Creditors’ retention of title clause crucial, say Sian Aitken and Lorna Sibbald
A recent judgment at the High Court in England will be welcomed by insolvency professionals and could have a significant impact on any company which is seeking to recover its goods from a customer firm when it suddenly goes out of business.
The Blue Monkey Gaming vs Hudson & Others (2014) ruling states that, in the event of an administration, the onus is firmly on the creditor rather than the administrator to identify any assets which are deemed to be retention of title (RoT) goods, ones that are bought on credit with the supplier having a contractual right to take them back in the event of a purchaser falling into insolvency.
An RoT clause in a contract gives the supplier legal ownership of any goods they are transferring to a buyer until they have been paid for. In order for it to be enforceable, this clause must be properly incorporated into the contract between the seller and the buyer. In the event of buyer insolvency, any goods subject to an RoT clause will not form part of the estate and therefore the seller will be entitled to their return or they will be given priority from the sale proceeds.
The Blue Monkey case arose from the 2009 administration of the Agora Group, one of the largest operators in the UK adult gaming industry, which occupied more than 100 arcades in the UK. At that time Agora Group had approximately 4,000 gaming machines, a mixture of which were owned and leased, in their arcades.
At the point of administration, MDM Leisure (whose claim was later assigned to Blue Monkey Gaming Limited following MDM’s entry into liquidation) were owed in the region of £4 million for machines supplied under an RoT clause. While MDM completed an RoT questionnaire, they were unable to produce an inventory of the goods supplied. They also failed to identify their machines, assert title, request payment for hire of the machines or make a formal demand for their return throughout the administration period.
The court ultimately ruled that the onus is on the creditor to locate and identify their goods, saying it would be “unrealistic, unworkable and incompatible” to place this burden on the administrator, given the commercial reality and significant workload they are faced with in the run-up to and following their appointment. Instead, the court felt that the obligation of the administrator is to allow and supervise access and to any goods claimed on an RoT basis.
This ruling clarifies the situation over retention of title in the event of an insolvency and should serve as a warning to any business which supplies goods on an RoT basis to another company. Even if the time and cost of having terms and conditions drafted is incurred, it is vital that companies need to ensure that they do not miss their opportunity to recover their goods or debt in the event of an insolvency by implementing and enforcing any claim quickly and in the correct manner.
This case has thrown up a number of practical implications, not only for creditors, but also for insolvency practitioners who must adopt a robust standard of communication which sets out what they will and will not do as part of their responsibilities in handling an administration. They must also allow supervised access to any creditor making an RoT claim and adjudicate that claim on the basis of the evidence produced.
Businesses need to be proactive before they find themselves in the role of creditor by drafting an RoT clause which is incorporated into any relevant contracts they enter into. It is also important that any goods should be marked and identified that they are subject to RoT at the time they are being supplied.
In the event of insolvency creditors must clearly assert an RoT claim at an early stage and demand delivery of any relevant goods which are not paid for. As highlighted in the Blue Monkey case, an early trip to the debtor’s site with a clear paper trail outlining your contractual right to RoT is essential. Along with the appropriate documentation in place, executing your claim in the right manner will help ensure you can seek payment if the administrator applies to have any of your RoT goods declared an expense of the administration. It will also enable you to resist any attempt to sell the goods to raise money for the wider creditors’ fund.
• Sian Aitken and Lorna Sibbald are partners at CMS www.cms-cmck.com