Suppliers recourse when payment delays

Retention of title clause aims at giving supplier priority over secured and unsecured creditors.

When a financially distressed company is placed under administration in Kenya, it automatically receives a 12-month breathing space from any adverse action being taken or continued by its creditors without court approval.

This gives the company the time it needs to put together a rescue plan or achieve a better outcome for its creditors than would be possible if it went out of business. In the event that this is not achievable, the 12-month moratorium may also be used to realise the property of the company in order to make a distribution to one or more secured or preferential creditors.

The moratorium further applies where a supplier wants to enforce a retention of title clause in a contract. Retention of title is standard practice internationally, and means that where a supplier has delivered goods, the ownership of those goods remains with the supplier until they receive full payment.

The aim of a retention of title clause is to give the supplier priority over secured and unsecured creditors of the company in the event that certain instances listed in the clause take place.

Instances usually included are insolvency or the commencement of insolvency proceedings against the company (which includes administration).

SUPPLIER MUST SEEK CONSENT FIRST

To invoke its retention of title clause and reclaim its goods, the supplier would usually approach the administrator appointed to handle the distressed company’s financial affairs. If the administrator declines consent, the supplier would turn to the courts for consent.

No steps regarding a retention of title clause can be taken without the consent of the administrator or the permission of the court. This prohibition also applies during any interim moratorium in place before an administrator’s appointment takes effect.

The steps outlined above in relation to retention of title clauses when companies are placed under administration are applicable in Kenya, under the Insolvency Act, 2015.

This might come as a surprise in Kenyan business circles as administration is a relatively new option for companies in financial distress.

ENSURING ENFORCEABILITY

In order to be enforceable, a retention of title clause must have been properly drafted in the contract between the company and the supplier. The supplier should take care to ensure that

both the legal and beneficial title to the goods is retained; the supplier has a right to enter the company’s premises and repossess the goods; there is an easy way to identify the supplier’s goods.

For example, the company may be required to mark them in a certain way or store them separately from other goods; and there is clarity on the circumstances under which it can demand payment for the goods and, upon non-payment, repossess them.

A supplier will want to require that the company insure the goods to protect against the risk of these being damaged or destroyed while in the company’s possession, and to ensure the supplier’s interest is noted in the policy.

A company on the other hand will want to ensure that title to the goods passes on delivery or, if the goods are paid for before delivery, as soon as the payment is made.

MAKING CLAUSES MORE ROBUST

A simple retention of title clause can be made robust by including other clauses such as all monies clauses, proceeds of sale clauses, or a mixed goods clause.

The parties should always take into account the type of goods supplied. Retention of title will be of little value to a supplier where the goods are perishable or have a low scrap or resale value.

For the most part, it pays to be painstaking about retention of title clauses, whether from the perspective of the supplier of goods or the company buying them, and to be aware of how retention of title relates to administration. To be forewarned is to be forearmed.

The writer is partner, Bowmans.