Pre-insolvency considerations
There are certain steps you can take in negotiating your contract with counter-parties and organising your records, which may put you in a better position in the event of your business partner’s insolvency.
Assessing your position
First, assess your position in relation to your business partners throughout your supply chain in the event of an insolvency. You will need to ask the following questions:
- do you have agreements in place with all of your business partners?
- do you have signed copies of these agreements?
- do they contain retention of title clauses, where possible?
- do they contain any rights of set off?
- are there any weaknesses in your supply chain?
- do you have any exclusive supply arrangements?
- do you have complete up-to-date records of all payments and deliveries relating to your business partners?
Minimising the damage
Having assessed your position, so far as is commercially possible you should make sure that:
- you have agreements in place with all business partners and have your own signed copy
- if you are a supplier, you have an appropriate retention of title clause in place (see below)
- if you are a purchaser, you have taken steps to minimise the impact of retention of title clauses (see below)
- you have an immediate contractual right of set-off in the event of insolvency
- you have identified any potential issues that may affect the flow of goods, and are able to prevent them from disrupting your supply chain
- you have a contractual right to exercise a lien over any goods you hold but to which you do not have title
- you have contractually excluded any rights to exercise a lien over your goods that are held by a third party
- you have negotiated insolvency exceptions for exclusive supply agreements
- you have thorough up-to-date records of all payments and deliveries, and are easily able to identify anomalies
Retention of title (ROT) clauses
If you are supplying goods, have you used ROT clauses where possible? If so, you should consider and prepare to use these to secure your goods or money to protect them/it in the event of a counter-party insolvency.
If ROT clauses are recognised in your relevant jurisdiction but your organisation does not have a ROT clause, you should consider:
- reviewing the wording of the standard terms and conditions including the ROT wording that was included in the relevant documentation and key correspondence at the time of negotiating the contract
- preparing to enforce the ROT clause, including in accordance with any agreed enforcement procedures – preparing standard enforcement letters, for example – that allow you to promptly enforce your ROT claims as soon as you become aware of a potential or actual insolvency
- is the ROT clause "all monies", by which title only passes to the purchaser once all invoices have been settled? If it is, this may put you in a stronger position
- is the ROT clause extended to cover the proceeds of on-sale, or goods that may have been processed to form a new product? If so, this may invalidate the entire ROT clause
- are your goods clearly identifiable as yours until title passes, and not co-mingled with other suppliers’ goods?
- have you kept accurate records of goods supplied and paid invoices?
If you are the purchaser, you may wish to consider how you can minimise the effect of a supplier ROT clause. For example:
- by checking if title passes on delivery (ie not including "all monies" wording)
- by periodically reducing credit balances with significant ROT suppliers to zero, ensuring title to all goods supplied to that date (including those supplied under "all monies" terms) will transfer to the purchaser
- by checking you have accurate records of ROT goods in order that financial records do not include ROT-supplied stock as assets of your organisation
You may need to seek jurisdiction-specific legal advice concerning the use and enforcement of ROT-type clauses.
