When advising directors and dealing with suppliers, we frequently encounter a lack of understanding surrounding the impact of a Retention of Title or ROT clause. This can sometimes directly impact the company’s ability to trade out of an insolvency position, when stock is subject to a valid ROT clause and the supplier takes steps to protect its own financial exposure.
If you have questions about ROT or want to discuss your situation with our practitioners, contact our team today.
What is a Retention of Title (ROT) Clause?
A retention of title (ROT) clause is a provision in a contract for the sale of goods in which the seller retains legal ownership of the goods until they have been paid in full. ROT clauses are there to help protect the seller against a potential loss in the event that their buyer becomes insolvent. They are a form of security for suppliers who sell goods on credit, which is very common in B2B industries. The ROT clause will allow the seller or supplier to reclaim their goods if their customer enters a state of insolvency.
What types of ROT clauses are there?
Traditionally, there are two types of ROT clause:
- Simple clause
- All monies clause
However, most ROT clauses we see are “all monies” now. As insolvency practitioners, we can help with both types, so please contact us if you would like more information.
What’s the Difference Between These Clauses?
Under a simple clause, the seller retains ownership of a particular stock item (or box of items) listed on a specific invoice until paid for in full.
An all monies clause effectively means that the seller retains ownership of all goods delivered until all outstanding invoices have been settled in full. Although this can present some challenges when attempting to enforce, an All Monies clause provides better protection for the seller, particularly if they do lots of business with the buyer, as the clause extends to all orders, not one specific invoice.
What are the Practical Implications if these ROT Clauses are Invoked by the Seller?
For a Simple Retention of Title clause, the seller has to demonstrate that a particular item (or box of items) can be tied back to a line on an outstanding invoice. Typically, this requires a unique reference (e.g. a bar code) that is detailed on both the outstanding invoice and the item (or packaging).
In contrast, there is no requirement to trace specific goods to each unpaid invoice for an all monies Retention of Title clause. It must be proven that all items were delivered by the seller.
Where are ROT clauses found?
To rely on an ROT clause, the seller must demonstrate that the clause has been “incorporated” and agreed to by the customer. For various reasons, ROT clauses are typically included in terms and conditions attached to the credit agreement, which has been agreed by a customer’s authorised signatory. Terms and conditions are also often attached to documents issued prior to an invoice, such as quotations and order acknowledgements.
Are Other Conditions Included in a Retention of Title Clause?
Some additional conditions primarily seek to ensure that repossession of a customer’s unsold goods (if and when deemed justified) is as straightforward as possible. Some examples include:
- Giving the seller the right to enter the purchaser’s premises (to avoid “trespass” issues) to collect the goods
- For goods to be “marked” to demonstrate that they are the seller’s property
- Storage of the seller’s goods separately from other stock items
- Allow the seller to check onsite if their conditions are being adhered to
Assistance with ROT Clauses
At BRI Business Recovery and Insolvency, we help our clients understand the implications of ROT clauses on a regular basis when considering the company’s financial position. If you are in a position where an ROT clause from your supplier is affecting your insolvency and would like some help and support, contact the team at BRI today.
Who is Responsible for Insurance if the Seller Retains Legal Ownership?
Typically, ROT clauses include provisions that the buyer is responsible for insuring the goods, often with a well-known or “reputable” insurer. Once delivered, the risk of loss or damage becomes the responsibility of the purchaser as the stock is under their control.
Are There Any Termination Provisions Included?
Clauses are typically worded to allow a seller to collect the stock prior to a formal insolvency event. If stock is collected, the seller will likely have to demonstrate that it was reasonable to conclude that the purchaser was insolvent.
Who Deals with the Supplier Claiming ROT?
Once a company enters a formal insolvency process, the appointed insolvency practitioner deals with ROT claims, possibly in conjunction with a legal advisor.
Prior to insolvency, it is the directors’ responsibility to choose whether to appoint their own legal advisor.
How Could a Valid ROT Clause Benefit a Supplier?
Following the creation of HMRC’s second preferential status (for certain taxes), distributions to unsecured creditors in a formal insolvency process have become less common. As a result,
ROT clauses have arguably become even more important.
This allows a supplier to collect their goods and, assuming they are in pristine condition and not obsolete, can be “resold” to another customer.
In a formal insolvency, a supplier of stock or consumables would be an unsecured creditor. Without an ROT clause, their claim would be the total amount owed to them. However, the value of goods returned under ROT (see below) effectively reduces their unsecured claim and the bad debt write-off.
How Do You Calculate the Value of an ROT Claim?
Firstly, a schedule of the goods located at the customer’s premises is prepared and agreed upon. Traditionally, the value is then based on the cost price (in keeping with invoices issued to the customer) for each item, which is then aggregated to give an overall claim.
More recently, we have seen a different calculation which is based on the lower of the cost price and the market value when returned. This distinction can be important if items are seasonal in nature or have been replaced by new models after delivery. In such cases, the market value of older (or obsolete) stock is likely to be less than the invoiced price to the customer.
Is Any Other Paperwork Issued by the Seller?
Once the value of ROT is agreed, the seller issues a credit note to the buyer for the value of stock taken back into their possession. This updates both the seller’s and the buyer’s accounting ledgers and also ensures that VAT (where applicable) is correctly accounted for.
What if there is no ROT Clause in my Terms and Conditions?
ROT clauses are best drafted by suitably qualified and experienced solicitors.