A rise in businesses experiencing critical financial distress at the end of last year is expected to translate into a significant wave of insolvencies this year.
The retail sector is one of the hardest hit – there are plenty of recent examples of retailers going bust, sadly there are likely to be more. The financial risk for those businesses which supply retailers is therefore a big worry. LegalEdge’s Sarah Hill looks at what you can do to protect your revenue if this affects your business.
A well drafted contract is your best defence.
A well drafted contract will contain clauses which anticipate things going wrong and put your business in a stronger position than it would otherwise be, should the worst happen.
One of the most helpful contractual clauses for a supplier is the retention of title (ROT) clause. If your standard contract does not contain one of these, you should consider inserting one.
How will a ROT clause help protect my business?
With no ROT clause, the default position is that legal title to the goods you supply passes to the buyer when you deliver those goods, regardless of whether or not they have been paid for.
Without an ROT clause, if your buyer becomes insolvent after you have delivered the goods to them, but before they have paid you, you will join the queue of unsecured creditors and may ultimately receive very little (or nothing at all) in payment.
You will have no right to retrieve the goods because legal ownership has already passed to the (now insolvent) buyer and the goods will form part of their assets and be under the control of the insolvency practitioner.
This default position can be changed by including an ROT in your contract with the retailer; in the event of the retailer going bust you will be in a priority position over other creditors with respect to your goods because you will still, legally own the goods you have supplied.
What should my ROT clause say?
An ROT clause commonly reverses the default position and says that legal title in the goods only passes after all outstanding invoices have been paid (this is referred to as an “all monies” clause).
Your ROT clause should be clear about what the trigger is for its use, this should be when you “reasonably believe” an insolvency event is imminent – so that you do not need to actually wait until the buyer is in administration/winding-up etc..
It is also sensible to include an express right to enter the buyer’s premises to repossess the goods in the event of certain triggers – without such a right you would risk trespassing.
If you need to repossess the goods, you need to be able to identify them once you are on the buyer’s premises. The clause should also include an obligation on the buyer to store the goods separately or distinguish them as yours in some way.
A word of warning…
You need to be careful with the drafting of your ROT clause to ensure you do not inadvertently create a charge over the goods. If a charge was created this would be invalid unless it was registered.
This risk can be mitigated with a severance provision, but it is always best to seek professional advice on the exact wording to avoid falling foul of this.
Act early if you think the retailer is experiencing financial difficulties. If formal insolvency proceedings have commenced you will need the permission of the insolvency practitioner or the court to exercise your ROT clause.
If you have gone to the trouble of drafting a strong ROT clause, you also need to make sure it is properly incorporated into your contract and that you can evidence that the terms have been agreed by the buyer ie make sure they sign the contract!
What if I don’t have or can’t get an ROT clause?
If you don’t yet have an ROT clause in your standard contract, here are a few practical tips to help safeguard your business against customer insolvencies:
- Take (or increase the % you take as) a deposit up front before you deliver any goods.
- Make sure your credit control processes are as strong as they can be. Your payment terms should be made very clear to your customers up-front and you should have people whose job it is to enforce these. Follow up straight away if your terms are not met.
- Check out the financial health of any new buyers and keep a watching brief on the financial health of your existing customers. A small investment in a credit checking/online alert service could save you significant money down the line.
The extent to which any business can protect itself with contractual clauses will depend upon the commercial strength of each party but, in today’s uncertain economic environment, including an ROT is a sensible way to protect your business against loss.
How can we help you?
We can review your commercial contracts to see where further protections could be added, including drafting effective ROT clauses and advising on using them. Get in touch on firstname.lastname@example.org to find out more.