Administrators and unpaid goods

An interesting recent case, which reached the Court of Appeal,called Sandhu v.Jet Star Retail Limited,considered the position of a creditor of a company in administration who had the benefit of a retention of title over goods supplied to the company.

A retention of title clause ( ‘ROT’) is a term successfully incorporated in a contract for sale, which, in effect, gives the seller of goods priority over other creditors, particularly in the event of the insolvency of the buyer. This is because ownership in the goods does not pass to the buyer until full payment has been received for them by the seller.

In this case, the seller supplied goods under a contract which said that, if the buyer became insolvent, the seller could by giving notice, prevent the buyer from selling or disposing of the goods supplied which had not been fully paid. However, when the buyer went into administration, no notice was served by the seller. With the blessing of the administrator, the buyer sold the goods to a third party. The seller was understandably annoyed and brought proceedings on the basis that the goods were his and the administrator was wrongly interfering with his title in the goods, which should only have been sold in the ordinary course of business.

It was found by the court, on the construction of the ROT, that since notice had to be given to prevent the buyer from selling elsewhere, there was an implied understanding that the buyer might be permitted to continue to sell the goods after insolvency, in the absence of such a notice. The seller therefore had no rights other than as an unsecured creditor.

The case highlights the importance of, firstly, having a comprehensive and appropriate ROT for one’s business. Had, for instance, the clause made clear that unpaid goods could only be disposed of in the ordinary course of business, the applicant might well have won the day. Secondly, it stresses the importance of keeping a tight rein on one’s credit lines. Although a ROT can be extremely useful, the credit position of customers needs to be constantly monitored and the appropriate action taken ,when and if there are tell-tale signs of cash flow problems, such as unpaid invoices or unanswered telephone calls.

For more detailed information please contact Andrew Fleming on 01473 230033 or emailarf@blockslegal.co.uk

The above is general comment only and individual advice should be taken