Insolvency: Retention of Title Clauses
Published 16 November 2020
The reality of the current pandemic and the economic impact thereafter is that it will result in the insolvency of many businesses. Currently in England and Wales corporate insolvencies are down from 2019 but this is largely explained by the assistance and protection given by government together with the difficulties facing Courts in carrying out their normal business. However, in relative terms these figures have risen recently with 778 in August and 926 in September. In Northern Ireland the Bankruptcy Court is currently not yet accepting new creditor’s bankruptcy or winding up petitions but once that restriction is eased it is inevitable that insolvencies will also increase.
In such circumstances, suppliers will want to know what their rights are in relation to goods supplied but not paid for. In the current climate suppliers should seek legal advice at the first sign of a customer being at risk of insolvency. A close eye should be kept on those customers who are falling behind on credit terms. Whilst it is likely in most cases that suppliers have some form of contractual terms and conditions in place, given the likely rise in insolvencies they would be well advised to review their contracts now with customers before there is any indication of financial trouble. Such a review can identify areas open for improvement and can be used to ensure more protection in the future. One of the key aspects to consider in the event of an insolvency situation is Retention of title (ROT) clauses.
The purpose of ROT Clauses in the provisions of a contract for the sale of goods is to ensure that title to any goods supplied remains with the supplier until the goods are paid for in full. Checking that the contract contains well drafted ROT clauses is crucial as it gives suppliers the chance to recover goods that a customer has received but not yet paid for. In an insolvency situation the lack of effective ROT clauses will mean that the supplier is likely to rank only as an unsecured creditor. On the other hand, where such ROT clauses exist and a customer suffers an insolvency event, suppliers can then take steps quickly to recover any unpaid goods supplied.
ROT clauses come in a variety of forms and it is important for suppliers to give careful consideration to these as not all may be appropriate for their business model. Care should be given to the use of more complex terms. If, for example, the ROT clause gives the supplier a right of access to the customer’s premises to recover the goods suppliers will have to be aware of how such clauses can be properly enforced during periods of lockdown or other government restrictions.
Ensuring contracts contain well drafted and effective ROT clauses will save considerable sums and given the inexorable rise in insolvencies suppliers should prepare now before it is too late.
This article is for general guidance only and should not be regarded as a substitute for professional legal advice.