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Customer Insolvency – Getting your Goods Back
Winning an order for the sale of goods creates both an opportunity and a risk. An opportunity to make a profit and a risk that your buyer will become insolvent before paying for the goods you have delivered. The use of an effective retention of title clause can reduce the risk and help your company.
In the face of stiff opposition your company has won a major order for the supply of goods. Terms of payment are 30 days from invoice date. It’s a rush job. You buy in the parts you need and hire additional labour. After much effort you meet the deadline and deliver the goods to your customer on time. The next day a Receiver is appointed to your customer. He tells you that your goods are still on the customer’s premises but that they won’t be paid for and won’t be handed back either. He tells you to file a claim for the purchase price if you want to but warns that there is no real prospect of your receiving any money.
This turn of events is a double blow for your company. Not only are you unlikely to see any of the purchase price, you are of course also saddled with the costs of buying in the parts and hiring the additional labour needed to complete the job on time. What’s more, the goods which you have produced and delivered to the customers are still sitting on the customer’s premises and your company is powerless to do anything about it. This may not seem like justice – but more often than not it is the law if you do not have a retention of title clause.
What is a retention of title clause?
Quite simply, it is a clause which prevents your customer from becoming the owner of the goods you have delivered until they have been paid for in full. They remain your property until paid for – even though they have been delivered to your customer’s premises. If your customer does not own the goods then the Receiver can have no claim over them – he will be obliged to hand the goods back to you on receipt of a properly made out claim to retention of title.
The following will help to ensure that your contracts contain a valid retention of title clause:
- Include a retention of title clause in your company’s standard terms of business
- Ensure that your terms of business apply to each contract your company enters into for the supply of goods. There is no point having terms of business if you don’t use them properly.
- Include a copy of your terms of business with your price lists, catalogues, quotes and tenders
- It is vitally important to acknowledge in writing your customer’s order and print on your order acknowledgement form your company’s terms of business
- Where possible, your company’s invoices and delivery notes should also have terms of business printed on them
- If terms of business are printed on the reverse of a document then the face of the document should include a statement drawing attention to them
- If, as is so often the case, orders are accepted orally and there is no written order confirmation, the oral acceptance should include the phrase “accepted subject to our terms of business” and your customer should be made aware of your terms of business at regular intervals
- Inclusion of your terms of business on the back of all pre-contractual and contractual documentation is desirable and it may also be appropriate occasionally, for example during slack periods of the trade cycle, to write to all customers reminding them of your terms of business
- In dealing with a new customer it is best practice that they sign a copy of your terms of business by way of acceptance and this signed copy is kept on the customer’s file
What attitude will the receiver take?
A Receiver will not concede your right to recover the goods unless he is presented with clear and compelling evidence of your claim. After all, the Receiver is appointed by a debenture holder, normally a bank, and it is his/her job to preserve and collect assets over which the bank claims to have a charge.
In practice he/she will look at the following points before conceding your claim:
- Were your terms of business made part of the contract for the supply of goods in question? If not your claim will be rejected. It is here that the importance of having observed the advice detailed above can be seen.
- Is your retention of title clause effective? Is it properly drafted? There is a significant body of case law representing attempts by Receivers and Liquidators to upset the validity of retention of title clauses.
- Can you provide proof positive that the goods remaining on the customer’s premises are goods which your company supplied? This raises an interesting point. If you are one of several suppliers of common items, such as an internationally recognised brand of film or black plastic bin liners, you may be asked to explain how you can tell the difference between the items that you have supplied and all the other items – they all look the same! Of course unless you specifically mark the cartons, pallets or wrappings you will never strictly be able to tell the difference between what you have supplied and what has been supplied by one of your competitors.
- Can you verify that the goods remaining on the customer’s premises relate to your unpaid invoice – as opposed to goods supplied by your company under earlier invoices which have been settled in full? This highlights the need to mark your goods in such a way that they can be cross-referenced to a particular invoice or delivery note.
How to make a claim under a retention of title clause
The starting signal
This will often be the receipt by your company of notification that your customer company has had a Receiver or Liquidator appointed, or is convening a meeting of its creditors. It is therefore important to be alert to the arrival of these documents in the post.
In general terms most people will, quite rightly, consider that the customer company will be unable to meet in full its debts and will wish to exercise their retention of title rights as the only useful remedy left to them.
Speed is essential
The moment you fear a customer may have gone bust, you must immediately ascertain your own position. If the amount involved is insignificant, is it worth at this stage taking any further action other than properly submitting your proof of debt in the customer’s insolvency? If however, the amount involved is material to your business you must then decide whether your time should be spent in pursuing your claim to retention of title or could be better spent elsewhere generating fresh business.
If you decide that the amount is material and worth fighting for then you should immediately gather together such supporting documentation as you can. Copies of your terms and conditions of trade, orders, acknowledgements of orders, delivery notes, invoices and a statement of the amount due should do initially.
Meanwhile you should be cautious about making further deliveries under existing contracts and if in doubt about your position contact your professional advisers.
Once you have the documents to hand you should visit the customer’s premises as quickly as possible. Do not make the mistake of turning up without any identification; you may not get very far!
At the customer’s premises
If a Receiver or a Liquidator has been appointed then it is likely that they, or a member of their staff will be at the customer’s premises. If the customer company has sent out notices convening meetings of its creditors, then there will be someone assisting the directors in convening the meetings and advising them for the time being.
In all cases these people are likely to introduce themselves as members of the Receiver’s or Liquidator’s staff or a member of a firm which is assisting the directors in the period up to the meeting of creditors.
On arrival you will probably see a member of the insolvency staff. When you do, explain that you are a creditor and that you wish to claim retention of title. You will find that the member of the insolvency staff, whilst polite, tends not to volunteer information other than his name and who he acts for; it is very much up to you to make your claim. You should explain that, without giving up any other rights you may have, you wish to reclaim goods supplied by you on terms which include a retention of title clause. You should go through the documentation showing the outstanding invoices and explaining the items that they relate to.
You should ask to see the items. If entry to the premises is refused, you must seriously consider whether you should instruct solicitors to press your claim. It is important that you have already decided before you arrive whether this is a step you wish to take in view of the sum involved, since making this threat and not following it through will probably damage your chances of negotiating a successful settlement in the future.
As a matter of practice, most members of the insolvency staff will allow you onto the premises if you have brought with you appropriate identification and the relevant paperwork. You will be expected to point out what you lay claim to. If you can identify the items you claim, it is important that you explain how you are able to identify that they are items that you supplied.
Once you have demonstrated that you can identify the items that you have supplied, it is unlikely that you will be allowed to take anything away; usually the member of the insolvency staff will, jointly with you, prepare an inventory of the items in detail and does not concede ownership. You should retain an original copy of this list and have it signed by a member of the insolvency staff.
Once the inventory is completed, unless the member of the insolvency staff is willing to release the items, you should either try and reach a satisfactory compromise or seek professional advice without delay.
When you visit the customer’s premises you may find that the Receiver is allowing the business to continue trading. You will be in a stronger bargaining position if you know that the products you have supplied are crucial to continued trade. If the member of the insolvency staff needs the items that you supply he will be more inclined to review your claim and, whilst making no commitment with regard to its validity, may make you an offer to settle there and then. In general terms these sorts of negotiations can be quicker and more beneficial to both sides than protracted claims pursued by professionals. Do not overestimate the strength of your hand. Unless you supply a unique item or one which is only obtained after a considerable period of time, the member of the insolvency staff will only go so far before he reaches a threshold where it is easier for him to reject your claim and go to the marketplace and buy for cash the items he needs. After all, your competitors will be happy to deal for cash over the counter.
Your professional adviser will undoubtedly wish to see the documents which comprise your claim; catalogues, terms of business, orders, order acknowledgements, invoices, delivery notes, statements of account and of course the inventory of items you have claimed.
At this stage it is wise to consider how far you wish to go. Although the loss of a debt of say €5,000 may well be material to you, if the items claimed are only worth €2,000 there must be a limit to how much in professional costs you are prepared to spend in order to pursue your claim. You should ask your professional advisers for their opinion on the likelihood of success – and for an estimate of costs. The claim will then take its course.
DOs and DON’Ts
- Ensure that your terms of business include a properly drafted retention of title clause
- Ensure that you have a clear understanding of how to make your terms and conditions of business apply to the contract
- Mark your goods clearly as originating from your company
- Cross reference your goods to the relevant invoice or delivery note
- Insist on making a physical inspection of your stock held on the customer’s premises when you receive notification of appointment of Receiver, Liquidator or creditors’ meeting
- Insist on obtaining a countersigned list of your goods on the customer’s premises
- Insist on prompt release of your goods and, if not forthcoming, take immediate professional advice
- Persist with your claim
- Consider the consequences for your company of delivering further goods against outstanding orders
- Delay once you receive notification of appointment of Receiver, Liquidator or meeting of creditors.
- Give up simply because the Receiver or Liquidator does not, at first, accept your claim.
Related Article: Top 10 Reasons Small Businesses Fail
Please call Noel Murphy today on 021-4310266 if you need further information on getting your goods back or a free consultation.