Retention of Title Clauses

Retention of title clauses

Creditors risk losing all or part of what is owed to them if their debtor becomes insolvent. To overcome this issue a creditor needs some form of security. This will allow him to recover assets from the debtor in satisfaction of the debt due if insolvency occurs.

There are two types of creditors, secure and unsecure. Secure creditors are those who secure their loan against an asset, for example property or they take floating charges of a company’s assets. Unsecured creditors are those who have not secured their loan against any assets. This is particularly true regarding the supply of goods because floating charges are not granted to trade suppliers. It should be noted that assets include a company’s stock in trade therefore goods supplied to the company, which have not yet been paid, will be used to pay off outstanding debt.

Under section 252 of the Enterprise Act 2002 if an insolvent company’s assets exceed £10,000 half of that sum must be put aside for unsecured creditors this increases to 20% of the rest up to £600,000. The rest goes to first to preferential creditors and then to creditors with floating charges over the company’s assets. This could potentially mean that there may be insufficient funds available to pay all the unsecured creditors.

There is now however a means for suppliers to regain control of their goods in this situation. Sections 17 and 19 of the Sale of Goods Act 1979 permit a seller to incorporate a clause into their sale contract known as a “retention of title” clause. Retention of title clauses provide that the seller retains ownership of the goods he has supplied until they have been paid for in full, once full payment has been received title will transfer to the buyer. Thus, in situations where the buyer becomes insolvent the supplier can recover his goods (because they are still his) from the receiver or liquidators before the remaining assets are used to pay debts. The leading common law authority is Aluminium Industrie Vassen v. Romalpa Aluminium Ltd [1976] 2 All ER 552 as this case established the legitimacy of including a “retention of title” clause into a sale contract. This is often why a retention of title clause is referred to as a “Romalpa clause”.

Retention of title clauses may also permit a seller to recover goods if they are mixed with other products. To do this the seller must state in the sale contract that he is to own the resulting mixture. This was illustrated by Goff LJ Clough Mill v Martin [1984] 3 All ER 982G when he held: “the property in the whole of such goods shall be and remain with the seller until payment has been made”. In this situation a court will imply a charge in favour of the seller. The seller must then register the charge within 21 days under section 860 of the Companies Act 2006. Failure to do so will mean that the charge is void against the liquidator.

Retention of title clauses provide security for sellers but must be drafted cautiously and thoroughly. Furthermore in situations where the goods are mixed ensure that any charges granted in your favour are registered.

Rachel Pellatt – Southampton Solent University Law Student who works one day a week at Lawdit

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