Preventative measures to get your goods back if a client hasn’t paid
This article will outline the process for recovering goods where you have not yet received payment from the client.
What is a retention of title?
In simple terms, a retention of title ensures that ownership of goods remains with the supplier/creditor until you receive full payment for those goods. There are a number of clauses that fall under the retention of title, which we will discuss further in the article. Without a retention of title clause, it’s likely you will not see any return if the company enters an insolvency procedure. If liquidation is the only option for the company, you will become an unsecured creditor – taking your place at the bottom of the hierarchy in order of payment for creditors. Retention of title helps mitigate the risk of the above, and can be used when putting your case to the liquidator who can enforce the clause.
It’s important to note that you should seek professional guidance when drafting the clause. This is a very complex area and many circumstances can occur, which can affect payment.
Why do I need the clause?
As mentioned above, company liquidation is a very real threat to many industries. It’s already estimated that a quarter of UK businesses have experienced a hit to their finances due to a client or customer entering insolvency. If you are waiting on payment for goods, it can seriously hinder your ability to survive. Therefore, a retention of title reduces the chances of not being paid, but the clause must be clear and agreed to beforehand.
We suggest including the retention of title clause in the overall terms of trade, and you must inform your customer of the clause before you begin your working relationship. If you include the clause in an invoice, for instance, the customer would need to sign that prior to the delivery of goods.
Above all else, check that:
- Your retention of title clause is in writing. If you have not included the clause in the contract, it will be difficult to prove that you had agreed with the customer.
- The customer has agreed to the clause and is aware of it in the contract.
- You have evidence of the customer agreeing to the clause, whether in email form, a signature or a note.
Why is payment overdue?
Payment can be overdue for a number of reasons. If your customer has stopped replying to communication or you are struggling to get hold of someone senior in the business, this is an early warning sign that all is not right.
A retention of title clause is particularly hard to enforce in the case of liquidation, and, especially, if the debtor understands the tricks of the trade if your wording is not clear. You should always take professional legal advice when attempting to recover goods under this clause, as you may have a hard fight on your hands.
How to recover your goods
If you are looking to recover your company goods, you must be able to identify them. If you are unable to distinguish your goods from others similar, generally, you will not be able to take them back until you receive payment. Best practice is to mark your goods with an identifiable logo or serial number, so you can always identify if they are mixed with others. It’s also worth marking the product – rather than the packaging – as some suppliers may swap the original packaging making it all the more difficult for you to identify.
You must also be able to prove, without doubt, that the customer has not paid for goods. If they have paid for some, but not all, they may try to argue that they have provided payment for all. Always keep records accurate to ensure you do not have to fight for the return of your goods.
Different retention of title clauses
There are a number of retention of title clauses, from the most basic to the ‘mixed goods’ clause.
Basic retention of title
This clause states that the goods are retained until payment has been received in full. The goods remain yours and you may collect from the debtor. However, in the meantime, your customer has a duty of care to ensure the goods remain in the condition they were sold. These are difficult to enforce. If the same goods are provided on a regular basis, you must be able to prove the stock on the premises is that which has not been paid for.
An ‘all monies clause’ is worded along the lines: “title to all goods shall be retained until all monies due are paid in full.” This allows for retention until all monies are paid to the creditor/supplier. These clauses are much more common, as less proof is required to recover goods. However, you should note that if any point the account has been paid up, any goods on site from before this date cannot be recovered.
Proceeds of sale
Some clauses seek to set aside the proceeds of sale to be held against the retention of title clause. Unless the funds are specifically held in a client account, these clauses are almost impossible to enforce. The clause effectively creates a floating charge over the proceeds. However, this cannot be enforced without being registered at companies house.
This clause is often more complex and challenging to prove. Essentially, the ‘mixed goods’ clause refers to your goods that have been mixed with others during manufacturing, for instance. However, the challenge can arise if the goods cannot be separated from others without damaging third-party goods. Again, we suggest seeking legal advice if this is the case.
Communicating with liquidators
If your customer does enter an insolvency procedure, you must alert the insolvency practitioner (IP) about the retention of title clause along with confirming you are enforcing the clause, prohibiting them from selling the goods without your consent. Protect your company by sending over a copy of the trading terms and the agreement of the customer regarding the clause. You may also be asked to complete a ‘retention of title questionnaire’ to provide the insolvency practitioner with more information on your particular situation.
It’s likely the insolvency practitioner will challenge the clause and you become an unsecured creditor. If that is the case, you will fall to the bottom of the hierarchy of payments.
Ultimately, you must seek urgent insolvency advice if your customer has entered into liquidation, and you need to recover your goods. Our business rescue experts can provide confidential insolvency advice for the best solution.