Michael Reid: Gone bust… Can I have my goods back?
Michael Reid discusses the complexities and challenges of trade credit, focusing on retention of title issues, the role of credit reporting agencies, and the difficulties faced by suppliers in reclaiming goods in the event of a buyer’s insolvency or liquidation.
It is an accepted feature of the business environment that payment tends to be made for goods and services following the date of delivery. The credit system has been around since ancient times and reflects a two-way business transaction between a supplier and a buyer where credit terms are agreed in advance of a delivery e.g., giving a period of 30, 60 or 90 days to pay for the supply.
Frequently, trade credit is often used by a business as a source of short-term financing, i.e., one has the benefit of the goods and can trade with them before payment has to be made to the supplier.
Clearly, a supplier will wish to undertake checks in order to be satisfied that it is appropriate to provide credit and indeed, it was back in 1841 that the Mercantile Agency was founded as one of the first commercial credit reporting agencies.
Other than the continuing challenge of a supplier ensuring that the agreed credit terms are observed, and payment is received for goods delivered, difficulty often arises when the buyer is subject to a formal insolvency procedure such as liquidation.
When this occurs, a supplier who has unpaid invoices can be expected to seek recovery of goods previously delivered which remain unpaid. If nothing else, it helps to reduce the unpaid debt because a credit can be given for whatever has been uplifted, as long as the goods remain of merchantable quality.
However, it is not as straightforward as simply turning up at the business premises and collecting goods because, from the liquidator’s perspective, sellable stock might be handy in terms of using it to provide cash for dividend purposes to the general body of creditors.
Accordingly, before even thinking about uplifting goods, one needs to look at what formal trading agreement exists between the buyer and supplier in terms of retention of title. For example, it is not unreasonable to expect that signed terms of trade have been documented between the parties long before any transaction is undertaken which regulates, inter alia, how goods can be repossessed in the event of non payment. Some suppliers rely upon the wording on a sales invoice but frequently such wording is inadequate.
A supplier may point to goods that show their logo/packaging and contend that nobody else could have supplied them but again, if the documentation is deficient, the liquidator will often remain in possession of the goods and sell them for the benefit of the liquidated estate. It is not unusual to see a supplier drive away in his empty van muttering darkly about organising a visit to his lawyer in order to upgrade the terms of trade such that the same problem does not arise in the future.
The first task is for the supplier to be able to identify goods that have been delivered and then link them to an unpaid invoice. That sounds easy but if the supplier has provided, say, windows or doors to a building company and these items have been incorporated into a building, such goods are deemed to be part of a building and hence, generally unavailable to repossess because removing them would cause damage to someone else’s property. Another good example is that of a flour supplier who will be unable to repossess his product if it has already been used to make bread or other bakery products.
Another challenge when seeking to uplift goods, even when cash has changed hands, is when an individual has paid, say, a £500 deposit for an item such as a sofa from a house furnisher that is then subject to liquidation. Unless the person can specifically identify a sofa in the showroom/warehouse as being theirs, a claim for retention of title will fail.
Some retention of title claims are easy to deal with because, for example, the supplier has a specific security such as a car or van, but generally, a queue will appear at the liquidator’s door of suppliers wishing to repossess goods.
Of course, if a supplier has a number of unpaid invoices and finds that goods have been sold by the buyer without payment being made to the supplier, it will be almost impossible to recover them from the third party who acquired them because the transaction was undertaken in good faith.
There have been occasions where an angry supplier suggests that items supplied by others can be uplifted in an attempt to mitigate the loss but, as one might imagine, this is tantamount to theft and hence, an inappropriate course of action. There are several well-known legal cases regarding retention of title and how a creditor can evidence that unpaid goods held by the liquidator should be returned but equally, a valid retention of title claim is often hard to demonstrate: leading to the annoyance and frustration of the supplier concerned.
The moral of the retention of title story is that the supplier should not wait until a company is subject to liquidation before checking / testing the retention of title conditions. All too frequently, that will be far too late and the benefit of recovery will be lost. If in doubt, seek expert advice.
Michael Reid is a licensed insolvency practitioner and partner of Aberdeen-based accountancy firm MHA