Retention of title or 'Romalpa' clauses are
standard fare in material supply contracts and arrangements.
Recent changes in insolvency laws make them less reliable and
as a consequence, terms of trade and credit arrangements are
likely to toughen.
Retention of title clauses generally provide that despite
delivery to the builder or to the site, title to the materials
will not pass until payment is received. Often the retention of
title is specified to continue until all debts owed to
the supplier are satisfied.
Accordingly, should the builder become insolvent, the
supplier is, in theory, entitled to repossess its materials, as
opposed to waiting for a potentially much less favourable
outcome of a deed of company arrangement or a disappointing
dividend after a long liquidation process, assuming of course
that there are any crumbs left for the builder and other
unsecured creditors at all.
Under retention of title clauses, as title does not pass
until payment in full, the builder does not own the property
and an administrator, as agent of the company, must hold the
materials on trust for the supplier. Until December 2007, if an
administrator proceeded to sell materials which are the subject
of a retention of title clause, the administrator could be held
liable to pay the supplier damages for "conversion",
(dealing with the materials inconsistently with the
supplier's title to them).
Amendments to the Corporations Act 2001 effected by
the Corporations Amendment (Insolvency) Act 2007 now
give the administrator the right to use and sell property which
is the subject of a retention of title clause. The effect of
the amendment is to protect administrators from liability to
claims as a result of the disposal of goods the subject of a
retention of title clause.
The administrator may be an administrator of a company under
administration or an administrator of a deed of company
arrangement. Generally administrators are prohibited from
disposing of property that is used, occupied by, or in the
possession of the company but which is owned by someone else.
However, s442C of the Companies Act 2001 expressly
excludes from that prohibition disposal of goods:
in the ordinary course of the company's
if it is done with the consent of the owner; or
with the consent of the Court.
Further, if the owner of goods the subject of a retention of
title clause demands the administrator return its goods,
disposal of those goods by the administrator after the demand
does not mean that the disposal is not in the ordinary course
of the company's business1.
The administrator must act reasonably in disposing of the
goods and the proceeds of sale must be set aside to the extent
that they do not exceed the sum owed to the supplier. However,
what is reasonable in the context of a company administration
may represent a very different result to taking goods back and
selling them to another customer at their full value.
The effect of the Corporations Amendment (Insolvency)
Act 2007 is that where it suits an administrator of a
company or deed of company arrangement not to return the
materials, the supplier will lose control of the goods. Whilst
the action taken by the administrator to dispose of the goods
must be "reasonable" in the context of the insolvency
administration that is by no means any assurance that the same
return will be achieved, as if the supplier recovered and
resold the goods to another.
The comfort extended by retention of title clauses has been
eroded. This is likely to dampen materials suppliers'
enthusiasm to extend credit. It also seems likely to increase
the tendency to require credit arrangements to be backed by a
third party or be secured by personal guarantee or other
When determining if a DOCA is to be terminated, public interest can, and often will, outweigh any benefit to creditors.
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