it is beneficial to receive early warnings about changes in trading patterns and experiences from other suppliers. These insights can provide crucial information about the financial health of your customer and their ability to meet their payment obligations.

By implementing these strategies and staying informed about your customers’ creditworthiness and payment habits, you will effectively manage credit risk throughout the customer journey and protect your business from potential financial losses.

For construction businesses we offer a free trial of our industry specific credit information and debt recovery services. 

Contact our team of experts on 01527 518800 for more information. 

#1 Construction Industry Credit Reference Agency

 As the construction sector’s only specialist credit reference agency we have been monitoring the situation closely and have been providing our members with up-to-the-minute updates.

We have been tracking sporadic periods of slow payments by Henry Construction Projects Ltd for the past decade but the frequency of slow payments has increased over the past twelve months.

Due to insider information gleaned from our 3,000 members we reduced the company’s recommended credit limit to zero in September 2022. We currently have almost 200 reports of late or non payment from our construction industry members.

Numerous early warnings have been sent to our members, warning them of the increased risk.

We have successfully collected just over £600k on behalf of our members during the first half of 2023.

The company was set up 13 years ago by William Henry as a small civils and groundworks company. Since then it has grown into a multi-disciplined construction contractor turning over more than £400m per annum primarily concentrating on residential and mixed use projects in the South East. The company is currently owned by 45 year old Mark James Henry.

The company was in the news last month as it was fined £234k by Westminster Magistrates Court for a preventable ‘fall from height’ incident two years ago which injured a Romanian national. It’s not known whether this fine has been paid.

Emma Reilly MCICM MCIM CEO of Top Service, commented:

“We are monitoring this situation very closely and keeping our members informed. At this stage of play it is very unlikely that the company will be able to avoid insolvency proceedings”.

The Insolvency Service have released statistics for April 2023. Overall there has been a 15% decrease in corporate insolvency (compared to April 2022). Compulsory liquidations rise, along with registered Administrations and CVA’s. CVL’s decrease, compared to April 2022.

Emma Reilly, CEO & credit management expert at Top Service Ltd commented “a comment made from a new member to Top Service has stuck with me recently. He said ‘just one avoidable bad debt is one too many’ and he is absolutely right.

Recently, whilst out and about talking to our members I’m finding there is a lot more awareness around assessing a potential customers credit worthiness when it comes to considering extending credit facilities. The awareness can flounder when it comes to keeping up to date with changes to the customers ability to pay, once credit facilities have been extended.

Keeping the due diligence up throughout the business relationship is vital to reduce the risk of being exposed to bad debt. There aren’t always standard warning signs when it comes to flagging a potential insolvency. There will nearly always be other creditors and intelligence that can be gathered from the industry that will forewarn you. That’s why industry specific credit information is so important”.

The Insolvency Service has today released it’s monthly report on company insolvency which shows a blanket rise across the board, compared to March 2022.

Of the 2,457 registered company insolvencies in March 2023:

• There were 2,011 CVLs, which is 9% higher than in March 2022;
• 288 were compulsory liquidations, which is more than twice the number in March 2022;
• 13 were CVAs, which is 44% higher than March 2022;
• There were 145 administrations, which is 12% higher than March 2022;
• There were no receivership appointments.

Included in the report is the following statement. The number of company insolvencies was 16% higher than the number in March 2022. The increase in company insolvencies compared to March 2022 was driven by an increase in the number of compulsory liquidations and CVLs. The increase in compulsory liquidations is partly as a result of an increase in winding-up petitions presented by HMRC.

Emma Reilly, MD at Top Service Ltd commented “Although temporary insolvency restrictions began to be phased out from October 2021, measures to protect small businesses brought in on 1st October 2021 through the Corporate Insolvency and Governance Act 2020 were still in place up to 31st March 2022. Namely the threshold for issuing a winding up petition was increased to £10,000 (temporarily replacing the threshold of £750.00) & the requirement of creditors to provide 21 days notice before proceeding with a winding up petition.”

Emma continued “There is definitely an increased awareness within the construction industry relating to the risks of being exposed to bad debt. We have seen an increased number of enquiries from construction businesses asking for support with credit information and debt recovery services”.

Government efforts to reform Companies House won’t achieve their aims without closing risky loopholes, insolvency and restructuring trade body R3 has warned.

The Economic Crime and Corporate Transparency Bill aims to address the misuse of UK company registrations and removals by reforming the powers of Companies House.

Nicky Fisher, Vice President of R3 said “The Bill won’t improve transparency over corporate entities and tackle economic crime while companies are dissolved and struck off the Companies House register with no investigation into the conduct of their directors. At the moment, anyone who is looking to avoid investigation can do this by waiting till their company is struck off the Register, as the option of restoring it via the courts to enable an investigation to happen is often too time consuming and expensive for the business’s creditors”.

Emma Reilly, MD of credit management specialists, Top Service Ltd, said “There is no doubt that some directors are taking advantage of the company dissolution process. We see it in the construction sector where a company has traded but then the directors fail to file a Confirmation Statement or accounts and the company gets struck-off and dissolved. When we know that a company is under threat of dissolution we will alert creditors so that they can oppose the striking-off. It would be better if there was a deterrent to abusing the dissolution process in the first place though”.

Recent statistics from the Government-backed British Business Bank (BBB) reveal that challenger & specialist banks have now overtaken traditional banks when it comes to small business lending.  In a survey carried out in the last quarter of 2022, 55% of the small businesses questioned had accessed finance from a challenger or specialist bank as opposed to a high street bank.

Emma Reilly, MD of specialist credit agency Top Service Ltd, said: “32% of construction businesses plan to grow in 2023 and it’s important that they are able to access the finance in order to achieve their growth plans”.

More details are available here: https://www.british-business-bank.co.uk/press-release/challenger-and-specialist-bank-lending-reached-record-high-of-35-5bn-in-2022-finds-latest-british-business-bank-research/

Have you heard of the British Business Bank (BBB)?  It was set up by the UK Government to help improve access to finance for smaller businesses.  The bank doesn’t lend directly but has relationships with 130 lenders, leasing companies and venture capital funds.

The BBB is currently administering the ‘Recovery Loan Scheme’ which helps UK businesses with a turnover of up to £45m to access finance using a 70% loan guarantee from the Government.  Even those businesses that were in receipt of the original Coronavirus Business Interruption Loan Scheme (CBILS) are eligible.

Emma Reilly, MD at specialist credit agency Top Service Ltd commented:  “A British Business Bank survey revealed that 32% of construction businesses were planning to grow in 2023 so access to finance is imperative to underpin that growth”.

More details are available here: https://www.british-business-bank.co.uk/ourpartners/recovery-loan-scheme/