Reservation (or Retention) of Title (ROT)
Suppliers often assume that goods belong to them until paid for and that exerting their rights over such goods should be a simple process. However it is often quite a complex area and legal advice should be considered.
The concept
Under the Sale of Goods Act, once goods are delivered to a customer they legally belong to the customer whether paid for or not. It is, however possible to contract out of this through the use of a Reservation of Title clause in the sale contract.
The basic assumption is therefore that goods belong to the customer and it is usually up to the supplier to prove otherwise.
There are several types of ROT clause, some of which are combinations of the following:
Simple clauses - giving the supplier rights over a set of particular goods not paid for;
All Monies clause - giving the supplier rights over all goods supplied by them whether paid for or not, provided they are owed money;
Extending clauses - claiming to give the supplier rights over the proceeds of sale or over the finished product or work in progress where their goods have been incorporated into a product. These are usually not valid unless a charge has been registered at Companies House.
If valid, then the supplier owns the products supplied and can normally expect to be paid for them or can collect them.
The ROT process can be complex, but usually follows this pattern:
Supplier visits site to make inventory, the Insolvency Practitioner agrees to pay for goods used if the supplier subsequently proves their claim;
Supplier provided with questionnaire to complete;
Supplier completes questionnaire and provides copy invoices, proof of deliveries etc.;
Practitioner considers claim and requests additional information;
Additional information provided;
Practitioner agrees claim or rejects claim;
If rejected then the creditor considers appealing decision through court application;
If agreed then the practitioner either pays for all the goods, pays for goods as they are used or allows the supplier to collect the goods.
Proving the claim
Whilst the concept of ROT is fairly simple, proving that a creditor has a valid claim is not necessarily so. In order for a creditor to have a valid claim they will normally need to be able to prove:
That the supplier is owed money - normally through invoices and proofs of delivery;
That there is stock on site - usually established through a site visit;
That the stock has been supplied by the creditor concerned - for example labels on boxes;
That the products concerned relate to specific invoices (only required if the creditor has a 'simple' ROT clause or they have an 'All monies' clause and the account has reached a zero position at some stage) - usually proven by the use of batch numbers and bar codes etc;
That the goods are in their original state, have retained their identity and can be easily removed without damage if incorporated into a product (e.g. an engine in a car) - usually identified during the site visit;
That the supplier has a ROT clause in the contract - usually by providing a copy of the conditions of sale;
That the clause has been properly incorporated into the contract - e.g. by a signed contract, proof of provision of terms and conditions, etc. The clause must be communicated pre-contract (i.e. not on an invoice which is post contract) unless there is a 'prior course of dealing';
That there are no conflicting contractual terms, e.g. the purchasing company has its own 'conditions of purchase' that claim that ownership passes upon delivery - the practitioner's staff may raise this as a query in which case it is up to the supplier to prove that their clause was communicated last prior to entering into the contract; and
That no other party has a claim over the goods (sometimes different suppliers claim rights over the same goods). In this case the supplier must prove that they supplied the particular goods.
The process
As soon as a supplier is aware of the insolvency of a business it is vital to act quickly. Place the office holder on notice that you have a claim, e.g. by fax to their office and attend site as soon as possible (but arrange this with the practitioner first).
Once on site conduct a full stock take of items that are there. Ensure that all information that may identify the stock is noted. Ensure that a member of the office holder's staff signs the stock list to confirm that they agree that the stock existed.
It is unusual to be able to remove stock at this stage. The office holder may continue to use the stock until the claim has been settled which can take some time. It may be possible to apply to court for an injunction to prevent its use but if the practitioner has agreed to pay for the stock used should a claim be proven it is unlikely that such an injunction would be granted. Legal advice should be sought at an early stage.
The supplier would normally be provided with a questionnaire for completion and supporting documentation requested. Once this has been submitted the practitioner may need to seek their own legal advice.
If it seems to be taking a long time to agree or reject the claim then complain to the firm dealing with the insolvency.
As mentioned previously ROT is a complex issue and legal advice should be sought.
