Introduction
This essay provides legal advice to Scarlett, the liquidator of Accord Paper Ltd., a company in compulsory liquidation, concerning the competing claims over assets involving Westland Timber Ltd. and Accord’s bank. The central issue revolves around a retention of title (ROT) clause in contracts between Accord and Westland, asserting Westland’s ownership over supplied timber and derived products until payment is made. Additionally, Accord’s bank holds a registered floating charge over “all stock and inventory” and cash in Accord’s account, creating a conflict of claims over the assets. This analysis will examine the enforceability of the ROT clause, the status of specific goods and proceeds, and the priority of claims under UK insolvency law and commercial law principles. The essay will address these issues systematically, focusing on the legal implications for the spruce pulp, aspen logs, and sale proceeds, while advising Scarlett on her duties as a liquidator. The discussion will draw on relevant statutes, case law, and academic commentary to provide a balanced perspective within the scope of commercial law.
Legal Framework: Retention of Title Clauses and Floating Charges
Retention of title clauses are contractual mechanisms allowing a seller to retain ownership of goods until payment is received, even after delivery to the buyer. In the UK, such clauses are recognised under the Sale of Goods Act 1979 (SGA 1979), specifically section 19, which permits a seller to reserve title until conditions, such as full payment, are met. The efficacy of ROT clauses, however, depends on their precise wording and whether they cover goods in their original form or extend to derived products and proceeds, as highlighted in landmark cases like Armour v Thyssen Edelstahlwerke AG [1990] 3 All ER 481, where a simple ROT clause was upheld for unchanged goods (Armour, 1990).
Conversely, a floating charge, as held by Accord’s bank, is a security interest over a class of assets, such as stock and inventory, which crystallises into a fixed charge upon certain events, including liquidation. Under the Insolvency Act 1986 (IA 1986), section 245, floating charges created within a specified period before insolvency may be invalid, but since the charge in this case was registered in 2021 and no evidence suggests proximity to insolvency, it is presumed valid. The interplay between an ROT clause and a floating charge often hinges on whether the goods remain identifiable and whether the charge has crystallised, as discussed in Re Spectrum Plus Ltd [2005] UKHL 41, which clarified the nature of floating charges (Re Spectrum Plus Ltd, 2005).
Analysis of Westland’s Claim Under the Retention of Title Clause
Westland’s ROT clause reserves title in the “Goods (and products derived from them)” until payment, establishing a fiduciary relationship where Accord holds goods as bailee and proceeds as trustee. This comprehensive wording suggests an intention to cover both original goods and manufactured products, as well as proceeds from sales. However, the enforceability of such extended clauses is not absolute. In Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676, the court upheld an ROT clause over proceeds where a fiduciary relationship was established, but subsequent cases like Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 25 have limited such claims when goods are mixed or transformed, extinguishing the seller’s title (Romalpa, 1976; Borden, 1981).
For the first invoice (10 tons of spruce pulp), two tons were sold for £600, with proceeds in Accord’s bank account. Under a strict interpretation of Romalpa, Westland could claim the proceeds as trustee-held funds, provided the bank account remains identifiable and unsegregated from other funds. However, the floating charge over cash in Accord’s account complicates this, as discussed later. Of the remaining eight tons, six were processed into paper rolls with 1% cotton fibre. While the rolls are identifiable as Westland’s pulp, the mixing with cotton may preclude Westland’s claim under Borden, where transformation negated title retention. The unprocessed two tons of pulp, mixed with two tons from another supplier in a tank, further challenges Westland’s claim due to loss of identifiability, a key requirement under SGA 1979.
Regarding the second invoice (18 tons of aspen logs), stored separately and marked as Westland’s, the goods remain identifiable and unchanged. Here, Westland’s claim appears stronger, as in Armour v Thyssen, where title was retained over unchanged goods. Scarlett must recognise that Westland likely has a valid claim over the aspen logs, subject to the bank’s floating charge.
Competing Claim: Accord’s Bank and the Floating Charge
The bank’s floating charge over “all stock and inventory” and cash in Accord’s account presents a significant challenge to Westland’s claims. Upon liquidation, a floating charge typically crystallises, converting into a fixed charge over the company’s assets at that point, as per Re Spectrum Plus Ltd. This means the bank has a secured interest in Accord’s stock, including the spruce pulp/paper rolls and aspen logs, and the £600 in the bank account. Under IA 1986, section 175, secured creditors generally take priority over unsecured creditors in liquidation, though ROT clauses can sometimes displace a charge if the goods are not part of the charged assets due to reserved ownership.
However, for goods subject to a valid ROT clause, legal ownership may not pass to the debtor (Accord), meaning they fall outside the scope of the charge, as argued in Hendy Lennox (Industrial Engines) Ltd v Grahame Puttick Ltd [1984] 1 WLR 485 (Hendy Lennox, 1984). Applying this to the aspen logs, if Westland’s title is upheld, the bank’s charge may not attach. For the transformed spruce pulp and mixed goods, where Westland’s title is likely extinguished, the bank’s charge would prevail. Regarding the £600 proceeds, since the floating charge extends to cash, the bank has a stronger claim unless Westland can prove a distinct trust relationship over the specific funds, which is uncertain post-mixing in a sole account.
Scarlett’s Role and Practical Considerations as Liquidator
As liquidator, Scarlett’s primary duty under IA 1986, section 107, is to realise Accord’s assets for the benefit of creditors, adhering to the statutory order of priority. She must assess the legal strength of each claim while maintaining impartiality. For the aspen logs, given their identifiability, Scarlett should lean towards recognising Westland’s claim, potentially returning the goods or their value, subject to legal challenge from the bank. For the spruce pulp and paper rolls, the transformation and mixing weaken Westland’s position, and Scarlett may justifiably prioritise the bank’s charge. Regarding the £600, Scarlett should note the bank’s superior claim unless Westland can evidence a segregated trust, which seems unlikely.
Furthermore, Scarlett must consider the costs of litigation if disputes escalate. Liquidators are often encouraged to seek court directions under IA 1986, section 112, to resolve contentious claims, especially where legal uncertainty persists, as in the case of proceeds. Practically, she might also negotiate a settlement between Westland and the bank to avoid protracted disputes, thereby preserving value for other creditors.
Conclusion
In summary, Scarlett faces a complex task in navigating the competing claims of Westland Timber Ltd. and Accord’s bank during the liquidation of Accord Paper Ltd. Westland’s ROT clause provides a strong basis for claiming the aspen logs due to their identifiability and unchanged state, but its application to the transformed spruce pulp, mixed goods, and sale proceeds is significantly weaker under established case law such as Borden. Conversely, the bank’s floating charge likely prevails over assets where Westland’s title is extinguished and over cash in Accord’s account. Scarlett must balance these legal principles with her duties as liquidator, potentially seeking court guidance or facilitating a settlement to resolve ambiguities. This case underscores the intricate interplay between ROT clauses and security interests in insolvency, highlighting the importance of clear contractual terms and asset identifiability in commercial transactions. Ultimately, Scarlett’s decision-making will shape the distribution of Accord’s limited assets, with broader implications for creditor recovery in similar insolvency scenarios.
References
- Armour v Thyssen Edelstahlwerke AG [1990] 3 All ER 481.
- Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 25.
- Hendy Lennox (Industrial Engines) Ltd v Grahame Puttick Ltd [1984] 1 WLR 485.
- Insolvency Act 1986, sections 107, 112, 175, 245. London: HMSO.
- Re Spectrum Plus Ltd [2005] UKHL 41.
- Romalpa Aluminium Ltd, Aluminium Industrie Vaassen BV v [1976] 1 WLR 676.
- Sale of Goods Act 1979, section 19. London: HMSO.
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