Retention of title can provide useful protection if one or more of your customers become insolvent. Our Restructuring & Insolvency team reviews the basics of how you can make retention of title work for you and provides an overview of some of the common pitfalls.

If you supply goods, the simplest step that you can take to reduce your exposure to a customer’s insolvency is to use effective retention of title (RoT).

However not all RoT clauses are effective and we see many RoT claims rejected in insolvency.

By default, once you sell goods on credit:

• the goods belong to the customer; and
• the customer owes you the purchase price.

This means that if an insolvency practitioner (IP) is appointed to the customer:

• the IP can sell the goods; and
• you will be an unsecured creditor and, at best, receive a small percentage of the debt due to you, and possibly zero.

However, if your customer becomes insolvent and you have a valid RoT clause, you will be able to take back goods held in stock by your customer.

What is an RoT clause?

An RoT clause is a clause in the contract of sale of goods that stops ownership of the goods passing to the customer until the supplier has been paid in full.

A very simple RoT clause might be of the following form:

“The property in the goods shall not pass to the Buyer until the price of the goods has been paid in full.”

What happens when an IP is appointed?

When an IP is appointed to your customer, they will try to assert that all goods held by the customer belong to the customer. A liquidator will sell those goods to maximise the return to the creditors as a whole. A receiver appointed on foot of a floating charge will sell those goods to maximise the return to the secured creditor who appointed the receiver (usually a lender) and a company in examinership will do this to enable the company to trade.

However, if the goods belong to the seller, the seller is entitled to the return of the goods, or to be paid in full.

The IP will look carefully at your RoT claim to determine if it is valid and what goods are covered by it. Often simple RoT clauses do not work at all or do not enable the seller to recover all or part of the goods that they supplied.

Problems with a simple RoT clause

There are a number of problems with a simple RoT clause, some of which arise from the nature of the goods you are selling and the uses to which they are put. Some of these problems can be addressed by use of a more complex RoT provision.

The risk of destruction or loss of the goods

Once you have delivered the goods to a customer, you want the customer to be responsible for them, not least because your insurer will probably not cover them. Your RoT clause can be amended to seek to deal with this.

The buyer should be granted the right to sell the goods

There are some statutory provisions that enable onward sales of the goods. However, it is probably better to expressly allowing the customer to sell the goods on an arms-length basis or in some controlled way, perhaps while the customer is solvent and has not received a notice from you to the contrary.

The goods need to be identifiable

If you use a simple RoT clause, the goods need to be identifiable. Very simply, if you seek to recover your goods, the IP will ask you to identify which goods were supplied by you and are covered by your unpaid invoices.

This is easy to do if you are selling goods with serial numbers and the serial numbers are in your invoices, for instance in the sale of cars. It does not work with bulk products, such as petrol, and is of limited use with consumer goods.

Which goods relate to which invoice?

The simplest way to deal with this is to use an all-sums due clause:

“The property in the goods shall not pass to the Buyer until the price of the goods and all sums due by the Buyer to the Supplier have been paid in full.”

This still has the weakness that if the account is ever cleared, all of the goods that you have sold to the buyer up to the date on which the account was cleared become the property of the buyer.

Which goods were supplied by you?

There are two main approaches to dealing with this issue – requiring that the buyer purchases the goods that you sell exclusively from you or requiring that the buyer stores goods supplied by you separately.

It is possible to deal with these two issues in a number of other ways. For instance, if your goods will remain in boxes until sold, by printing the invoice number on each box.

Intermingled goods

If your goods are mixed with goods supplied by others, they are only recoverable if they can be relatively easily separated. For instance, if you supply diesel engines that are bolted into equipment, they can probably be recovered. On the other hand, if you supply flour that is mixed into cakes, the mixture is irreversible.

Goods affixed to land

If you supply goods that are affixed to land, they are generally not recoverable once affixed. One classic case example in this regard was gravel laid out as the subbase of a road.

Proceeds of sale

It is notoriously difficult to apply an RoT clause to the proceeds of sale. In other words, once your customer has sold your goods, your RoT claim ceases to protect you.

It is possible to construct arrangements where you get such protection, but arrangements that achieve this are complex to document and to operate. Therefore, they are generally only applied to high value goods.[1]

RoT claims have failed entirely because they have gone too far, particularly as regards proceeds of sale where the courts have taken the view that they amounted to a charge on the assets of a company, which was void for lack of registration.

Miscellaneous issues

RoT cannot apply to services; there is simply nothing to take back if you have, for instance, provided specialised advice or cleaned a building.

RoT clauses can be printed on the front, or back of delivery dockets, or incorporated into more formal contracts to supply goods. However, care should be taken that they are printed in a readable size and are not lost by sending one sided scans of such documents.

The protection of RoT clauses can be lost if there is a difference between the terms printed on your customer’s orders or other documents sent to you and what is printed on your documents. Careful analysis is then needed to determine which set of terms prevail.

Separately, if there is an overarching contract between your business and the customer, that may prevail over your standard terms.

Conclusion

RoT can provide quite significant protection for suppliers when their customers enter an insolvency process. Accordingly, it is prudent to use RoT wherever it is applicable.

As restructuring and insolvency lawyers, we usually come across deficiencies in RoT clauses when there is a contest between a supplier and an IP insolvency practitioner as to whether the RoT clause is effective. In some cases, we conclude that the clause is not effective and suggest amendments to better protect the supplier in the future. As a supplier, that is not the ideal time for your RoT clause and its operation to be considered by lawyers, who may find that it is not effective.

Moreover, depending on the nature of your business and the level of risk, there are other mechanisms that may be more suitable to protect your interests. These include appointing your customer as an agent[2] and actually taking a charge over assets of your customer.

Accordingly, we suggest that you obtain legal advice as regards drafting RoT provisions that are suitable for your business and incorporating it into your contracts.

That said, if you decide to simply copy an RoT clause that you like from a contract with one of your suppliers, please bear in mind that less is often more and, in particular, a clause applying to the proceeds of sale is likely to fail.

The content of this article is provided for information purposes only and does not constitute legal or other advice.

[1] For further detail see, for instance, the Irish chapter of “Retention of Title in and out of Insolvency”, Marcel Willems ed., Globe Law, ISBN: 9781909416796.

[2] Something to be done with care, an agent can bind you and may accrue significant rights under the Commercial Agents Directive.