A supplier wishing to assert a claim to reservation or retention of title (ROT) of stock it has supplied may be faced with a real predicament on learning that a customer has gone into administration.
Imagine that in the run-up to administration a supplier has problems finding someone to speak to regarding the claim. Fraught conversations with the customer's management come to an end.
The customer's directors are told by the proposed administrators not to make concessions to suppliers or to allow stock to be handed back. The administrator's appointment then takes effect, but by the time the supplier is fully in the picture, a sale of the business and its assets may have already taken place, leaving a new company is in possession of the supplier's stock.
The supplier may at some stage receive a questionnaire asking for details of any ROT claim the supplier may have. However, the supplier may also be told that the administrator has reached agreement with the new owner of the business, leaving the new owner responsible for dealing with suppliers' claims and that the supplier should contact them direct.
A few points are important if the supplier is to maximise its chances of recovery:
- The rights of a supplier of stock under an enforceable ROT claim are sacrosanct in an administration.
- A sale of business and assets by the administrators, whether by way of a pre-pack sale or otherwise, cannot deprive the supplier of its rights. Those rights are to recover the relevant stock or to be paid the sale proceeds received by the administrators for the stock concerned or the open market value of the stock if that is a higher figure.
- Strictly speaking, administrators should not dispose of ROT stock or any other assets owned by third parties without the consent of the supplier or a court order; in practice this rule is often in effect by-passed by administrators stating in their sale agreement with the buyer of the business that they only sell such right title or interest as the company has. As noted above, however, the fact that a buyer may have taken possession of the relevant stock does not affect the supplier's legal rights.
- A supplier that can prove it has an enforceable ROT claim can sue the administrators of a company under the law of tort if they purport to sell stock in breach of the above rules. The administrators have a defence if they can show they were not negligent and that at the time of the disposal they believed and had reasonable grounds for believing that they were entitled to make the sale. For this reason, suppliers should notify the customer and the administrator of their claims promptly, and hold administrators accountable as explained above. Any negotiation with a buyer of the stock should be conducted on the basis that this is without prejudice to any claim the supplier has against the administrators.
- It has long been recognised - and was recently acknowledged again by the courts in Mir Steel UK Ltd v Morris and others - that as between administrators and a buyer of assets from a company in administration, it is open to the parties to agree that all risks of claims relating to a particular asset or assets will be borne by the buyer. (This is sometimes the agreement reached where details of the supplier's claims are made known to the buyer and the price is negotiated to reflect the risks identified). However, this does not change any of the points noted above regarding the legal rules that apply to protect suppliers, and which are a vital part of any supplier's armoury.