Matters to be considered in relation to a claim

September 1994

63.13 Specific matters to be considered

The official receiver needs to be satisfied on each of the following before accepting a claim from a supplier:-

  1. that the wording of the clause extends to cover the goods or monies being claimed (see also paragraph 63.14);
  2. that the clause has been incorporated into the contract (see also paragraphs 63.15 and 63.16);
  3. where the supplier is claiming goods, that they can conclusively be identified as having been provided by the supplier claiming them (see also paragraphs 63.17 to 63.21). Where proceeds of sale are claimed then the monies must represent the proceeds of sale of the items which incorporated the goods from the supplier or the proceeds of sale of the goods themselves (see also paragraph 63.26);
  4. where the clause attempts to claim goods supplied or the proceeds of their sale, but is not an ‘all sums’ clause, that the goods supplied relate to an unpaid invoice (see also paragraph 63.22); and
  5. where the clause is an ‘all sums’ or multi-purpose clause, reference should be made to Part 4 of this chapter for other matters which should be considered by the official receiver. Such matters include deciding whether or not the arrangements create a registerable charge and, if so, that it has been registered with the Registrar of Companies or under the Bills of Sale legislation, for companies and individuals respectively. The registerable charge may be void in respect of an individual if it represents a bill of sale over after acquired property (see particularly paragraph 63.19).

63.14 Extent of the clause

The official receiver should carefully consider the wording of the clause. He should be satisfied that the terms of the clause mean that the supplier retains legal title to the goods or that he is entitled to claim the proceeds of sale of goods sold prior to the insolvency. If the clause goes beyond permitting the supplier to recover unused/unsold goods supplied then a charge is likely to have been created (see paragraphs 63.27 to 63.30). A foreign business may attempt to enforce a clause in England and Wales which is acceptable in its own country (sometimes under the legislation of that country). Where the goods are located in England or Wales, the law outlined in this chapter should be applied. The official receiver should exercise care in dealing with claims by foreign suppliers as a charge or form of security is often created which will be void against the liquidator or trustee if not registered (see paragraphs 63.28 to 63.30). If the official receiver is in doubt about the precise meaning of any clause he should consult Technical Section at HQ London.

63.15 Incorporation of clause

Under the general law of contract the offer made by one party has to be accepted by the other before there is a valid contract. Therefore the official receiver should ensure that the clause was notified to the insolvent prior to the supplier accepting the insolvent’s offer. (However the clause may be valid despite being introduced after the contract was made if the insolvent agreed to it being part of the contract and if there was further consideration by the insolvent in respect of the agreement to amend the contract terms.) The clause will be effectively incorporated into the contract if:-

  1. it is in contractual documentation signed by the insolvent; or
  2. it is contained in an unsigned document which, prior to entering into the contract the insolvent knew contained contract terms even though he was not aware of their effect; or
  3. it was in a document the terms of which the supplier had done all that was reasonably necessary to draw to the attention of the insolvent prior to entering into the contract. It is not necessary for the insolvent to have actual knowledge that the document contained the contractual terms for a clause to be effective and since retention of title clauses are common, such a clause need not have been specifically drawn to the attention of the insolvent.

Further details of the ways in which the clause may be incorporated into the contract are given below.

63.16 Method of informing insolvent of clause

Ideally the terms of business should have been sent to the insolvent prior to entering into any contract (or made clear in any conversation during which the contract was entered into) as well as appearing on all documents. However, this will very rarely be the case and the method used by the supplier to inform the insolvent of his terms of business will vary. The terms may have been notified by the supplier before trading began or in the acknowledgement of the order, quotation, catalogue or price list. Usually the offer to enter into a contract will be an order by the insolvent and the contract will be entered into on the despatch of the acknowledgement of order or despatch of the goods themselves by the supplier. In considering a retention of title claim the official receiver should specifically consider the following matters:-

  1. conflict of the terms of the businesses - If the supplier purported to accept the insolvent’s offer (based upon the insolvent’s terms of business) but the supplier’s terms of business conflict with those of the insolvent, then there will not have been an unconditional acceptance of the insolvent’s offer but instead the supplier will have made a counter offer. If the insolvent then proceeded with the transaction he should be treated as having accepted the supplier’s terms of business and the clause will be part of the contract (Butler Machine Tool Co v Ex-Cell-O Corp (England) Limited [1979] 1 All ER 965). Any changes to the contract terms may be made in writing or orally regardless of the method used to enter into the contract.
  2. contract made verbally - The official receiver should try to establish whether there was any mention of the supplier’s terms of business during the conversation. A short statement should be taken from the person who ordered the goods on behalf of the insolvent if the official receiver considers that it may be difficult to resolve the matter with the supplier based upon the evidence of the relevant person. If there was no mention of the clause during the conversation in which the contract was made and there was no subsequent agreement of both parties that the clause should be part of the contract’s terms, with additional consideration being provided by the insolvent, the supplier’s claim should be rejected. However, where there have been regular transactions between the insolvent and the supplier, the official receiver should apply the terms of business of previous contracts to the contract which is subject to the claim of the supplier where it is shown that the parties intended these to apply (but see also (d)).
  3. clause on the invoice only - if the clause is contained in the terms of business on the supplier’s invoice and was not previously agreed by the insolvent and the supplier, the clause should be rejected by the official receiver. This is because the contract was made prior to the invoice being sent to the insolvent. However, the official receiver should ensure that the invoice was not delivered to the insolvent prior to the delivery or collection of the goods (ie prior to the supplier’s acceptance of the insolvent’s offer) as in this case the clause will have been incorporated into the contract. The clause might also be valid if there was an agreement between the parties after the contract had been entered into, but only if the insolvent provided new consideration for the introduction of the clause as a term of the contract. Where there have been regular transactions between the insolvent and the supplier, the official receiver should apply the terms of business of the preceding contract to the contract which is subject to the claim of the supplier, provided the parties intended that the same terms of business were to apply. Therefore the official receiver should accept a claim on this basis if the clause was notified to the insolvent on an invoice relating to the preceding contract, even though the clause may not have been validly incorporated into the contract to which the invoice relates.
  4. alteration of terms of business - the official receiver should make enquiries to see whether either the insolvent or the supplier have changed their terms of business during the period when the contracts were made for the goods (or just prior to this period in the case of (b) above). If they have, the official receiver should ascertain the details of the changes, the date(s) of those changes and the manner in which the other party was informed of the changes. The official receiver should then ensure that the new terms of business regarding retention of title have been incorporated into the contracts for the goods being claimed.

63.17 Identification of goods - generally

The goods being claimed must be identified as those supplied by the supplier claiming them. The best method of identification is where the goods have serial numbers referred to on the unpaid invoices, or if the goods are marked with the name of the supplier. Where the goods cannot be identified in such a way, the official receiver should make enquiries to ascertain whether the insolvent obtained the same goods from other suppliers. If so, he needs to satisfy himself that the goods being claimed are the actual goods supplied by the supplier claiming them. The insolvent’s records and papers may be useful in seeing whether the insolvent has dealt with more than one supplier for similar goods in the past and the assistance of the company director(s) or bankrupt should also be sought where necessary. The supplier should be allowed access to the insolvent’s premises to inspect the goods held with a view to identifying those which he considers are subject to his claim. The supplier should not of course be allowed to remove any goods until the official receiver is satisfied that the claim is valid. An inventory of the goods held by the insolvent should be made by the official receiver and where possible this should include serial numbers or identifiable markings of those goods thought to be subject to a clause. If the official receiver disposes of goods and the supplier raises objections, perhaps by legal action, there will then be detailed information available to defend the allegations. Identification of some specific types of goods are considered in greater detail in paragraphs 63.18 to 63.21.

63.18 Identification of goods used in manufacturing process

Raw materials sold subject to a clause cease to be caught by it once the manufacturing process has begun (ie once the goods have lost their identity) if the clause was drafted only to retain ownership in the goods until payment was made for them (Borden (UK) Limited v Scottish Timber products Limited [1979] 3 All ER 961) but not where the clause seeks to retain ownership of the finished product (see also paragraph 63.19). In the case of Borden (UK) Limited the resin supplied was manufactured into chipboard and had lost its identity so could not be claimed. Similarly in the case of Re: Peachdart Limited ([1983] 3 All ER 204) leather supplied was cut up and used in the production of handbags. Again the claim to the goods failed as cutting the leather was considered to be sufficient to create a new product. However, it may be possible for the supplier to retain title to the goods supplied even if they have been used in a manufacturing process, provided the goods are still identifiable, in their original form and easily removable (Hendy Lennox (Industrial Engines) Limited v Grahame Puttick Limited [1984] 2 All ER 152). In this case the view was expressed that an engine bolted to a generator set did not lose its identity as an engine and therefore any ownership rights that existed prior to incorporation into the generator set were unaffected. Where a clause seeks to retain title to goods which have lost their identity, the supplier’s claim is likely to be invalid unless the clause has been registered as a charge under the Companies Act 1985 for a company or under the Bills of Sale Act 1878, for an individual (see also paragraphs 63.28 and 63.29). Additionally, in the case of an individual, if the charge is over future acquired property it is likely to be void (see below).

63.19 Retaining ownership once goods manufactured

(amended August 2012)

The supplier may have become the owner of a new product manufactured by the insolvent where it incorporates the supplier’s goods, provided the supplier and the insolvent agreed to this as part of the contract terms. However where the insolvent would have been entitled to the goods on the payment of the outstanding amount of the invoice, a charge is likely to have been created. In the case of a company, a charge should have been registered, otherwise it is void against the liquidator. In the case of an individual the charge, to the extent that it covers future acquired chattels, is likely to be void (by virtue of Section 5 of the Bills of Sale Act (1878) Amendment Act 1882) unless the property falls within section 6 of the Bills of Sale Act 1882 (certain fixtures) or the property is substituted for property forming part of the security on the original execution of the Bill. If the Bill is not void it will require registration under the Bills of Sale legislation (see paragraph 63.29). The official receiver should therefore reject a supplier’s claim to the insolvent’s manufactured goods on the basis that the goods supplied have lost their identity, except in company cases where a charge has been registered with the Registrar of Companies to the extent that it covers future acquired chattels. Where the supplier is entitled to the manufactured goods, he will have a duty to take reasonable care to obtain a proper price for the goods on disposal. The official receiver should, when the goods are handed over to the supplier, request that any surplus made on the sale is passed to the liquidator or trustee. There is some doubt as to whether a clause relating to a claim to products incorporating material supplied by the supplier is a bill of sale or is registerable under section 860 of the Companies Act 2006. Such cases should therefore be referred to Technical Section.

63.20 Identification of goods fixed to land

Where the goods being claimed have been fixed to land, the goods become fixtures and are deemed to be part of the land. (Generally a fixture must have an actual connection with the property, not just be brought into contact with it, but should not be part of the original building). The rights in goods will normally be lost when they are fixed to land, but there are certain exceptions. If it is alleged that goods have wrongfully been fixed to land, the official receiver should consult Technical Section at HQ London.

63.21 Identification of fungible goods

Where "fungible" goods (ie. - goods which are moveable and are estimated by weight, number or measure eg. - grain) are mixed with those of the insolvent (or other suppliers), the supplier may have stipulated in the contract that the mixed goods will be held by the parties as tenants in common. Whether or not such a term appears in the contract, the official receiver should permit the supplier to remove the proportion of the goods which he supplied that are amongst the mixed goods provided:-

  1. the supplier’s goods have been mixed with identical goods and so have not lost their identity; and
  2. that the official receiver is satisfied on the validity of all other aspects of the claim.

It will also be necessary to take account of any goods that had previously been removed from the bulk in order to calculate the supplier’s share.

63.22 Goods or sale proceeds claimed relate to an unpaid invoice

Except where there is an ‘all sums’ clause (see paragraph 63.25), the official receiver should ensure that the goods or sale proceeds subject to the claim relate to an invoice for which full payment has not been made, otherwise the claim should be rejected. This is a matter for the supplier to prove. Where there has been regular business between the insolvent and the supplier, payments on account may have been made. The official receiver should usually apply the monies paid by the insolvent to discharge the invoices in date order starting with the earliest invoice. However, if the monies were clearly allocated to a particular invoice, then it is those goods that were paid for. Where a claim relates to a partly paid invoice, reference should be made to paragraph 63.23.

63.23 Partly paid invoices

Where a claim relates to a partly paid invoice, the manner in which the official receiver should proceed depends upon the terms of the contract. The guidance in this paragraph applies only where ownership of the goods has not passed to the insolvent eg as a result of a charge being created by the clause. Since where title has passed the supplier will only be able to prove in the insolvency for the price of the goods. Where there has been a part payment for goods the official receiver should ensure that the contract provides for the supplier to retain title to the goods until the supplier received payment in full for those goods. Where title has not passed and the supplier seeks to recover the goods, he should give credit for any part payment, but he may be able to off-set any sums so paid against amounts owed to him by the insolvent (including any claim the supplier may have for damages for breach of contract).

Where the contract for the purchase of specific goods provides that title in the goods does not pass until payment is made, the official receiver should treat the goods as the property of the supplier if payment has not been made (assuming the claim is valid in all other respects). This will be the case even if the supplier has claimed, sued or obtained judgment for the sum owed prior to the insolvency order. However, where the contract provides that the insolvent has failed to pay the debt and the supplier has a choice of terminating the contract and recovering the goods or seeking to recover the debt, the commencing of an action for the debt will have passed title in the goods to the insolvent, unless there was an agreement to the contrary. Conversely, where the supplier decided to recover the goods in such circumstances, he will have been precluded from taking legal action but unless there was a contrary agreement he may still have a claim in the insolvency for breach of contract, as well as the right to recover the goods from the Official Receiver’s possession. In some circumstances Section 49(2) of The Sale of Goods Act 1979 may allow the supplier to recover the goods and claim in the insolvency proceedings for the value of the goods. Such a claim will normally be dealt with when a distribution is to be made to unsecured creditors and it will therefore fall to an insolvency practitioner to resolve. It is important that the official receiver provides full details of any goods released to suppliers under his authority, when he hands over the estate to the liquidator or trustee. If the official receiver is in doubt on how to deal with a part payment made on an invoice he should consult Technical Section at HQ London.

Notes: [IPROH]

63.24 Rejecting claims generally

Whenever a supplier’s claim to goods or the proceeds of their sale is rejected, the official receiver should ensure that the supplier is recorded as an unsecured creditor of the insolvent.


[Back to Part 2 - Enquiries to be made by the Official Receiver] [On to Part 4 - Additional matters to be considered for 'all sums' clauses and multipurpose clauses]