In his latest Coffee Break Briefing webinar, Frettens’ own ‘Insolvency Guru’ Malcolm Niekirk provided advice for Insolvency Practitioners on dealing with creditors who claim Retention of Title.
If you’re looking for our online retention of title assistant – here’s the link to that.
This is the summary of that briefing.
If you'd like to watch the webinar back, you can do so below, if not, read on for our summary...
Quick Links
- How retention of title works
- The ‘default setting’
- Incorporation of contractual terms
- Simple clauses
- Advanced clauses
- Administrations – Atlantic Computers
- Retention of title made simple
How does retention of title work in insolvency?
Retention of title is, primarily, a credit control tool. It is used by businesses who sell goods to try to reduce the risk of bad debts.
The supplier keeps ownership of the goods that they sell, even after delivery to the buyer, until they have been paid for.
Because the seller is still the owner of the goods, they have the right to repossess them if the buyer doesn’t pay them.
What the supplier will really want is to be paid. But if they can’t be paid then they can at least take their goods back.
The ‘default setting’
This is the way that the law says that ownership of goods transfers when they are sold, if nothing else is agreed.
The rules are contained in the Sale of Goods Act 1979. There are a number of rules that apply in different circumstances. What they boil down to is this:
Unless something else is agreed between the buyer and the seller, then by the time the buyer receives the goods they will already be the buyer’s property. The seller will lose ownership of their goods, probably before they are even delivered to their customer.
Incorporation of contractual terms
That ‘default setting’ puts the seller at risk because it doesn’t give them the credit control terms that they would like.
Many businesses ask their customers to agree to something different, which they often do by having printed terms of business which include, among other clauses, a retention of title clause.
Whether those printed terms actually work, or not, depends on whether they are agreed by the customer. If agreed, the terms become part of the contract. Otherwise, the contract is governed by the Sale of Goods Act 1979.
Under those default Sale of Goods Act rules, the goods belong to the customer once delivered.
These ‘small print’ clauses are often not discussed or expressly agreed between the buyer and seller and, in some cases, the buyer doesn’t even see them at all!
The rules on when a contract is made
Contract law has rules which decide when a contract is made.
The law imagines that one party makes a final offer in the negotiations, then the other party accepts it and effectively both shake hands at that point (there were no further negotiations).
Negotiations are often more complicated than that example and less clear cut. Nevertheless, the legal analysis does require you to go back and identify who made the final offer that was then accepted. It is then on acceptance of that final offer that the contract is made.
So, the trick for the seller is to ensure that their printed terms are included in the final offer and therefore accepted by the buyer.
Prudent sellers want both:
- a retention of title clause in their printed terms; and
- contracting procedures to ensure that their customers accept their terms to make them part of the contract.
Simple retention of title clauses
A retention of title clause can be simple.
A clause which simply states that ‘Ownership of the goods does not transfer to the buyer until they are paid for’, for example, will work in many circumstances.
It won’t give the seller of the goods the best possible protection and more complex wording can make a more effective clause.
Advanced retention of title clauses
I will look at three advanced forms of retention of title clauses which you might see. These are:
‘All monies’ clauses
This is where title is not retained on an invoice by invoice basis. Instead it is held back across the whole trading account. The seller keeps ownership of all goods in the buyer’s possession the whole time that the buyer is owed any money.
This is particularly effective where a supplier has a regular customer with repeat deliveries. The all monies clause will mean that while the customer owes them anything none of the goods (that have been delivered to them) will belong to them.
‘Separate storage’ clauses
This clause requires the buyer to segregate the goods that they have received from the seller and keep them separate from other goods. This means they will be easy to identify if the seller needs to repossess them.
This clause is somewhat artificial as usually no one expects it to be enforced during a regular trading relationship. It tends to be something that suppliers don’t regularly check up on.
But, it can be really useful if the goods have been mixed. Imagine you’ve just been appointed as liquidator of a company. A lorry delivered heating oil to the factory two weeks before your appointment. The oil supplier is now claiming retention of title.
In this scenario, the buyer probably put the oil in a tank which already had some oil in it. Maybe it was a quarter full, for example. It would be impossible for the supplier to separate out the oil that they supplied from the oil that was already in the tank.
If a separate storage clause was in place, the buyer would be in breach of it. That would give the supplier the right to claim a proportionate part of the oil in the tank.
‘Proceeds of sale’ clauses
Suppliers try to use these when their customer has sold on the goods, without paying for them.
The purpose of the clause is to give the supplier a degree of ownership of the book debts that you are collecting for the company in liquidation. The clause tries to divert the book debts from you (as liquidator) to the supplier.
I’ve seen quite a few of these clauses in my time, but I am yet to see one work! They usually fail as they give the supplier an interest in the debts that have been created by the company, and the value of that claim is limited to the value that they are owed. This is essentially a charge and, unless it has been registered as such at Companies House, it won’t be valid.
If you’ve got a supplier who is aggressively pursuing such a clause, then you might want to seek advice on this!
Administrations – Atlantic Computers
Administration throws up a “ringfence” around a company’s assets. It protects goods that are in the company’s possession even if it does not own them. It protects goods over which suppliers are claiming retention of title.
Even with a good retention of title claim, the administration “ringfence” means the supplier cannot uplift their goods unless they’ve got permission from you as administrator or from the court.
Administration offers only temporary protection. It gives you a breathing space when you are first appointed. It does not change the relationship between the insolvent company and its suppliers. It does not change the ownership of anything.
What does Atlantic Computers say?
Atlantic Computers says you have a duty as administrator to assess, fairly and quickly, the supplier’s claim. And, if the claim is good, you should either allow them to take their goods back or, if you need them for the administration, pay for them.
Note also, the recent changes to IA’86 around ss233-233B. The purpose behind the new provisions is to make it harder for suppliers to cut off the supply of goods and services, make ransom demands etc. to an insolvent company.
As administrator, you must pay for supplies made post-appointment.
Retention of title made simple
We’ve put together a ‘Retention of Title Assistant’ website to help you as an insolvency practitioner deal with retention of title claims.
The time when it will be most useful is when you’ve got a claim in front of you as well as the paperwork. Get the supplier to fill in the usual questionnaire and once you’ve got it back, alongside the supporting evidence, you can enter the site and see what issues you’re likely to face.
I ran through a hypothetical scenario to demonstrate how the assistant works, which you can watch below. Or, if you are ready to try out the Retention of Title assistant yourself you can do so using the pink button below.
Signing off
Thank you for reading our summary, we hope it was useful!
Make sure to bookmark the Retention of Title assistant, so you can return to it at any time (especially if you dealing with multiple claims), and print out any relevant pages.
We have a few dates for your diary, which are as follows:
- Coffee Break Briefing – ‘It’s not fraud!’
- 13th February 2023
- R3 Southern & Thames Valley forum (Reading)
- 23rd – 24th March 2023
- Frettens’ Second Annual Insolvency Conference
- 12th May 2023
Details for these events will be sent to the Insolvency email list in due course. If you’re not already signed up to our list, you can do so here.
Specialist Insolvency Solicitors
If you have any questions after reading this article, please don’t hesitate to get in touch with Malcolm. He’d be more than happy to speak with you.
You can call him on 01202 499255, or fill out the form at the top of this page, for a free initial chat.
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