The difficult economic climate means that it is more important than ever for businesses to protect themselves against the risk of key customers or suppliers becoming insolvent. A simple measure that can be taken by suppliers of products to protect themselves against the risk of customers or distributors becoming insolvent is to ensure that the relevant supply agreement or terms of trade includes a properly drafted retention of title clause.
A retention of title clause (also known as a Romalpa clause) is a contractual provision used in supply agreements under which the supplier retains ownership of goods supplied until payment is received. It is common for these clauses to create a trust in favour of the supplier under which the purchaser holds proceeds from the sale of the products supplied as trustee for the vendor.
The intention of these clauses is to give a supplier a right to repossess products supplied in the event of non-payment. Retention of title clauses need to be very carefully drafted to ensure that they are effective in achieving the desired aim.
Even if a supplier is unable to repossess the products supplied, the Corporations Act provides some comfort to suppliers that use retention of title clauses where customers go into external administration. Under section 442CC of the Corporations Act, suppliers that have supplied goods subject to a retention of title clause will rank ahead of other unsecured creditors in an administration.
All suppliers should consider conducting a review of their credit arrangements and trading terms to ensure that they are adequately protected against the risk of customers or distributors becoming insolvent.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
