Retention of title and insolvency – best practice tips on how to protect your position
With a growing number of high profile and high value insolvencies in the retail sector, manufacturers and suppliers of goods need to ensure that they have adequate contractual protections in place. However, given the fast-paced nature of retail, parties in the supply chain often overlook or do not pay close and regular enough attention to the terms and conditions which regulate the supply of goods.
Retention of title claims are a regular feature of claims made against insolvent retailers. Many manufacturers and 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.
One area that is often overlooked in retail insolvency is the buyer's right to sell goods after they have been supplied notwithstanding a retention of title clause in the applicable terms and conditions.
It is well established 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 and 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.
Termination of the Licence to Sell
Credit insurers usually insist on their insured clients having all monies retention of title clauses but also an automatic termination of the licence to sell in the event of an insolvency of the buyer.
The effect of this type of clause is to give a supplier a contractual right to insist that the buyer and the insolvency practitioner appointed over them shall stop selling the supplier's goods immediately upon their 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 after the administrator was appointed.
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 controls systems are available to provide a printout from the retailer's IT system showing the amount of goods held and their value. Previously, it was necessary to visit all of the buyer's premises and obtain inventories at each shop, depot etc., but in most of the big retail insolvencies in the last few years the central stock control register can produce a list of all the stock held at a certain date which can then be valued to determine the value of the retention of title claim. 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 to protect the value of a supplier's claim. This will be equally effective. 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.
Conclusion
It is essential to terminate the licence to sell and preferably incorporate such a clause into the applicable terms and conditions to avoid these problems arising.
Credit insurers will usually require insured clients to have such retention of title clauses in their terms and conditions along with a right to terminate the licence to sell. This minimises the claims they receive under their credit insurance policies if the suppliers are insured.
The volatility in the retail sector is unlikely to abate any time soon, so suppliers should review their standard terms and conditions to ensure that they are fit for purpose to deal with these situations. Even if suppliers have to contract using the buyer's terms, maintaining a robust set of terms and conditions will at the very least act as a bench mark when negotiating supply deals.