section 176A ‘prescribed part’ fund for unsecured creditors. Other steps remain possibilities, such as a compulsory tort liability insurance mechanism designed to reduce the unfairness involved in subsidies from involuntary non-adjusting, unsecured tort creditors.

Retention of title and quasi-security

In chapter 3 it was noted that many companies raise finance and arrange the use of assets by using sale arrangements in a manner that substitutes for security. ‘Quasi-security’ devices such as retentions of title, hire purchase and leasing agreements, factoring and sale and lease-back contracts are used in order to supply credit but avoid the scope of pari passu by keeping the assets at issue out of the corporate insolvency estate. The efficiency considerations attending the use of such devices were considered in chapter 356 and concerns noted on a number of fronts: that quasi-security devices may produce inefficient transfers of insolvency wealth away from unsecured creditors; that quasi-security undermines the efficiencies associated with security because it increases the uncertainties associated with lending; that poor information on the use of quasi-security devices and legal unknowns produce unnecessary uncertainties; and that quasi-security devices do not, in reality, deliver real protections for creditors who resort to them.

Before questions of fairness are addressed, it is as well to make clear the nature of the legal limitations that affect quasi-security devices. Rather than deal with all varieties of quasi-security, one example of the genre – the retention of title (ROT) clause – will be focused on here. To commence, the terms upon which title to goods can be retained by a creditor should be outlined.57

56See pp. 125–33 above.

57See generally S. Wheeler, Reservation of Title Clauses (Oxford University Press, Oxford, 1991); Wheeler, Reservation of Title Clauses: Impact and Implications (Clarendon Press, Oxford,

1992); I. Davies, Effective Retention of Title (Fourmat, London, 1991); G. McCormack, Reservation of Title (2nd edn, Sweet & Maxwell, London, 1995); G. Moffat, Trusts Law: Text and Materials (4th edn, Cambridge University Press, Cambridge, 2005) ch. 15; Sir G. Lightman and G. Moss, The Law of Administrators and Receivers of Companies (4th edn, Thomson/Sweet & Maxwell, London, 2007) ch. 17. On the importance and enforcement of ROT clauses see S. Wheeler, ‘Capital Fractionalised: The Role of Insolvency Practitioners in Asset Distribution’ in M. Cain and C. B. Harrington (eds.), Lawyers in a Post Modern World: Translation and Transgression (Open University Press, Buckingham, 1994). On the interaction of unjust enrichment, restitutionary techniques and retention of title see G. McMeel, ‘Retention of Title: The Interface of Contract, Unjust Enrichment and Insolvency’ in F. Rose (ed.), Restitution and Insolvency (Lloyd’s of London Press, London, 2000).

642 gathering and distributing the assets

A simple ROT clause will involve a provision in a contract of sale that stipulates that property in the goods being sold will not pass from seller to buyer until the purchase price has been paid in full.58 Such a clause will not require registration as a security interest in order to be effective.59

In more complex arrangements, sellers may attempt to reserve title not merely in the original goods (for example, raw materials) but also in the proceeds of sale of such goods or in products manufactured from such goods or in the proceeds of sale of such products.60 In the Romalpa case61 the Court of Appeal held that when a seller S supplies goods to buyer B under a ROT clause and authorises B to sell the goods on condition that B accounts for the proceeds of sale, S may, on B’s insolvency, rely on the fiduciary relationship established62 and have an equitable right to trace those proceeds and prevent them from falling into the insolvent estate of B. (A key issue is whether the relationship created between the parties is fiduciary rather than merely that of debtor to creditor.) By such use of a ROT clause, S is given a right in rem in the

58See Sale of Goods Act 1979 s. 19(1) (the statutory basis for ROT clauses). If a seller attempts to reserve merely equitable, as opposed to legal, title to the goods this will be treated as a charge void for non-registration: see Re Bond Worth Ltd [1979] 3 All ER 919. On the EC Late Payment Directive and Member States’ obligations to recognise contractually agreed-upon ROT clauses see G. McCormack, ‘Retention of Title and the EC Late Payment Directive’ [2001] 1 JCLS 501.

59See Aluminium Industrie Vaassen BV v. Romalpa Aluminium Ltd [1976] 1 WLR 676;

Armour v. Thyssen Edelstahlwerke AG [1990] 3 WLR 810, [1991] 2 AC 339. In its initial

deliberations on these issues, the Law Commission had strongly favoured the registra-

Commission decided to give such matters further consideration in a wider context going beyond company security interests: see McCormack, ‘Law Commission and Company Security Interests’, p. 3.

60The danger with a complex ROT clause is that it will be found by the courts to create a registrable charge and will be void if not registered under the Companies Act 2006 s. 860: see, for example, E. Pfeiffer WW GmbH v. Arbuthnot Factors Ltd [1988] 1 WLR 150, [1987] BCLC 522; Carroll Group Distributors Ltd v. Bourke Ltd [1990] ILRM 285; Compaq Computers Ltd v. Abercorn Group Ltd [1992] BCC 484.

61Aluminium Industrie Vaassen BV v. Romalpa Aluminium Ltd [1976] 1 WLR 676.

62For criticisms of this point see J. Ulph, ‘Equitable Proprietary Rights in Insolvency: The Ebbing Tide?’ [1996] JBL 482 at 498; R. Bradgate, ‘Reservation of Title Ten Years On’ (1987) Conv. 434 at 440; J. de Lacy, ‘Romalpa Theory and Practice under Retention of Title in the Sale of Goods’ (1995) 24 Anglo-American Law Review 327 at 337.

proceeds and does not have to compete with the creditors for a share in B’s insolvency estate.63

In the Romalpa instance, the aluminium foil had not been processed or mixed with other goods. When, however, materials are supplied subject to a ROT clause and there is such a processing or mixing, an issue is whether the seller can rely on the ROT clause to trace into the product that results from processing or mixing. A distinction is to be drawn between cases of mixing goods and instances in which the goods have been processed so as to lose their identity.64 In the Borden65 decision, resin was supplied for use in the manufacture of chipboard and the Court of Appeal held that if S sells goods to a manufacturer knowing that the goods will be subject to the manufacturing process before being sold, there is no fiduciary relationship between S and B and S cannot rely on a simple ROT clause to ensure tracing: a right over the finished product will have to be provided for by express contractual stipulation.66 Borden thus leaves open difficult issues concerning the point at which the seller’s goods lose their identity and become a new product.67 Where the sold goods have been mixed with other goods and are identifiable readily and can be separated easily then the seller can retain them.68 Where, moreover, the goods have been mixed with similar goods then, even if

63If a buyer has become insolvent then the seller can achieve ‘debt recovery’ via his ability to assert a right in rem. If, on the other hand, the proprietary remedy available to the seller is confined to operating by way of a security charge, then, as noted above, ROT sellers invariably lose out upon the buyer’s insolvency due to their failure to register the security charge as per the Companies Act 2006 s. 860.

64See M. Phillips, ‘Retention of Title and Mixing – Exploding the Myth’ (2007) 20

Insolvency Intelligence 81.

65Borden (UK) Ltd v. Scottish Timber Products Ltd [1981] Ch 25. See also Re Bond Worth Ltd [1980] Ch 228; Re Peachdart [1984] Ch 131.

66For an example see a High Court of Australia case involving the sale of steel and claimed entitlement to products manufactured with the steel: Associated Alloys Pty Ltd v. ACN 001 452 106 Pty Ltd [2001] HCA 25, [2000] 202 CLR 588 – discussed in K. Stock, ‘Australian Developments in the Law of Retention of Title’ (2002) 15 Insolvency Intelligence 1; J. de Lacy, ‘Corporate Insolvency and Retention of Title Clauses: Developments in Australia’ [2001] Ins. Law. 64. (In Associated Alloys the majority of the High Court distinguished the English cases and held that a ROT clause could be drafted allowing the seller to trace proceeds of sub-sale by way of trust: see further Lightman and Moss, Law of Administrators, p 475.)

67For discussion see J. de Lacy, ‘Processed Goods and Retention of Title Clauses’ [1997] 10 Palmer’s In Company; Ulph, ‘Equitable Proprietary Rights in Insolvency’; A. Hicks, ‘When Goods Sold Become a New Species’ [1993] JBL 485; P. Birks, ‘Mixing and Tracing’ (1992) 45(2) Current Legal Problems 69.

68Hendy Lennox (Industrial Engines) Ltd v. Grahame Puttick Ltd [1984] 1 WLR 485. See Phillips, ‘Retention of Title and Mixing – Exploding the Myth’.

644 gathering and distributing the assets

separation is not possible, title may be retained where it is possible to decide the retaining party’s contribution to the total stock of the goods. In CKE Engineering,69 Judge Norris QC ruled that where, by agreement, a zinc ingot had been mixed and melted with other zinc, there was no difficulty in two companies agreeing that the contents of the melting tank should be treated as owned in proportion to their contributions and in giving effect to a ROT clause with respect to an agreed proportion of the mixed goods.70 Case law post-Borden suggests that when attempts are made to draft ROT clauses so as to retain title in new products or proceeds thereof, the courts will construe these as intending to vest legal ownership of the manufactured product in the hands of the buyer subject only to a registrable charge in favour of the seller.71 It may, however, be possible for the seller and buyer to agree which of them is to become the owner of any manufactured product: this was the suggestion of Goff and Oliver LJJ in Re Clough Mill Ltd.72

From a creditor’s point of view, a particularly useful version of the ROT clause is the ‘all-monies’ provision which retains title in the seller’s hands until all debts owed to the seller on any grounds are fully paid. (It has been suggested that about half of all ROT clauses are of the ‘allmonies’ kind.)73 In an insolvency a benefit of such a clause is that it is not necessary to identify which items in a stock of supplied goods have been paid for: with an ‘all-monies’ clause all of the stock remains the seller’s property. It is arguable that such reference to obligations unconnected with the immediate sale should be viewed as involving a charge, but in the Armour74 case the House of Lords did not regard such a clause as creating a right of security and unanimously held that all-monies clauses are ‘legitimate retention of title’.75

69Re CKE Engineering Ltd (in administration) [2007] BCC 975.

70See also Spence v. Union Marine Insurance Co. Ltd (1867–8) LR 3 CP 427; Sandeman and Sons v. Tyzak & Branfoot Steamship Co. Ltd [1913] AC 680; Glencore International AG v. Metro Trading International Inc. (No. 2) [2001] 1 Lloyd’s Rep 284.

71Re Peachdart [1984] Ch 131.

72[1985] 1 WLR 111, 115, 124. See also Re CKE Engineering Ltd (in administration) [2007] BCC 975. See further de Lacy, ‘Corporate Insolvency and Retention of Title Clauses’, pp. 70–5.

73See A. Hicks, ‘Retention of Title: Latest Developments’ [1992] JBL 398 at 400; J. Spencer, ‘The Commercial Realities of Reservation of Title Clauses’ [1989] JBL 220 at 227: in Spencer’s survey 59 per cent of materials suppliers (of various sizes) said that they used ROT clauses.

74Armour v. Thyssen Edelstahlwerke AG [1990] 3 All ER 481, [1990] 3 WLR 810.

75See Hicks, ‘Retention of Title’, p. 403 and also the discussion therein on part-payment.

The value of an all-monies clause is particularly high when the value of the goods sold is rising. If, for example, paintings are supplied by A to a gallery B under an all-monies arrangement, retained ownership of these will operate in effect as security for the debt the purchaser owes in relation to the purchase price for the paintings but also for other debts (for example, relating to furnishings supplied by A to B under other contracts). Keeping an asset of escalating value out of the insolvency estate has the effect of advancing in priority a series of formerly unsecured debts beyond the immediate transaction. It places that asset out of the reach of floating charge holders76 and ordinary unsecured creditors.77

Do ROT clauses offer a means of bypassing pari passu that creates unfairness? A first key consideration here is that, as noted, ROT clauses do not have to be registered.78 Unsecured creditors may, accordingly, be unfairly misled concerning the insolvency risks they are running when they supply goods on credit to a company.79 Trade suppliers, for instance, may see an array of assets in their debtor’s possession but these assets may belong to other parties and there is no register that can be resorted to so as to reveal this information. The existence, never mind the nature and extent, of the ROT clauses will remain invisible.80 Not only is the pari passu principle bypassed but so are the disclosure protections attending the use of security devices.

Matters are made yet worse for the unsecured creditors referred to because corporate accounts will routinely treat goods supplied under ROT arrangements as purchases by the debtor company. Goods which are not the property of the company concerned thus commonly appear as assets in the balance sheet and it is rare for auditors’ notes on accounts to

76But see judges’ comments re the hypocrisy of banks complaining of ROTs when they have the floating charge: Re Clough Mill Ltd [1985] 1 WLR 111.

77The Cork Report, para. 1645, recommended that ROTs should be restricted to the price outstanding on the goods involved in the transaction and that securing the payment of moneys beyond this should be achieved by the creditor using a fixed or floating charge.

78The CLRSG recommended in 2001 that a notice-filing system be introduced for company charges. Complex retention of title clauses would be registrable but not simple

ROTs: see CLRSG, Final Report, para. 12.60. See also the Law Commission, Consultation Paper No. 164, Registration of Security Interests: Company Charges and Property other than Land (July 2002); Law Commission, Company Security Interests: A Consultative Report (Law Com. No. 176, September 2004); Law Commission, Company Security Interes ts (Law Co m. No . 2 96, Au gu st 200 5). Se e p . 6 48 b elow.

79See Cork Report, paras. 1631–65.

80See A. Belcher and W. Beglan, ‘Jumping the Queue’ [1997] JBL 1, 16–17.

646 gathering and distributing the assets

mention retentions of title.81 As has been commented about ROTs: ‘they remain invisible until they become important’.82

When the Cork Committee took evidence on ROTs, a ‘cry for certainty’ was made by ‘consultee after consultee’.83 The complaint was that claims involving ROTs were often confused and that, without clarity, the prospect of expensive litigation overshadowed commercial life. Cork’s response was to accept that such complexities could not be avoided and could be negotiated around.84 It could be contended, however, that all unnecessary legal uncertainties compound the informational unfairness that ROTs can occasion.

A second basis for seeing ROTs as conducing to unfairness is that such devices are not equally available to all creditors. The costs of using ROTs may be relatively low for many suppliers because standardised contracts can be employed but, as noted in chapter 3, the suppliers of certain goods, such as fuels, paint, food and fodder, are unable to use ROTs at all because such materials disappear on consumption and leave the creditor with an unsecured claim.85 The effect is to load insolvency risks unduly onto the shoulders of those suppliers who happen to deal in goods that are consumed in the short term. A similar point can be made in relation to those suppliers who are repeat players and those who are engaged in a series of ‘one-off’ transactions. The latter may find it far more difficult to impose ROT clauses on their debtors.

A third cause of unfairness may arise from the use of ROTs to secure debts beyond the immediate transaction. As already noted, this is a particularly acute problem where the asset involved is of escalating value. That growth in value, combined with an all-monies (or all-liabilities) clause, will not be a windfall that becomes available to the body of unsecured creditors but will serve to prioritise certain unsecured debts (those owed to the asset supplier) and will ultimately86 leave other unsecured creditors looking at a smaller insolvency estate than they anticipated.

Such unfairnesses as are noted may be compounded by inequalities of bargaining power. Powerful creditors will be able to impose ROT clauses

81C. Williams, ‘Retention of Title: Some Recent Developments’ (1991) 12 Co. Law. 54.

82Belcher and Beglan, ‘Jumping the Queue’, p. 17.

83Cork Report, para. 1627. 84 Ibid., paras. 1628–9.

85Contrast the situation and approach taken regarding processed goods in the Antipodes: see Re Weddel (NZ) Ltd [1996] 5 NZBLC 104; Associated Alloys Pty Ltd v. ACN 001 452 106 Pty Ltd [2001] HCA 25, [2000] 202 CLR 588; de Lacy, ‘Processed Goods and Retention of Title Clauses’ and ‘Corporate Insolvency and Retention of Title Clauses’.

86Of course the floating charge holder is the first to ‘suffer’.

on debtors but those with less market power (or subject to more competitive circumstances) may be unable to retain title.87 The ROT is accordingly a device that may prove unfair in so far as it shifts insolvency risks to those who are the newest and weakest players in the market.

There is an argument, however, that use of ROT clauses can be conducive to fairness. The Cork Committee did not advocate the outlawing of ROT clauses in insolvency, noting that this would usually benefit floating charge holders, not unsecured creditors, and stating:

suppliers have opted for reservation of title clauses precisely because they seek to avoid the unfairness which results when they supply goods on credit, a floating charge crystallises and a receiver then takes the goods and realises them for the benefit of the debenture-holder leaving the supplier with nothing. It seems to us that suppliers are entitled, in such circumstances, to take steps to protect themselves and that it would be wrong to deny them the protection they seek.88

Cork was disposed not to curtail contractual freedoms more than necessary89 but was faced with its respondents’ ‘wide unanimity’ of view that ROTs should be subjected to disclosure. The Committee recommended that a disclosure requirement along the lines of Article 9 of the US Uniform Commercial Code should be adapted to English needs so that there should be disclosure of names of suppliers imposing ROTs; descriptions of the types or classes of goods covered by the ROT; and the maximum amount that at any one time could be secured by the ROT.90 Consumer goods, as covered by the Sale of Goods Act 1979 (covering goods ordinarily bought for private use or consumption), would, on Cork’s recommendations, not be covered by a disclosure requirement. Cork did not take a view on how far tracing should be allowed to extend but, as noted, did consider that a duly registered ROT should be limited to the price outstanding on the goods immediately contracted for and should not take the all-monies or allliabilities form.

87See Leyland DAF Ltd v. Automotive Products plc [1993] BCC 389 which demonstrates the potential for a ROT clause to contribute to a supplier’s bargaining power, i.e. where continued supplies are vital to a receiver’s attempts to keep a company running (noted in Belcher and Beglan, ‘Jumping the Queue’, pp. 18–19).

88See Cork Report, paras. 1633–4; G. Elias, Explaining Constructive Trusts (Clarendon Press, Oxford, 1990) p. 135: ‘It is only fair that suppliers of goods to businessmen should be able to stipulate for ROTs in respect of the goods which they supply. It would be unprincipled to give the power to take property rights by way of security to the lending institutions and nobody else.’

89Cork Report, para. 1637. 90 Ibid., para. 1638.