Understanding Retention of Title (ROT) Claims in Insolvency

What is Retention of Title?

Retention of Title (ROT) is a clause which can be inserted into a contract allowing a seller to retain legal ownership (or 'title') of goods supplied until the customer has made full payment for them.

Retention of Title aims to provide the supplier with an element of security should the customer enter into formal insolvency proceedings prior to paying for the goods. Should this happen, the supplier may activate the Retention of Title clause and either ask for the unpaid goods to be returned by the insolvency practitioner or for full payment to be made. 

Retention of Title during insolvency: The need to prove

Retention of Title can be a complex affair unless the clause is unambiguous in its content, and presented in a manner that cannot be disputed by the debtor. Problems can arise, however, when a creditor assumes that they have a right to reclaim unpaid stock, but the debtor company refuses to recognise the clause, or claims to have no knowledge of its existence.

As Retention of Title forms part of a written contract between the supplier and their purchaser it may not have even been discussed during negotiations, however, as long as it is clearly added as a clause in the contract or included as part of the invoice, creditors can use this to enforce a claim they make against an insolvent debtor. During matters of insolvency, it is always the responsibility of the creditor to provide the insolvency practitioner with the information needed to prove its existence.

'Simple' and 'all-monies' clauses

There are two main types of Retention of Title clauses: a simple clause, and an all-monies clause

• Simple clause - A simple clause works on an order-by-order basis. The supplier will retain legal ownership of the goods from one order until that order has been paid for in full. Any outstanding payments from subsequent or previous purchases are not relevant.
• All-monies clause - An all-monies clause encompasses all orders made by a customer. The supplier will retain legal ownership of all goods until all money owed by the customer has been paid

Potential issues surrounding a Retention of Title clause

Without a detailed Retention of Title clause that addresses all potential issues, it is unlikely that creditors will see success in their attempts to recover unpaid stock. There are various issues inherent in this system that reduce the chances of a beneficial outcome for suppliers.

These include:

• The customer selling the goods to a third party
• Processing the goods in some form
• Using them in the manufacture of another product
• Using the goods to make a new product, and then selling that product to a third party

Clearly, the possibility for rejection of a claim is very high. This is a complex area that requires professional input when the clause is first formulated, as well as when attempting to reclaim stock.

It is a good idea to contact the liquidator as soon as you know the purchaser is insolvent. Along with a covering letter, you should send a copy of your terms of trade, a statement showing the extent of their debt, and copies of any relevant invoices.

Begbies Traynor can advise on all aspects of Retention of Title, from the wording of a clause to the inclusion in a contract or other document. We operate from offices around the country, and can arrange a same-day meeting with one of our licensed insolvency practitioners.