Retention of Title (ROT) clauses play a key role in safeguarding sellers by enabling them to retain ownership of goods until buyers meet specific obligations (usually full payment). But what effect does insolvency have on ROT clauses and the ability of sellers to repossess their goods?
What is Retention of Title?
A ROT clause is a contractual provision that allows sellers to retain ownership of their goods until the buyer has paid for the goods. ROT clauses offer a vital layer of protection and security (albeit not in the strict sense), particularly in the event the buyer enters a formal insolvency process.
ROT clauses come in various forms, each offering different levels of protection. The two most common types of ROT clauses are as follows:
- Simple Clause
This clause ensures the seller retains both legal and beneficial ownership of goods until the buyer makes payment and operates an on order-by-order basis. - All Monies Clause
This clause provides wider protection, and the seller retains legal title to all goods supplied to a buyer until all money owed by the buyer has been paid.
In brief, for an ROT clause to be enforceable, it must have been incorporated into the contract between the parties and the seller’s goods must be capable of identification.
ROT and Insolvency
In the event a buyer enters into an insolvency process, sellers can seek to rely on their ROT clauses in order to recover any goods that have not been paid for by the buyer.
ROT and Proving in Insolvency
It is the responsibility of the seller to provide the Insolvency Practitioners appointed in relation to the buyer with the information required to prove the validity of the ROT claim, including evidence of the incorporation into the contractual relationship and how the goods can be identified. Any ROT claims in the context of insolvency should be dealt with swiftly to avoid the risk of the seller’s assets being sold during the course of the insolvency process.
ROT and the Types of Insolvency
The type of formal insolvency process a buyer has entered into will impact the enforceability of a ROT clause.
If a business has entered administration, a seller cannot repossess goods (even with valid ROT) without consent from the Administrator or the Court. However, an Administrator must take into account a seller’s ROT clause when seeking to sell the business and/or assets of the buyer as reselling goods which are subject to a valid ROT claim will constitute conversion.
If a business has entered liquidation, the existence of a ROT clause means that the seller is likely to have a course of action to recover the goods. If there is no ROT clause, the seller will rank as an unsecured creditor in the liquidation.
If a business is subject to a Part A1 moratorium, a seller cannot repossess any goods in the buyer’s possession without permission from the Court.
Alternatives to Retention of Title Clauses
ROT clauses should complement, not replace, robust credit control strategies. Consider these alternatives:
- Upfront Payments
Reducing credit periods or requiring deposits adds security. - Credit Insurance
Insuring against buyer default provides an extra safety net. - Bank Guarantees or Letters of Credit
These tools ensure payments while minimising risk.
Final Thoughts
ROT clauses are a useful mechanism for protecting sellers in commercial transactions. However, the existence of a ROT clause may not necessarily entitle the seller to repossess the goods from the buyer if the buyer enters an insolvency process. Any claim relating to ROT in insolvency needs to be addressed promptly and formulated properly.
This article is for information only and does not constitute legal/financial advice. Please contact us for advice tailored to your specific position. Some of the content presented on our website has been generated with the assistance of Artificial Intelligence (AI). We ensure that all AI-generated content meets our high standards for accuracy and relevance.
