Why are Retention of Title clauses important in an insolvency context?
Retention of title (“RoT”) isa concept whereby the seller of goods attempts to protect itself against non-payment by retaining ownership of goods until payment is received, even after the goods have been delivered. An RoTclause gives a buyer the a right to deal with the goods supplied in accordance with the overall commercial relationship between the parties. That right does not automatically terminate upon the insolvency of the buyer.
However, if a buyer does enter into an insolvency process the impact can be significant on a seller who has contracted with them to provide goods. If the contract between the parties contains a RoT clause then, depending on the insolvency process being entered into by the buyer, the seller may have a right to reclaim possession of the goods.
In an administration, a seller cannot repossess goods even if there is a RoT clause in their contract with the company in administration. This is an important point for a seller to bear in mind. The only way that a seller can repossess goods is if the administrator consents to it or an order is made by the court. This prohibition also applies during an interim moratorium in an administration.
In a Part A1 Moratorium, the seller may not repossess goods unless it has permission from the court. During the moratorium period, the buyer can (with the court’s permission) sell goods in its possession that are subject to an RoT clause. If it transpires that a buyer has sold goods which a seller did retain title to then they may face a claim for conversion. The tort of conversion occurs when a buyer intentionally does anything to goods which belong to a seller and which is inconsistent with that seller’s rights. Under a claim for conversion a seller could be entitled to damages for any loss suffered as a result of the sale of the goods.
In liquidation the existence of a RoT clause means that the seller may have a course of action to reclaim the goods. If an RoT clause is not present, then the seller will rank as an unsecured creditor and is likely to only receive a percentage of what they are owed (if anything at all).
Case analysis
In Fashoff(UK)Ltd(t/a Moschino) vMartin Henry Linton, Baron Jon Menswear Ltd [2008] EWHC 537 (Ch), it was established that a valid RoT clause existed in the contract between the parties, however, this was not enough for Fashoff to repossess unpaid goods when Baron Jon when into administration.
Under paragraph 43 once an application for an administration order is made, a notice to appoint an administrator has been filed or an administration has taken effect, a supplier of goods with a valid RoT clause is prevented from taking any steps to repossess those goods which are still in the company’s possession, unless the administrator consents or the supplier obtains the leave of the court.
Fashoff originally made a claim under paragraph 43(2) of Schedule B1 of the Insolvency Act 1986. The purpose of this provision being to enable a company to enforce security over the property of a company in administration. During the proceedings, Fashoff contended that their applications could fall under paragraph 43(2) or paragraph 43(3). Paragraph 43(3) enabled a company to repossess goods held under the terms of a hire purchase agreement. It transpired that Fashoff subsequently abandoned their claim under paragraph 43(2) and proceeded under paragraph 43(3) only. However, the court found that Fashoff had failed to show that it had an arguable case on the merits for an application under paragraph 43(3) to succeed.
In this case, Baron Jon, a fashion retailer, had gone into voluntary administration. Subsequently, the administrator, Mr Linton, negotiated the sale of Baron Jon’s assets, including its stock, to a third party, Premium Retail Limited (“Premium”). It was a term of that sale that Premium would be obliged to honour any RoT claims between Baron Jon and its suppliers for a “reasonable” period of time after the sale. Fashoff sent the administrator details of its entitlement to repossession of certain goods under an RoT clause that had existed between itself and Baron Jon. Having failed to satisfy himself of the validity of Fashoff’s claim under the alleged clause, the administrator resisted Fashoff’s claim. Eight months later, Fashoff issued an application, by which time the agreement between Premium and the administrator relating to the honouring of RoT claims had lapsed.
Fashoff submitted that they had a good claim on the merits and that the administrator should have acceded to their claims at the time when they were made in writing. In any event, the normal rule was that, in the absence of evidence to the contrary, leave should be granted under Sch.B1 para.43(3) of the Act. The administrator submitted that the goods in question were no longer in Baron Jon’s possession, having been sold to Premium. The protection of Premium’s interests clause, woven into the resale agreement with Premium, had long since elapsed and Baron Jon had not retained any beneficial or constructive interest in those goods at the relevant date, namely the date on which the court was asked to grant leave. The administrator contended that Fashoff had no arguable case on the merits against Baron Jon or the administrator for possession of the goods under Sch.B1 para.43(3).
Fashoff’s applications were refused by the court. Fashoff had delayed making its application for eight months which proved fatal: such delay was contrary to the objective of the 1986 Act in relation to the administration procedure and would of itself be sufficient to dispel Fashoff’s application. In addition, the court cited a lack of evidence and potential hindrance to the process of the administration.
In conclusion
There is a significant body of case law which has impacted the efficacy of ‘proceeds of sale’ and ‘mixed goods’ RoT clauses and as a result an RoT clause of this nature will rarely enable a seller to retain title over goods which have been sold unless they have been registered as a charge at Companies House.
Notwithstanding the above, it should also be noted that just because a valid RoT clause exists in the contract between parties, the seller will not automatically be entitled it to retain title over goods and receive payment for them if the buyer enters into an insolvency process. It is important that a seller takes stock of their position and responds pro-actively if they believe that they can rely on the existence of an RoT clause once a company has entered an insolvency process. In addition, goods must be in actual or constructive possession of the administrator at the relevant time, any delay could impact the chances of an application succeeding.
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