Customer Insolvency and Retention of Title
Impact of the Corporate Insolvency and Governance Act 2020 (CIGA) on Retention of Title clauses.
As Cathrine Ripley explained in her insight article “My Customer is Insolvent – Get Me Out of Here!” (see related articles below), the extension, by the Corporate Insolvency and Governance Act 2020 (CIGA), of the prohibition on suppliers taking action under ipso facto termination clauses to contracts involving even the supply of non-essential goods and services, in the event of a relevant insolvency procedure affecting the customer, represented a significant change in the law.
The temporary breathing space for so-called “small suppliers” was scheduled to expire on 30 June 2021, such that from that point, it would cover them too, unless further extended.
Subject to certain exceptions, the prohibition catches not only refusals to supply but also any attempts to do “any other thing” which would include, for example, increasing prices or making further supplies dependent upon the payment of outstanding sums owed.
A further potential consideration for a supplier, as a result of CIGA, relates to Retention of Title clauses. These are clauses that state that title to the goods supplied does not pass to the buyer until the goods are paid for.
Although CIGA does not specifically forbid the enforcement of Retention of Title clauses by suppliers against insolvent customers, as the new ipso facto rule prevents a supplier from exercising a contractual right to do any other thing due to a customer entering into a relevant insolvency procedure, this could include exercising contractual rights under a Retention of Title clause where that is triggered by reason of the insolvency procedure. When drafting any new or revised Retention of Title clause, that should be borne in mind
Before CIGA, Schedule B1 of the Insolvency Act 1986, as amended, was enacted to preclude enforcement steps including taking possession of goods under a Retention of Title clause where the customer is in administration or is the subject of an unexpired notice of intention to appoint an administrator.
Under CIGA, a new moratorium procedure was introduced under which a company is protected from various types of creditor action in respect of debts which arose before the moratorium was put in place.
Such a moratorium can be put in place by a company’s directors filing the appropriate papers with the Court. The moratorium is overseen by a Monitor and is intended to last for an initial period of 20 days, but this can be extended by the directors for another 20 days, or for up to a year after the initial 20 day period by agreement of the creditors, or by court approval. Whilst it remains in place, a moratorium will prevent a supplier taking any steps to enforce security over a company’s property and taking any steps to repossess goods in the company’s possession except with the Court’s permission (a qualification that also applies in an administration scenario, where the consent of the administrator provides another route to permitted enforcement).
Many other considerations will continue to apply with regard to retention of title clauses, for example that they are not a substitute for an adequate credit control system, and that depending upon the nature and/or turnover of the goods supplied, they may be difficult to enforce.
Similarly there is little point in preparing a skilfully drafted retention of title clause if you do not ensure that your terms of business, which include that skilfully drafted clause, actually govern the contract under which you are supplying your customer. As always, ongoing changes in legislation and developments in case law are such that suppliers of goods should regularly evaluate their terms of business generally and their Retention of Title clauses in particular.
Disclaimer: this article is not to be relied upon as legal advice. The circumstances of each case differ and legal advice specific to the individual case should always be sought.