What happens to unpaid for stock when a company liquidates? Buyers and sellers alike beware
When a company buys stock from a supplier on credit and then goes into liquidation, who owns those goods – the company or the supplier? In such instances, retention of title applies. Upholding the fundamental principles of fairness and treating all creditors equally is enshrined in the process of liquidation.
Retention of title (ROT) refers to a legal concept that addresses the ownership of goods or assets supplied to a company. When that company becomes insolvent, ROT can be a complex issue to untangle. Even seemingly clear-cut cases are not simple, as our example below demonstrates.
When a supplier sells goods to a company on credit, the ROT clause in the contract allows the supplier to retain ownership of the goods until they are fully paid for in full. This means that, if the company becomes insolvent or goes into liquidation, the supplier can reclaim the goods rather than them being included in the insolvent company’s assets to be distributed among creditors.
The principle behind the retention of title is that the supplier, as the legal owner of the goods, has a right to recover their property if the buyer fails to pay. However, the specific rules and regulations regarding ROT can vary between jurisdictions. For the supplier to exercise their rights under a retention of title clause, they need to demonstrate a contractual right and that the goods can be identified and are still in their original, or substantially unaltered, state.
They need to prove that they supplied the goods under a valid ROT clause, as well as following certain procedures and timelines for reclaiming the goods. The practical application of ROT can be complex and often depends on the specific circumstances, contractual arrangements and laws of the relevant jurisdiction.
A recent creditors’ voluntary liquidation case we were involved in focused on a warehousing company handling everyday household items. On our appointment, a supplier claimed ROT over part of the stock. On the face of it, this seemed valid – the invoices and the stock items appeared present in the warehouse. However, the stock items could not be separately identified from other stock at the warehouse that had been supplied by other suppliers. The claim was rejected due to an inability to identify their specific goods, allowing the stock items to become assets available for the estate.
This case shows that what initially might seem unambiguous is in fact beset with conditions.
Help from the experts
If you, as a business owner or supplier, are dealing with a case where ROT may be relevant, our experienced business recovery and insolvency team can offer down-to-earth advice on strategic decisions. Additionally, our colleagues across the Moore Global network are well placed to discuss matters concerning international jurisdictions.