We are following on from our one of previous blogs where we set out the priority of payments for creditors, which can be found by clicking here.
The last in the waterfall is the unsecured creditor and we thought it might be a good idea to focus on one of the tools to assist unsecured creditors in either getting paid or getting their goods back – retention of title.
What is a Retention of Title Clause
A retention of title (ROT) clause is an express term in a contract for the sale of goods. It entitles the seller to keep the legal title in the goods until the buyer pays the seller in full. This clause provides protection to the seller if the customer becomes insolvent as it provides the right for the seller to repossess its goods. Otherwise your goods will be sold by the administrator or liquidator and the proceeds will be subject to the priority set out in the previous blog.
How does an ROT clause work
These ROT clauses have been subject to well documented court cases over the years with the Rompula case being the most well known to the extent that the ROT clauses are quite often referred to as “Rompula Clause”. It should remembered that simply having such a clause does not make it effective. So what is needed?
- A properly drafted clause must be in your terms and conditions
- The clause must be incorporated into the contractual relationship between the parties
- The goods covered by the clause must be identifiable against unpaid invoices
Types of ROT Clauses
There are different types of ROT clauses in use from the very simple to more sophisticated clauses.
- Simple – the legal and beneficial title to the goods remains with the seller until paid for
- All monies – which is the simple clause but also claims for all other monies owing to the supplier
- Sophisticated – includes additional rights such as; right of entry to repossess goods not paid for, preventing the sale of goods before payment is made, to keep the sellers goods separate and marked accordingly.
Some of the more sophisticated clauses have attempted to trace the proceeds of sale and also to create charges over the goods. These clauses are not effective because tracing monies into a customer’s bank account fails if the funds are being paid into an overdrawn account. Likewise, creating a charge over the goods fails because the charge needs to be registered against the company at Companies House.
Practical Considerations
There are a few practical steps that you can take when inserting these clauses into your terms and conditions of trade.
- Consult a solicitor to draft your terms and conditions of trade
- Check whether the clauses suit your business model and what you are suppling
- Ensure proper incorporation of your terms with the customer – invoices are a post contractual document, which is why most clauses fail
- Make sure the goods you are supplying are identifiable as yours
Given the ever-changing case law surrounding ROT claims and their enforceability there is no substitute for good credit control together with a periodic review process of your terms and conditions. Both of these measures can safeguard your interests in cases of non-payment or insolvency. If you are in any doubt about whether your terms and conditions are valid then you should seek professional advice.
If you require any assistance please do not hesitate to call us on 0800 118 2948
You don’t know what we can do until you ask.