Retention of Title – a creditor’s perspective

Margaret Linn, Manager in our Business Recovery and Insolvency team, provides an overview of how business owners can maximise their chances of successfully making a claim in respect of goods they have supplied to a business that then enters insolvency

Businesses that supply goods often believe that they retain the ownership of the goods until they have been paid for. This is called “retention of title” or “reservation of title”. This is shorthand for saying that the supplier retains or reserves the title (which means ownership) until the goods have been paid for. It is something that comes up frequently in the insolvencies that we deal with.

However, the right to retain or reserve title isn’t automatic, and I recently had a liquidation where a supplier could not reclaim their unpaid goods supplied to an insolvent customer as they had no valid reservation of title agreement. This was an unnecessary and avoidable loss to that business which the business owner found very frustrating as they had believed they were entitled to the return of their goods.

This article covers the most common issues that we see regarding retention of title. It will help business owners to assess their current provisions regarding retention of title and what they need to do to ensure they have a valid clause.  This will maximise the chances of recovery in the event goods are supplied to a business that enters an insolvency process.

What is reservation or retention of title?

Simply stated, it is a clause in your terms of business that states title to goods supplied will not pass until payment has been made.  Effectively, you retain ownership until the goods are paid for. You need to have a clause because without it the legal position is that the title to the goods transfers to the purchaser on delivery. No clause means no claim.

What is an ‘all sums’ clause?

If goods supplied and not paid for have been sold by your customer, an ‘all sums’ clause allows you to recover any of your paid goods still held in stock to the value of the unpaid invoices. If the clause dos not specify “all sums” then it is likely that you will only be able to reclaim the goods supplied on individual unpaid invoices. If those goods are no longer in the possession of the insolvent company, you can’t claim them. This is particularly frustrating when the business still holds a heap of stock you supplied previously but has been paid for. Without an “all sums” clause you will have no claim over that stock.

Identification of goods

You must be able to identify the goods you supplied.  This is crucial where the customer purchases similar stock from more than one supplier. Labelling goods that you supply with your own labelling, brand or unique referencing will mean the goods you have supplied are easy to identify.

What happens if my goods are still with the customer but have been incorporated into something else?

If your goods can be recovered without damage to the item they were incorporated into you can still claim them back.  The usual example cited is, if you supply an engine that is put in a generator, you can unbolt and recover your engine without damage to the generator, so your clause is valid. Whereas, if you supplied fabric that has been made into cushions, your clause will fail.

How do you establish valid retention of title?

The key point is that the customer must be aware of your terms of trading before you enter into a transaction.

Ideally when you have a new customer purchasing on credit terms, before you accept and fulfil their first order you should send them your terms of trading and get a signed copy returned for your files.  Having the terms on the back of a delivery note or invoice, issued after the order has been accepted and dispatched, is too late and will mean your clause is not valid.

To summarise business owners should take time to review the terms and conditions that they supply goods under. Four key things to think about:

  1. Do you actually have a retention of title clause in your terms and conditions?
  2. Does it refer to “all sums”?
  3. Are the goods you supply labelled or marked with your unique referencing?
  4. Make sure that any new customers sign and agree your terms and conditions before you start supplying goods.

MHA Henderson Loggie’s Business Recovery & Insolvency team are happy to answer any questions you have on this topic.