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Can suppliers (creditors) reclaim their stock if an insolvent customer hasn’t paid for them?

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Can suppliers (creditors) reclaim their stock if an insolvent customer hasn’t paid for them?

Reviewed: 4th August 2016

If suppliers have included a ‘retention of title’ clause in their terms of sale, they may be able to reclaim stock if a purchasing company becomes insolvent. In essence, if a straightforward clause such as this is included, ownership of the goods only passes to the buyer once payment has been made in full.

This isn’t a simple issue, however, as a creditor’s rights depend on the individual circumstances of each case, as well as on the actual wording used for the clause. Determining the validity of a retention of title clause is a complex process, and the outcome will be decided by the Official Receiver or appointed insolvency practitioner.

How much detail is in the clause?

In its basic form, the clause might say that a creditor has the right to enter your premises to reclaim their goods if payment is overdue, or your company enters insolvency. In more detailed examples, the clause might include what happens if some of the goods have already been sold, or if they’ve been integrated into other products, for example.

It’s also worth noting that a written contract may be needed to prove the existence of a retention of title clause. A contract should have been offered by your supplier, and the terms accepted by your company as the purchaser.

Retention of title questionnaire

A retention of title questionnaire can help establish your supplier’s rights to ownership, and will be sent to them by the Official Receiver if they make a claim after you’ve entered insolvency.

The questionnaire can be tailored to individual circumstances, and the supplier will also have to provide documentary evidence to back up the claim. Responsibility lies with the supplier to prove the existence of a retention clause, and a time limit to do so is sometimes set by the Official Receiver.

Potential complexities

The potential complexities for your supplier, of trying to reclaim goods include:

  • If they have already been sold to a third party, your creditor may believe they can still recover the items. The success of this depends on the wording of the clause, but for practical reasons alone, it is unlikely that they will be able to do so.
  • If the goods have been used to make another product, but can’t be detached from that product. A claim is unlikely to be successful in these circumstances, as the goods are no longer in their natural state.

It’s possible that the clause could result in a ‘charge’ being created over the goods, even if they have been sold. This could potentially make your supplier a secured creditor, and therefore higher up the hierarchy for payment in insolvency.

Was the clause valid?

If the retention clause was part of a written contract, clearly notified and confirmed by the debtor via their signature, or was part of an unsigned document that the debtor knew about, the clause could be deemed valid.

Equally, the clause might have been included on an invoice received prior to taking receipt of the goods. In this case, if it was also agreed that delivery of the items signified acceptance of all terms by the purchaser, the clause is likely to be valid.

Real Business Rescue is part of Begbies Traynor, the UK’s largest professional consultancy firm. We can address any issues in relation to retention of title, and provide advice on what to do if one of your suppliers believes they can reclaim their goods.

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