Winding up is the procedure to end a company’s life and the most commonly used method to

such procedure is known as Insolvency. This is commonly seen when a company has lost its

potential to perform its financial obligations. The law regarding such procedures are provided

under the Insolvency Act 19861. Compulsory liquidation can be seen during the dissolution of

a company where an administrator is appointed by the court to investigate the financial status

of the company which led to its failure. In that instance, the responsibilities of the directors

are discontinued and the company’s administration and affairs will be controlled by the

appointed administrator. Later on, a liquidator will identify and secure all the company’s

assets and distribute them to the creditors of the company. According to the statutory

hierarchy of distribution, priority lies on secured creditors who had placed securities by way

of charges, mortgages and etc. This puts unsecured creditors in an unenviable position where

they are unlikely able to collect debts of the insolvent company. Attempts to improve the

position of unsecured creditors by way of including retention of title clauses in their terms and

conditions of sales or taking guarantees are said to have met with hostility from the courts.

Retention of title clauses allows sellers to reserve their title or ownership on goods that are

sold to the purchaser which can be identified. These clauses will provide a reservation of title

or ownership until such debts are fully paid in respect of the contractual agreements.

Retention of title clauses are used by creditors in attempt to gain some ‘priority in the queue’.

Upon successful incorporation of such clauses into a contractual agreement would give rise to

proprietary rights. Thus, the seller would have a better chance getting their money back in the

events that the purchaser defaults payment and the seller has become a creditor. Such clauses

are also known as ’Romalpa clauses’. The effectiveness of such clauses rest in its

incorporation as failure to provide a clear and proper clause would render it invalid. Upon

successful incorporation of such retention of title clauses would allow sellers to recover

unpaid goods delivered to the purchasers upon a failure to pay or until certain conditions are

satisfied. This is expressly provided in S. 19 of the Sale of Goods Act 19792 and has been

commonly applied by business entities ever since the case of Aluminium Industrie Vaasen

(AIV) v Romalpa Aluminium3 which is the pioneer authority in this area of law regarding

retention of title clauses. AIV supplies aluminium to Romalpa who manufactures aluminium

products. AIV has included retention of title clauses in their contractual agreements in the

events Romalpa defaults the payment. Eventually, Romalpa does indeed default their

payment. The court allowed AIV’s claim and recognized the retention of title clauses within

1 Insolvency Act 19862 Sale of Goods Act 19793 [1976] 1 WLR 676

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the contractual agreements and AIV was able to recover the foils and also the proceeds of

sale. Hence, AIV as a seller was able to improve their position as an unsecured creditor

through these clauses which gives them proprietary rights. Another case to be considered

regarding such clauses is the case of Armour v Thyssen4 where the court also held that such

retention of title clauses incorporated into contractual agreements are valid and it is because

of a legitimate retention of title instead of a right granted by the buyer. In simple terms, such

rights can only be granted when the title of the property has passed to the buyer.

Although retention of title clauses gives the impression that it is an effective solution for

sellers to gain proprietary rights in the events that they become creditors in the future, the

practice of such clauses has been proven to be very problematic in many cases. This can be

seen when the clauses in question are not always as simple as in the case of Romalpa. This is

because not all cases involve purely simple retention of title clauses. These clauses are in

some circumstances seen as charges by the courts depending on the contents of the clause. If

it is deemed to be a charge by the courts, failure to register such charges would render it void.

This was emphasized in the case of Clough Mill Ltd v Martin5. The case involves a contract

that contains clauses which allows the seller to claim products made by the materials sold to

the purchaser in the events where the purchaser defaults payment. These clauses are rendered

as being in the nature of a charge by the court and due to their non-registration, it is

considered void. However, the court also confirmed that if the retention of title clauses

incorporated into the contractual agreements was in fact simple retention of title clauses, it

will not amount to a charge and that registration was not necessary. Oliver LJ emphasized that

a charge can only be created by a buyer on its own assets. Thus, if said assets have not

deemed to be passed then it is not possible to create a charge. This approach was also applied

in cases such as Re Bond Worth6 and Borden v Scottish Timber7. The court in these cases

held that the retention of title clauses incorporated into the contractual agreements were void

as the goods are rendered to have passed to the purchasers and they are deemed to be charges.

Thus, upon non-registration of such charges will render it to be void. Hence, the effectiveness

of such retention of title clauses in respect to unsecured creditors are highly questionable

especially in cases involving complicated contractual clauses regarding the retention of title or

ownership of goods sold or goods produced by the materials sold to the purchaser.

4 [1991] 2 AC 3395 [1985] 1 WLR 1116 [1980] Ch 2287 (1979 3 All ER 961

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It is in fact very common for a contractual agreement to include additional complicated

clauses in attempt to improve the seller’s security and also to maximize profit. Businessmen

are naturally greedy and would tend to get the most out of everything especially in contractual

agreements. Thus, retention of title clauses in contractual agreements are rarely simple and

would tend to include many elaborated variation of title retention clauses against the

purchasers in order to improve the seller’s priority and security in the events that they become

a creditor. A perfect example would be the case of Re Peachdart8. The seller in this case sells

raw material leathers to the purchasers who would eventually manufacture them into leather

products. This case involves retention of title clauses in a contract that permits the seller to

retain ownership of the raw materials and goods produced by the raw materials until the entire

debt is fully paid in the events that they become creditors. The courts rejected such retention

of title clauses and held that the creditor only retains the ownership of the raw materials sold

and not the leather products manufactured by the purchaser. The courts justify its decision by

emphasizing that the identity of the original materials sold has changed after manufacture and

would not fall under such retention of title clause. Thus, the issue of whether goods have

indeed changed its identity is a question of fact. This is important to be considered by sellers

when inserting retention of title clauses in their contracts as any clauses regarding the

retention of ownership of after-products will be rejected by the courts. This is illustrated in the

case of Borden v Scottish Timber where resin sold to manufacture cupboards are said to have

changed in its identity. This approach was also used in the case of ModelBoard v Outer Box9

where sheets of cupboard were used to manufacture cupboard boxes are also deemed to have

changed in its identity. However, there are exceptional cases where the courts deemed

otherwise. This can be illustrated in the case of Hendy Lennox v Grahame Puttick10 where

engines that contain serial numbers are not deemed to have changed in its identity despite

having a change in appearance. Hence, the retention of title clauses included by sellers can

only succeed in direct goods sold that have not changed in its original identity.

Another type of additional clause within the title retention clause which sellers would include

in their contract in attempts to improve their security and profits in the events that they

become a creditor is the retention of ownership on the proceeds of resale of goods. However,

such clauses are commonly rejected by the courts. These clauses dictate that the seller would

obtain the proceeds of resale of goods from the purchasers before debts are paid in full. As

mentioned above, the judge in the case of Romalpa allowed the claims for proceeds of sale. In

8 [1984] Ch 1319 [1993] BCLC 623 (Ch)10 [1984] 1 WLR 485

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Romalpa, the court ruled that the defendant was holding the goods as a bailee or agent for the

seller, and therefore, a fiduciary relationship can be found in between the parties. Thus, the

seller was able to trace and claim the proceeds of sale under the defendant’s account using

tracing rules originated from Re Hallett’s Estate11. However, this position in law was quickly

corrected by the subsequent cases and since then Romalpa proves to be the only case allowing

such a claim. In the case of Re Bond Worth, Slade LJ held that claims towards the proceeds of

sale will only succeed when the relationship between the purchaser and the seller is a

fiduciary one. His lordship also held that the relationship between the purchaser and seller is

merely of a debtor-creditor, and therefore equitable rules of tracing do not apply. Clauses

containing claims towards the proceeds of sale are considered as creating a charge, and

therefore it was rendered void for non-registration. The court distinguished Romalpa by

emphasizing the fiduciary relationship as provided expressly in their contract which then

claims for proceeds of resale are allowed.

In the case of Hendy Lennox v Grahame Puttick, the case of Romalpa was again distinguished

and claims towards proceeds of resale was again being rejected on the basis that the contract

in this case only provided the repossession of goods and that there were no implied rights to

proceeds of resale. The case of Re Andrabell12 also held similar judgement where claims

towards proceeds of resale was rejected since it found that there was no fiduciary relationship

between the parties. This pattern of judgement was quite consistently traced along cases that

emerged after. This can be seen in the case of Tatung v Galex Telesure13 where the seller

inserted clauses where the proceeds of sale would belong to the seller absolutely and that they

have to be kept in a separate account for the seller. Phillips J emphasized that these complex

clauses which claims proceeds of sales have created a charge, and have also rejected these

clauses upon non-registration. His lordship also struck out similar clauses in the case of

Pfeiffer Weinkellerei-Weineinkauf v Arbuthnot Factors14. In this case, Phillips J ruled that

purchasers are normally allowed to sell the goods they bought in order to run his business in a

more marketable way. It will normally be done under his own account and not as a fiduciary

to the seller. It was also held that the clauses are drafted in a way that implies the nature of a

seller’s interest on the proceeds of sale which was not of a fiduciary one. Therefore, in

agreeing such clauses, those clauses can be seen as charges and also be rendered void upon

non-registration. Hence, it is now obvious that the courts would likely reject additional

clauses such as clauses retaining after-products with changed identity and also clauses which 11 1880 13 CH D 69612 [1984] 3 All ER 40713 [1989] 5 BCC 32514 [1987] BCLC 522

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claim the proceeds of resale within the retention of title clause where a charge is deemed to

have been created and upon non-registration would render it void. This would definitely give

a negative impact on the position of an unsecured creditor as they cannot highly depend on

additional clauses inserted into the retention of title clause within contractual agreements.

Furthermore, business entities would also improve their security by having guarantees as an

accessory contract to ensure that the obligations between parties of the original contracts are

fulfilled. In the events where the purchaser defaults payment, the guarantor/surety will have to

carry out the obligations of the primary contractual agreements between the debtor and the

creditor. However, as it is a secondary contract, it will not be enforceable if the primary

contract is deemed to be void. In addition, the formalities of a contract must be present and

for such secondary contracts to be enforceable, the guarantee has to have evidence in the form

of writing according to S. 4 of the Statute of Frauds Act 167715. This can be illustrated in the

case of Actionstrength v International Glass Engineering16. The court held that oral

acceptance will not satisfy the formalities of a secondary contract unless induced by the

actions of the guarantor and that acceptance should be in the form of writing.

On the other hand, the courts would discharge the duty of the guarantor in situations involving

alterations/variations made in the original contract agreement without the consent of the

guarantor. These rules are also known as the rules in Holmes v Brunskill17. However, the

courts in the case of Hackney Empire v Aviva Insurance18 states that if it is clear that the

changes made in the original contract are of insignificant importance, the rule in Holmes will

not apply. Another case to be considered is the case of Harvey v Dunbar Assets19. The courts

held that when it involves a number of co-guarantees, the guarantee contract will not be

binding if any of the sub-guarantee contracts are rendered void. This approach was confirmed

in the case of Topland Portfolio v Smith News20 where the court held that if there is a

significant change in the original contract, the guarantor will be discharged. Thus, it is evident

that the courts provide a very strict approach that is unfavourable to creditors regarding

guarantee contracts. However, there are exceptional cases involving a change in the original

contract that the courts have ruled in favour of the creditors. A significant case to be

considered is the case of Levin v Tannenbaum21. The courts in this case held that when there

15 Statute of Fraud Act 167716 [2003] UKHL 1717 (1878) 3 Q.B.D. 49518 [2012] EWCA Civ 17619 [2013] EWCA Civ 95220 [2013] EWHC 144521 [2013] EWHC 4457

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are variations to the guarantee contracts that is not consented by the guarantor, the guarantor

would generally be discharged. However, if such variations involve providing additional time

for debt payment, the guarantor will not be discharged of its guarantee contractual obligations

as it would be extremely unfair and detrimental towards the creditors. This can also be

illustrated in the case of National Merchant Building Society v Mallett22 where the courts in

this case held that a change in the credit limit does not inevitably discharge the guarantor from

its guarantee contractual obligations.

In conclusion, although having guarantees seems like the best option to ensure financial

security of unsecured creditors, there are many cases where the courts will discharge a

guarantor especially in situations involving a variation of the guarantee contract which is very

common in a business context. It is also evident that any attempts to improve the position of

an unsecured creditor by way of including retention of title clauses have met with hostility

from the courts. This is illustrated where clauses included in contractual agreements retaining

title or ownership of goods sold is not highly dependable especially in common situations

where the identity of the goods sold will normally change. Also, additional clauses to claim

the proceeds of resale are also commonly rejected by the courts as it would only allow such

clause involving a fiduciary relationship. Hence, a reform towards the concept of the Romalpa

clause is in fact necessary as it has been proven to be an ineffective weapon for creditors. The

system of registration in US law can be considered here where according to the Uniform

Commercial Code, sellers will be required to obtain a signed agreement from the purchasers

with every contractual agreement regarding the details of security in the events of default

payment satisfied by both parties. The agreement would then be perfected upon being filed in

public office and any documents regarding contractual agreements that are not filed shall not

be binding on third parties and should be rendered void.

Bibliography

22 [2013] EWCA Civ 4526

Beale, H.G. (2012).Chitty on contracts. (31st Ed ed., Vol. II). London: Sweet &

Maxwell Ltd.

Peel, E. (2003). Treitel: The law of contract. (11th Ed ed.). London: Sweet & Maxwell

Ltd.

Sparrow, R. (n.d.). Retention of title: Can ‘all moneys’ clauses and proceeds of sale

clauses ever work?.The Student Journal of Law, Retrieved from

http://www.sjol.co.uk/issue-5/retention-of-title---can-all-moneys-clauses-and-

proceeds-of-sale-clauses-ever-work

Sealy, L. (2009). Commercial law. (4th Ed ed.). Oxford: Oxford University Press.

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