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There are many issues that can hinder the collection of book debts and insolvency (of either the creditor or the debtor) is usually the catalyst for most them. Following an insolvency, those attempting to collect book debts are often faced with a number of reasons as to why a debtor can’t or won’t pay, including the set-off / contra arrangements, product warranty concerns, defective or non-delivery of goods or services and last, but not least, retention of title (“RoT”) clauses.

For financiers who have taken an assignment of such book debts (i.e. a factor or invoice discounter) or provided finance for the purchase of goods for onward sales, RoT clauses in its client’s supply chain can cause particular concern given a debtor is unlikely to pay for goods where it is not clear they will obtain good title or who they should pay to obtain good title. To understand the challenges the financier faces in such circumstances, it is helpful to briefly review the types of RoT clauses that are commonly used, the enforceability of them and the risks to the financier where valid RoT claims bite.

Types of clauses

RoT clauses start at the basic level and then get more and more far reaching with the intention of providing the unpaid seller with additional levels of protection.

At the basic level is the “simple” clause where title in a specific item delivered to the buyer will not pass until the buyer has paid for that item.  These clauses are most effective for bespoke products made to order and larger goods which are easily identifiable (e.g. specialist bespoke machinery).

Next up, is the “current account” or “all monies” clause where the seller seeks to retain ownership of the goods delivered until all debts and other obligations of the buyer to the seller are fully paid. These clauses are common where sellers engage in bulk or regular trading activities with buyers on standard credit terms.

Seeking to build on the simple and all monies clauses, sellers may incorporate further terms seeking to:

  • retain ownership in goods even when they are sold on to sub-buyers  – the “extended” or “continuing” RoT clause; and/or
  • acquire ownership of the proceeds of sale of the goods if they are sold to a sub-buyer – the “tracing” or “prolonged” clause and/or
  • where the goods are manufactured into something else, the seller acquires ownership of the resulting property or a proportion of it  – the “aggregation” or “enlarged” RoT clause.


A well drafted RoT clause is one thing, but enforceability of that clause is quite another. There can be a stark contrast between the reality of fast moving commercial trading relationships and the mechanics of the underlying contractual documentation.

Consequently, there are a number of hurdles for an unpaid seller to overcome before it can rely on a valid RoT clause and recover its goods. At the basic contractual level, have such terms been properly incorporated into the contract with the buyer? RoT clauses are commonly found on the reverse of sellers‘ invoices and, without more, this is unlikely to be accepted as binding on the buyer. Further, the buyer may have superseded the seller’s contractual terms by incorporating its own terms (e.g. on a purchase order form).

Where RoT clauses have been properly incorporated into the seller’s contract with the buyer, the next question is whether or not title has been successfully retained. Where the goods are mixed with others, consumed or subjected to a manufacturing process, to the extent the seller is unable to adequately identify the goods it claims title to, then it is unlikely the seller’s claim to recovery of the goods will be successful. Even where the goods can be identified, to the extent the RoT clause is an “aggregation / enlarged” clause seeking ownership of newly formed goods, since this is a claim to something additional to the original goods supplied (the purpose being to secure payment of the unpaid original goods), such a clause is likely to constitute a registrable security interest (i.e. a floating charge). The consequences of failing to register such an interest are addressed below.

If an RoT clause has been properly incorporated into the contractual dealings and title has been successfully retained (because the goods have been adequately identified and, if an “all monies” RoT clause applies, title has not passed to the buyer because obligations remain outstanding to the seller), then it may be possible for the seller to recover its goods from the buyer. This is not so straight forward where the buyer has entered administration as the statutory moratorium under paragraphs 43 and 44 of Schedule B1 to the Insolvency Act 1986, prevents recovery action without the permission of the administrators or the court. Permission may not be granted if recovery will impede the purpose of the administration, cause disproportionate loss to others or if there is undue delay in seeking permission. Recovery of the goods, where permissible, will clearly impact the positon of the financier who has funded the buyer. In this event, the financier may wish to take steps to perfect its client title to the goods or make such other arrangements as may be necessary to ensure any sub-sales of the goods by its client can proceed.

In a sub-sale of the goods by the buyer to a third party customer, has the third party buyer obtained good title where the original supplier remains unpaid?  The basic legal principle here is that a person who does not own property cannot confer it on another (for the latin lovers – “nemo dat quod non habet” or the “nemo dat” rule).  A notable exception to this rule is found in the Sale of Goods Act 1979 and the Factors Act 1889 (still in force) which provide that where a buyer in possession of goods with the consent of the seller delivers them under a sale / agreement for sale to a third person who receives them in good faith and without knowledge of the true owner, then that sale is valid as if expressly authorised by the true owner.

Where sub-sales by the buyer have validly transferred title to a third party, the original supplier (having lost title to the goods) may seek to rely on the provisions of its “tracing” or “prolonged” RoT clause which seek to trace into the proceeds of sale of the unpaid goods.  Such claims will compete with the financiers claims, albeit a financier with a prior registered security interest is likely to have priority.

Leaving aside the practical issues for the unpaid seller in identifying the proceeds of the unpaid goods, where the original supplier’s RoT clause goes further than retaining title and seeks to acquire rights in the proceeds of sale of the goods, this has been deemed a security right registrable under the provisions of the Companies Act. Rarely will such RoT related rights be registered as a security (i.e. as a floating charge over the buyer’s book debts) and therefore the original supplier’s claim to the proceeds of sale will, in most cases, be void as against any creditor, liquidator or administrator of the buyer.  In exceptional circumstances, where a fiduciary relationship has been established between the seller and the buyer, the buyer may be under a duty to account to the seller for the proceeds of sale. Most pure commercial sale transactions will not create fiduciary relationships and RoT clauses which seek to impose such conditions would be closely scrutinised and the courts will look at how the parties conducted themselves in practice as opposed to unrealistic contractual restrictions contained in the sales documentation.

Irrespective of the legal analysis of the supplier’s and the financier’s competing claims to the proceeds of sale,  at a practical level, where there the risk of a potential RoT claim exists, it may be advisable for the financier to seek waivers from the relevant suppliers and ensure, at an appropriate time, that its client’s debtor is on notice as to who it must pay to obtain good title to the goods.

Double RoT?

Given the widespread use of RoT clauses, it will not be uncommon for goods to be purchased and sold on terms which both contain RoT provisions. Where goods are supplied on RoT terms by the original supplier and then sold on by the buyer to a third party customer on terms which also include a valid RoT provision (the “double RoT” scenario) then, if title has not passed to the third party, it may be possible for the original seller to recover the goods directly from the third party customer.

The third party debtor cannot rely on the statutory protections referred to above (the exceptions to the “nemo dat” rule) since its contract with the buyer operates to prevent title passing until payment is made. The possibility that an original supplier can recover goods directly from third party debtors will not be welcome news to a financier who has funded the buyer and taken an assignment of the buyer’s debts owed by that third party for the goods received.  Fortunately for the financier, the original supplier faces a number of challenges here. In addition to the difficulties referred to above (incorporation of terms and identifying the goods), the original supplier will need to identify the third party to whom its buyer has sold the goods and then establish if that third party is still in possession of the goods and has not itself sold them or otherwise consumed them or subjected them to a manufacturing process.  The original seller is unlikely to have any rights to enter the third party’s premises and see above where the third party debtor has entered administration and the statutory moratorium applies.

In most cases the original supplier’s terms will include an express or implied authority for the buyer to sell the goods to a third party and whilst such authority exists and the third party is not in breach of its terms with the buyer (i.e. is within agreed credit terms), an estoppel argument is likely to be raised against any supplier seeking to recover goods from the third party.  With a “simple” RoT clause, the third party can defeat the original supplier’s claim at any time by simply paying the buyer at which point title should pass (with an all monies RoT clause, title may have passed if the third party’s running account with the buyer went into credit or hit a nil balance).

Assuming the above difficulties can be overcome and the third party has not obtained good title to the goods, it remains possible for the goods to be recovered directly by the original supplier, albeit this risk would seem small given the challenges identified. As stated above, where this risk is identified, the financier may wish to put the debtor on notice of its interest and seek advice as to the steps it should take to protect its interests.


RoT clauses remain in common use in commercial transactions and, absent a registered security interest or other form of surety or insurance product, are usually the only protection available to an unpaid seller of goods. As can be seen above, retaining title to goods can be problematic for financiers who have financed the buyer’s purchase or sale of the goods.

For financiers, the existence of RoT clauses in their client’s supply chain will not come as a surprise but, on an insolvency, an enhanced focus on the issue may be necessary and, where RoT risk is present, they should act promptly and seek advice early to ensure their interests are adequately protected.