Retention of Title to Goods
Suppliers regularly extend credit facilities to customers or deliver goods before payment is made but in the event of the customer’s insolvency the supplier’s unsecured claim for the price will be of little or no value.
Frequently the best way for a supplier to limit its loss is for it to recover supplied goods. Ability to do this depends on a number of factors but most importantly the supplier must have a valid, enforceable and well-drafted Retention of Title clause.
These clauses are now commonplace in suppliers’ terms and conditions but they are often not well drafted and difficult to enforce.
If the clause is well worded and the supplier can provide evidence that the customer is bound by the terms and conditions (and of course the customer still has them) then the supplier can recover its goods having the effect of ranking the supplier above other creditors of the insolvent customer.
When a customer’s financial viability is called in to question, suppliers need to:
• Act fast – once the customer takes steps to implement a formal insolvency procedure, no action can be taken without the consent of the insolvency practitioner.
• Locate the goods.
• Serve a written demand – this should be made to the debtor and/or the insolvency practitioner notifying them that the supplier is exercising its right to recover the goods and demanding that they be made available for collection.
• Make immediate arrangements to inspect the goods – an inventory needs to be taken or made available to identify the goods over which the claim is being made. The supplier should ensure that full details of goods sold appear on all paperwork (i.e. serial numbers or batch numbers).
• Provide evidence that the retention of title clause was incorporated into the contract between the supplier and the customer (i.e. produce a signed copy of the terms and conditions containing the clause).
• Ask the insolvency practitioner to provide an undertaking to preserve the goods or pay for any that he sells.
• Take immediate legal advice to mitigate exposure.
A well drafted retention of title clause may contain rights for the supplier to enter the customer’s premises without trespassing, the ability for the supplier to recover goods for all sums owed by the customer to the supplier, or a possible action in damages for conversion against an administrator or liquidator who sells goods which could be identified as belonging to the supplier.
If a supplier is still unsure about the financial standing of a customer it should consider reducing the amount and any period of credit allowed to the customer, taking other forms of security, and/or obtaining credit insurance.
Ian Liddle, partner, Farleys Solicitors LLP.