Retention Of Title claims in Insolvency

When a company enters liquidation or receivership, one of the key issues facing suppliers is whether they can recover goods delivered to the company but not yet paid for. A properly drafted Retention of Title (ROT) clause can provide valuable protection, potentially allowing a supplier to recover goods rather than rank as an unsecured creditor in the insolvency.

However, the effectiveness of such clauses depends on their wording, the circumstances in which the goods were supplied, and whether the goods remain identifiable and capable of recovery.

What is Retention of Title?

A Retention of Title clause is a contractual provision under which a supplier retains ownership of goods until the purchaser has paid for them.

Under section 19 of the Sale of Goods Act 1893, as amended, parties may agree that ownership will not pass to the purchaser until specified conditions have been fulfilled.

In a typical commercial transaction, goods are delivered to a customer on credit terms, often 30 or 60 days. Where a valid ROT clause applies, the supplier may retain ownership notwithstanding delivery of the goods.

The importance of such clauses was established in the landmark English decision of Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976], from which the expression Romalpa clause and retention of title originates.

This becomes particularly important when the purchaser subsequently enters insolvency.

The importance of ROT clauses in liquidation

In an insolvent liquidation, the liquidator is responsible for identifying and realising the company's assets for the benefit of creditors.

Goods that remain the property of a supplier under an enforceable ROT clause do not ordinarily form part of the company's assets available for distribution to creditors.

Consequently, the supplier may be entitled to recover those goods, subject to establishing its ownership and complying with the applicable legal requirements.

Without an effective ROT clause, the supplier will generally rank as an unsecured creditor for the unpaid purchase price and may receive only a small dividend, or none at all.

Furthermore, caselaw differentiates between valid Retention of Title clauses and a charge being created, with the latter requiring the supplier / lender to register the charge in the Companies Registration Office (CRO).

Different types of Retention of Title clauses

There are four principal forms of ROT clauses commonly encountered in commercial contracts.

1. Simple Retention of Title

Ownership remains with the supplier until the particular goods delivered have been paid for in full.

This is generally the most straightforward form of ROT clause to enforce, provided the goods can be identified.

However, difficulties arise where goods have been processed, mixed with other materials or incorporated into finished products.

In Somers v Allen [1985] IR 340, the Irish courts considered the effect of supplied goods losing their separate identity, illustrating the limitations of simple ROT clauses.

2. Aggregation of Title clauses (in relation to composite stock)

These clauses seek to extend the supplier's ownership rights where goods have been incorporated into other products.

Their effectiveness generally depends on whether the original goods can be separated from the finished product without causing damage.

In Hendy Lennox (Industrial Engines) Ltd v Grahame Puttick Ltd [1984], diesel engines incorporated into generator sets remained capable of removal, allowing the supplier's ownership rights to be maintained.

By contrast, in Borden UK Ltd v Scottish Timber Products Ltd [1979], resin used in the manufacture of chipboard had become irreversibly mixed with other materials, preventing the supplier from asserting continuing ownership.

Where the original goods lose their identity, an attempted claim over the finished product may instead constitute a charge requiring registration.

3. All-Sums-Due Retention of Title

Ownership remains with the supplier until all outstanding amounts owed by the purchaser to that supplier have been discharged, rather than merely the invoice relating to particular goods.

Such clauses can provide wider protection, particularly where a supplier has an ongoing trading relationship with a customer.

An important Irish authority is Frigoscandia v Continental Irish Meat Ltd [1982] ILRM 396, in which the High Court recognised that an All-Sums-Due clause could constitute genuine retention of title rather than a charge.

The reasoning was that a charge could not arise over goods that had never become the purchaser's property.

Note, care must be afforded that notwistanding an All Sums due Retention of Title clause in place, the effectiveness for a supplier may be severely diluted if a supplier client had been in credit at any time during the relevant trading period, and the contested stock is not sufficiently identifiable to show that is from a batch of later unpaid stock and not from the period before, which would deem the resepctive stock not recoverable under such a Retention on Title clause.

4. Proceeds of Sale clauses

These clauses attempt to extend the supplier's protection to proceeds arising from the purchaser's resale of the goods.

They are more legally complex. Depending on their substance, they may constitute a charge over the purchaser's assets rather than a genuine reservation of ownership.

An important Irish decision is Carroll Group Ltd v G & JF Bourke Ltd [1990] ILRM 285 where the supplier sought to recover proceeds from the resale of cigarettes. Although the contractual arrangements contemplated a separate bank account and a trust over the proceeds, the monies had instead been paid into the purchaser's general bank account. The High Court held that the arrangement constituted a charge rather than an enforceable proprietary claim to the proceeds. As the charge had not been registered, it was void against the liquidator.

The subsequent Court of Appeal decision in Unitherm Heating Systems Ltd v Wallace (as Official Liquidator of BHT Group Ltd) [2015] further illustrates the difficulties suppliers may encounter in establishing ownership of proceeds from goods that have already been resold.

These decisions highlight the importance of distinguishing between retaining ownership of identifiable goods and attempting to claim ownership of the proceeds of their resale.

Retention of Title and the Companies Act 2014

An important distinction exists between a genuine ROT clause and a charge over company assets.

A valid ROT clause does not ordinarily require registration with the Companies Registration Office because ownership of the relevant goods has never passed to the purchaser.

However, where a contractual provision creates a charge over the purchaser's assets, the registration requirements of the Companies Act 2014 become relevant.

Under section 409 of the Companies Act 2014, a charge requiring registration that has not been properly registered is generally void against the liquidator and creditors.

Accordingly, a supplier who believes it has retained ownership may discover that its contractual provision actually creates an unregistered charge, leaving it to rank as an unsecured creditor.

Practical considerations for suppliers and liquidators

Suppliers seeking to enforce ROT clauses should ensure that:

• The clause was properly incorporated into the contract before delivery.

• The goods remain identifiable, preferably through serial numbers, stock records or other documentation.

• The goods have not been substantially transformed, incorporated into other products or resold in circumstances defeating the claim.

• The supplier can provide invoices, delivery notes and contractual terms supporting its claim.

• Where proceeds of sale are concerned, the contractual arrangements and handling of those proceeds support the supplier's asserted rights.

  
  

From a liquidator's perspective, ROT claims require careful examination before goods are released. The existence of a clause on an invoice does not automatically establish ownership. A liquidator on appointment will verify the contractual arrangements, identify the relevant goods, establish whether payment has been received and consider whether any a valid Retention of Title exists or an unregistered charge.

Conclusion

Retention of Title clauses remain an important protection for suppliers extending credit to Irish businesses. However, the distinction between ownership of goods and security over the proceeds of their sale is fundamental. A properly incorporated ROT clause covering identifiable, unpaid goods may be enforceable in insolvency, whereas more extensive clauses can give rise to complex legal issues.

Irish case law demonstrates that simple ROT clauses and properly drafted All-Sums-Due clauses can provide effective protection. ROT clauses extending to manufactured goods or proceeds of resale require particular care.

For suppliers, effective contractual drafting and accurate stock records are essential. For insolvency practitioners, careful scrutiny of ROT claims is necessary to ensure that third-party ownership rights are respected while protecting the interests of the general body of creditors.

Ultimately, a Retention of Title clause is only as effective as its legal enforceability and the evidence available to support it.

Note: This article is of a general nature rather than constituting legal advice. International case law cited has persuasive power only rather than being precedent in the Irish courts. Suppliers who wish to incorporate valid ROT clauses in their trade should ensure to obtain specific and bespoke legal advice.