Retention of title – how can franchisors and suppliers best protect a claim against an insolvent company?
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Most franchisors, or their affiliates, will act as suppliers of goods and services. As a franchise or distribution network grows, so does the systemic risk to the franchisor or supplier of default and failure within the network. It is therefore important that franchisors and suppliers invest in proper legal advice and legal contracts to ensure that they have the contractual rights to act quickly and effectively if the need arises.
Franchisors and suppliers should ensure that they have comprehensive and robust terms of supply (ideally in a separate document from the franchise agreement) which have effective "retention of title" clauses so they can take action to recover goods in an insolvency situation.
However, in our experience, these terms are often overlooked.
Retention of title claims are a regular feature of claims made against insolvent businesses. Many suppliers of goods need to have an all monies retention of title clause enabling them to recover the goods held by the retailer when they go into insolvency or alternatively payment for those goods in full to the value of the goods held at the date of the appointment of the insolvency practitioner.
It is an established principle in English Law that a buyer of goods has the right to sell goods once they are in possession, notwithstanding the supplier having retention of title and ownership in the goods. By selling the goods to a third party, title effectively passes, thereby negating the benefit of the retention of title clause. Recovering the proceeds of sale of any goods supplied is impossible unless the supplier has obtained a legal charge over the assets of the company to the value of the goods, which is unusual in normal supply relationships.
In addition, credit insurers usually insist on their insured clients having an automatic termination of the licence to sell in the event of an insolvency of the buyer.
This type of clause will give a supplier a contractual right to insist that the buyer and the insolvency practitioner shall stop selling the supplier's goods immediately upon the practitioner's appointment. To back this up, we recommend writing immediately upon their appointment revoking the licence to sell and demanding an inventory showing the value of the goods held at the time of their appointment so that the value of the retention of title claim can be calculated as it crystallises at that point.
If the buyer continues selling the goods after receipt of such a letter then the supplier is entitled to claim the value of all goods sold following termination of the licence to sell, together with any goods that are retained by the buyer. This enables the full valuation of the retention of title claim to be pursued and hopefully payment made in full if the business carries on trading.
In most cases, the administrator will resolve the retention of title claim by paying the full value of the goods held once the inventory is agreed. Stock control systems are usually available to provide a printout from the retailer's IT system showing the amount of goods held and their value. This is essential in deciding whether or not to pursue a retention of title claim.
If this clause is not contained in the terms and conditions then a letter should be sent immediately to the administrator, terminating the licence to sell in any event. If no such letter is sent or if there is no such clause in the terms and conditions, then the value of the retention of title claim will diminish with each day of continued trading as the stock is depleted and sold.
It is therefore essential to terminate the licence to sell and preferably incorporate such a clause into the applicable terms and conditions to avoid these problems arising.
If you would like more information on this issue, please contact Gordon Drakes or Larry Coltman.
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Please be assured that Fieldfisher is continuing to work with clients to navigate COVID-19 related issues and on business as usual needs. Do get in touch with us if you would like to chat anything through.