Guide

When can a company recover its goods under a retention of title clause?

Gateley Legal

Article by

If the company you are dealing with has entered insolvency (or even if it hasn’t) and you are owed money for unpaid invoices, you may be able to recover your stock under retention of title.

In this article, Liz Russell explains when and how you may be able to take advantage of retention of title provisions in your standard terms of supply.

What is a retention of title clause?

Retention of title (ROT) provides assurance to a supplier of goods that if the customer does not pay, it may in certain circumstances be able to recover the goods. It is particularly helpful if the customer becomes insolvent, as otherwise the goods will be sold by the administrator or liquidator and the proceeds shared between all creditors.

By incorporating a ROT clause in the customer agreement you (as the supplier of goods) may retain title to your goods supplied until those goods, and potentially all other monies owed to you, have been paid by your customer (and if the customer does not pay, the goods must be returned).

How does a ROT claim work?

There are three parts to a valid ROT claim:

  1. a properly worded retention of title clause
  2. the ROT clause must be incorporated into the contractual relations
  3. the goods to which the clause relates must be identifiable.

The different types of ROT clause

ROT provisions can be very basic in form.

A simple ROT clause will state that the legal and beneficial title to the goods supplied is retained by the seller until the goods are paid for.

Far better, an all monies ROT clause will state that the legal and beneficial title to the goods supplied is retained by the seller until the goods are paid for along with all other monies owing to the supplier on any account.

A more sophisticated ROT clause might go on to deal with the following rights and obligations in the supplier’s favour:

  • the right to repossess goods that have not been paid for;
  • the right to prevent a customer from selling or using the goods before payment;
  • the right of entry to repossess the goods not paid for;
  • an obligation on the customer to store the seller’s goods separately from any other party’s goods; and
  • an obligation on the customer to mark all seller-provided goods as such and allow the seller access to the goods to verify this.

Incorporating such rights and obligations ensures that the goods can be easily recovered from the customer without fear of trespass on the customer’s property. If your current supply agreements (or other standard terms) do not provide for the above, there may be benefit in you revisiting and reviewing your standard agreements.

Practical considerations when looking at a ROT claim

  • Incorporation: A ROT clause needs to be properly incorporated in the contractual relations between the parties. A contract signed before the first order that incorporates the supplier’s standard terms and attaches a copy of them is best. The credit account application form is often the best place for this. Otherwise you risk losing out in the ‘battle of the forms’ where the parties keep exchanging their own standard terms with each other and a judge needs to decide whose terms were in place at the moment the contact was actually formed. Remember that invoices are usually supplied after a contract has been entered into, so any ROT clause contained in them will not normally apply. The exception may be if a course of dealing argument has built up over time.
  • Course of dealing: Where there has been a trading relationship, have the actions of both parties been consistent with the provisions of the ROT clause/ agreement? If the conduct conflicts with the provisions of the agreement, then the ROT clause may be ineffective.
  • Identification: For a simple ROT clause to be effective, specific goods must be identifiable against specific unpaid invoices. This could be done by reference to serial numbers but will often be very difficult with small or fast-moving goods. If you cannot link the goods that haven’t been paid for back to the unpaid invoices then the ROT clause will fail. For an all monies ROT clause to be effective you only need to identify goods that you supplied to the customer. If you were a sole supplier of particular goods then this will be straightforward.
  • Value of goods: Is there any economic benefit in pursuing goods under an ROT clause if the goods are low value? It may be better for administrators or liquidators to sell them and pay you a proportion of the proceeds.
  • Ever-changing case law: Given that particular clauses can be rendered ineffective by the courts at any time, frequent reviews of your ROT clauses (and other standard terms) should be regular practice.

How to pursue an ROT claim

Against a company before it enters insolvency

Check your contract allows you to do it, then set out your retention of title claim and what you intend to do in writing. Refer to which invoice(s) are unpaid, the relevant provisions of the ROT provision you intend to rely upon and any evidence of non-payment.

If your contract provides for rights of entry to the customer’s premises to repossess the goods, you may be able to attend the customer’s property to identify and/ or recover the goods supplied that have not been paid for. Otherwise you will need to agree collection terms with the customer.

If the customer is subject to financial distress they may allow you to attend and recover your goods without further issue.

If the ROT claim becomes contentious you should seek legal advice to maximise your chances of recovery of your goods.

Against a company after it enters insolvency

Where a customer has already entered an insolvency process, the onus is on you to prove that the goods are still yours and not the customers. Contact the insolvency practitioner (IP) urgently. Until notice is received, the IP may continue to use or sell the goods without payment to you. After they have been notified that the goods are yours they could be held personally responsible to pay you for them you if they sell them.

Attend the customer’s site as quickly as possible to identify and agree a stock take with the IP’s team. This provides a shared understanding of which goods are present.

The IP will issue a ROT questionnaire for you to complete and use this to assess the validity of your claim. As part of which you will need to detail the ROT provisions, the supplied goods, and evidence that the customer has not paid for them.

Early notification is required because the IP will only have limited knowledge of the company (and trading history). An IP is protected from personal liability for the seizure and/ or disposal of another’s property or goods where they have reasonable grounds to believe that the goods belonged to the customer company.

The IP may have sold the business and assets already and may tell you to speak to the buyer. In fact, the IP will only have sold the company’s property to the buyer (and not therefore your property). Try to make arrangements with the buyer to pay for or return the goods, but if these discussions fail you may be able to claim against the IP instead.

If an ROT claim fails, the claim will be an unsecured claim in the insolvency process (and a proof of debt will need to be filed with the IP). Depending on the financial situation and realisations available for the company subject to the process, distributions may not be available to unsecured creditors.

Click here to read more about how assets are distributed in a company insolvency.

Retention of title – seeking legal advice

Establishing ROT can be a complex legal process. Legal advice from solicitors used to dealing with IPs will greatly improve your chances of successfully recovering the goods.

What are the alternatives to retention of title?

Given the ever-changing case law around ROT provisions and their enforceability, there is still no substitute for a sound credit control system to identify when customers are becoming an increased risk. Bank guarantees or credit insurance can offer alternatives in some scenarios, though for most credit insurance policies, there is a pre-condition that you have a satisfactory set of standard business terms (and may require a review process prior to obtaining).

Our Restructuring Advisory team have the required expertise and experience to assist you with any restructuring challenges you may face. Please contact us if you would like to discuss any aspect of this article or series.

Gateley Plc is authorised and regulated by the SRA (Solicitors' Regulation Authority). Please visit the SRA website for details of the professional conduct rules which Gateley Legal must comply with.