Protecting the rights of sellers
02 October 2015
Insolvency not only has a serious impact on the debtor, but also on his creditors: the debtor loses the right to freely (within reasonable boundaries) dispose of his assets; the creditors face the risk of never getting their outstanding invoices paid – at least, not in full. This especially affects the ordinary, unsecured and unprivileged/non-preferential creditors.
Creditors may try to mitigate the risk of insolvency of their debtor by improving their position. This may be done, for instance, by having a security right such as a right of pledge or mortgage vested, or by obtaining a personal security, such as a suretyship or a guarantee, from a third party such as a shareholder or parent company. Another way in which a creditor may create a stronger position can occur in a situation concerning the sale of (mostly movable) goods. The seller of such goods may under certain circumstances retain title to the goods.
Nowadays, apart from consumers, more often than not purchasers don’t pay the purchase price for goods purchased at the time of closing the purchase agreement or even at the moment the goods are delivered to them. Transferring title to the goods to the purchaser before the purchase price has been paid is a risk for the seller – not only in the event that the purchaser becomes insolvent, but also outside insolvency. In the event that the purchaser goes into insolvency before having paid the purchase price, the seller is mostly confronted with a liquidator and very strict statutory insolvency laws that may disallow him from exercising his rights, at least temporarily. But even if the purchaser is not in insolvency, the seller is not sure to get paid. The purchaser has gained title to the goods and therefore is their owner, and so it could be that he might sell the goods to a third party – who, in principle, is not obligated to pay the purchase price to the original seller because there is no contractual relationship between them in this regard.
Needless to say, it is essential for the seller to protect his rights as best he can and as early as he can. The concept of retention of title in itself is complicated enough in one jurisdiction, but becomes increasingly so in times of growing globalisation, where foreign jurisdictions come into play. It is not customary any more that a manufacturer purchases the supplies he needs only in the nearest city or even in his own country. On the contrary, with the use of the internet the quality and price of goods for sale can instantly be checked and compared all over the globe. And the ordering process is completed by a mouse click. In that situation it is even more important that the supplier knows what his rights are when he ships his goods to another country, possibly even another continent.
Questions a seller needs an answer before even entering into an agreement concerning the sale of goods to a purchaser abroad include the following:
• When is ownership being transferred: upon conclusion of the sale agreement or upon delivery?
• Do the laws of the purchaser’s jurisdiction accept a retention of title even when it was agreed under foreign law? If so, are there any formal requirements, such as a need for registration or that the retention of title must be explicitly agreed in writing?
• What is the effect on the seller’s rights of the goods being co-mingled with other goods or being processed into other goods?
• Is the purchaser allowed to sell to a third party any goods delivered under retention of title; and if so, is the seller entitled to the purchase price paid to the purchaser by that third party?
• What are the requirements for enforcing a retention of title when the purchaser is in default?
• If the seller recovers the goods after part of the purchase price has been paid, is he obligated to refund the purchaser what was paid in whole or in part?
• To what extent does the insolvency of the purchaser have an impact on the seller’s rights?
Clearly, the seller should not wait until the purchaser has been declared bankrupt to start thinking about these questions, and not even wait until after delivery of the goods or after entering into the sale agreement. Doing that would greatly enhance the chance that the seller is too late and already has lost title to the goods and possibly also the prospect of getting paid. Especially when it concerns goods of considerable value or when the seller intends to sell goods to the same purchaser on a regular basis, it is absolutely vital to know the answers to those listed above. Such preparatory action can save the seller an awful lot of trouble.