As with all insolvency processes it is crucial that as a creditor you participate in the process and where possible vote, but essentially ensure that you have submitted a claim.
Within this article we provide an overview of retention of title (ROT), the benefits and the pitfalls and how it could help mitigate a supplier’s risk of being placed at the bottom of the payment hierarchy i.e. being an unsecured creditor.
It is estimated that a quarter of UK businesses have experienced a client or customer entering insolvency. If you are waiting on payment for your goods, it can seriously impact your own ability to trade.
Without a valid retention of title clause, it’s highly likely you will have to write off the majority or all of your debt. Having a well drafted ROT clause could improve your position considerably.
If you have a valid ROT clause and your customer becomes insolvent, then the first thing you must do is find out whether or not they still have any of your products. If so, then they may be recovered so that you can sell them to other customers.
Retention of Title
An ROT clause is a clause that is included in the terms and conditions of sale when goods are being sold. The clause protects the seller if the goods are not paid for.
A straightforward ROT clause within a contract of sale essentially means that ownership of goods remains with the supplier until full payment for the goods has been received. There are a variety of ROT clauses which may be used depending on the circumstances.
This is a basic ROT clause that states title to specific goods that can be matched up to an outstanding invoice are retained by the supplier until payment has been received in full.
‘All monies’ clause
An ‘all monies’ clause allows for retention of title until all monies due from the debtor are paid to the supplier. This contrasts with the order-by-order basis of a simple ROT clause. An ‘all monies’ clause is often included separately, but also in addition to, the ‘simple’ retention of title clause within a contract.
Proceeds of sale’ clause
This type of ROT clause addresses the problem of goods having already been sold on and may entitle the original supplier to the proceeds of sale. Unless the funds are held in a client account, these clauses are very difficult to enforce.
‘Mixed goods’ clause
If the goods supplied were used in the manufacturing process, and mixed with other goods, a ‘mixed goods’ clause may allow the supplier to claim right of ownership over the original raw materials. This type of clause can be problematic as it may not always be possible to separate the raw materials without causing damage to the third-party goods.
In order to enforce an ROT clause it needs to be clearly defined and signed by both parties. A supplier can then put their case to the appointed Liquidator to prove that title should remain with the supplier and enforce the clause accordingly.
A customer should be made aware of any ROT clause before, or when a contract is agreed, for it to be enforceable. It is also advisable to include these clauses within the terms and conditions of trade and not simply documented on the back on an invoice.
Ensure that you have evidence of the customer agreeing to the clause, whether in email form, a signature, or a note.
ROT clauses work best when they are specific and limited in scope. Too broad and non-specific, and they will prove useless when it comes to putting the clause into action following your customer’s insolvency.
Are there any limitations to enforcing a Retention of title Clause?
- If the supplier is aware their goods will go on to be used in the purchaser’s normal course of business i.e. sold on before payment has been made, then any ROT clause may well be unenforceable.
- Where a company has entered administration unless permitted by the Administrator or by Court Order, a supplier will not be able to enforce a ROT clause due to the moratorium that’s in place.
- Common sense dictates that any perishable goods are, by their very nature, going to make an ROT clause unenforceable.
- Ensure that your ROT clause doesn’t try and represent itself as charge over the customers assets. Charges over companies must be registered with Companies House within 21 days of their creation. If you fail to do so, then the charge becomes void.
What should I do next if I think I have a valid retention of title clause?
On the appointment of either the Official Receiver or a commercial Insolvency Practitioner you should notify them with the existence of your claim. Until this notification, the company, under the Office holders’ control, may continue to use your goods without payment to you.
Additionally, the insolvency practitioner has the right to sell or dispose of any goods they reasonably believe belong to the insolvent company.
The appointed office holder will likely send a retention of title questionnaire to you on appointment, but if they haven’t, then be sure to request one and complete it as soon a practically possible. The questionnaire will give the appointed office holder a better understanding of the situation and establish whether the ROT clause meets the necessary requirements to be enforceable, it’s very important that you send any relevant documents to support your claim.
- Details of the Retention of Title Clause – Evidence of express acceptance of your terms and conditions by the insolvent company
- Details of the Supplied Goods – A schedule of the goods supplied by you to the insolvent company.
- Identification of Goods – Details of how you intend to identify goods e.g., packaging, serial numbers, or other markings.
- Specific Goods Belonging to You – You will; need to specify which goods on the buyer’s property that are covered by the retention of title clause.
- Prove, without doubt, that the customer has not paid for goods – Always keep accurate records.
Following notification, you should arrange try to attend the company premises in order to identify your goods so that they can be put to one side and not mixed with other assets.
It is essential that when drafting your ROT clause, you seek the appropriate legal guidance to ensure that they are legally enforceable and commercially effective.
It is often the case that suppliers will draft their own ROT clause then rely on it indefinitely. With the ever-changing development in case law, it is important that you regularly review your ROT clauses, and their ongoing enforceability and effectiveness.
If challenged on the validity of your ROT clause you should always obtain professional advice and guidance as retention of title is a complex area of the law, this can be further complicated by the various scenarios that could occur during an insolvency process.
If you are unable to meet the requirements to enforce your ROT clause, then you may find yourself back in the payment hierarchy as an unsecured creditor.
This brings us back to the importance of always filing a proof of debt, no matter how small your debt may be. If you are unsure on how to file a claim or have concerns about the content of any of the documents you have received, the team at Restart BTi are always on hand to lend free support and advice.
If you do intend to manage the process yourself, ensure that once you have lodged your proof of debt you seek acknowledgement of receipt from the insolvency Practitioner. It is also important to understand that that there are no issues or requirements for further documentation to be sent to support your claim.
It may be the case further down line that you are asked for further supporting documentation when the Insolvency Practitioner intends to make a distribution to creditors. Again, ensure that you respond to this request within the relevant time frames in the notice and if you have any concerns again the team at Restart BTi will be able to assist.
Another useful tip is where you encounter an insolvency you may want to hold onto any invoicing or statement data that may deleted or archived because of the bad debt. We often see this dealing with claim further down the line and without this supporting information the Insolvency Practitioner may not agree your claim.
Don’t be afraid to ask for updates on the progress of the insolvency and ensure that you take note of progress reports to understand what progress has been made and what the likely dividend prospects are. Ultimately, the insolvency practitioner is working to try and get your money back, so you are fully entitled to receive such information. Also, you are also able to question the level of fees even though the basis may have been approved previously.
An unsecured creditor or several unsecured creditors with at least 5% of the unsecured claims can request additional information regarding the costs of the procedure.
Any request must be made in writing within 21 days of receipt of the report and a response must be given within 14 days. A creditor can then apply to Court within 21 days of receipt of the information or after expiry of 14 days from which the insolvency practitioner had to response.
An unsecured creditor or a number of unsecured creditors with at least 10% of the unsecured claims can make application to Court on the grounds that the costs are excessive. Such an application should be made within 8 weeks of receipt of the report.
Whilst this is a useful tool it will involve a Court application so there will be additional costs. It is therefore always better to deal with things such as costs at the outset of the procedure.
Dealing with insolvent debt can be difficult and, in some cases time-consuming. Having a business partner to support you through this process can make a huge difference to the success of your claim.
Our Creditor services team at Restart BTi can assist with the entire claims process no matter what type of insolvency you are dealing with. We will lodge your initial claim, deal with any queries, and make sure that important deadlines are met. We will oversee fee approvals on your behalf and call on our own licensed Insolvency Practitioner when we feel that an independent review or investigation may be required.
We can represent clients at meetings or on committees and will ensure that the difficult questions are asked to endeavour to get the best possible outcome for our clients. With our wide network of support, we can engage with other creditors and seek further support to guarantee that your voice is heard.
Our bespoke case management system, Divisi, ensures that we proactively monitor your insolvency portfolio, providing transparent reporting via our web-based portal.
This service is offered to our clients at no charge so if you want to remove the burden of managing your insolvency documentation and enhance your dividend prospects, then please contact Paul Hughes on 01246 959388 for further information.
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