When a supplier goes under owing you goods

Administration is a change of control, not a pause, and the administrator has no duty to finish your order. What decides your recovery is a narrower question than most buyers expect: on the day, did the goods belong to you?

Problems, in order · Part of Outsourced General Counsel

Administration is not a pause. It is a change of control, and the person now in control of your supplier has no duty to finish your order.

That is the part that surprises people. The purchase order is still a contract, the invoice you paid is still evidence of payment, and none of it obliges an administrator to ship anything. What decides how much you recover is a narrower question than most buyers expect: at the moment the company went in, did the goods belong to you?

Can I go and collect the goods I have already paid for?

The Sale of Goods Act 1979 is unusually blunt about this.

Read that against your own order. If you bought "40 tonnes of resin" and the supplier held 400 tonnes in a silo, nothing was ever ascertained as yours, and on the day of the appointment you were not an owner. You were a creditor who had paid in advance, which is the worst position of the three available: worse than an owner, and worse than a buyer who had not yet paid.

If you bought a specific machine, with a serial number, tagged in the workshop and recorded against your order, the position is usually the opposite. Under section 17 property in specific or ascertained goods passes when the parties intended it to pass, and a contract that says title passes on payment does exactly what it says.

There is a middle case worth knowing about, because it is the one most often missed. Where you have prepaid for a specified quantity out of an identified bulk, section 20A can give you an undivided share in that bulk as a co-owner. The conditions are narrow: the bulk has to be identified in the contract or by later agreement, and you have to have paid. But where they are met, a prepayment that would otherwise have been an unsecured claim becomes a proprietary one.

What should we actually do in the first week?

The order matters. Do the ownership work first, while the warehouse still looks the way it looked on the day of appointment. An administrator's staff will move, consolidate and sell stock, and a claim to identified goods is much harder to make three weeks later from a photograph nobody took.

Write to the administrator with the purchase order, the payment, and the evidence that the goods were set aside. Ask for their position in writing. Ask whether they intend to trade the business on, because an administrator who is selling it as a going concern often does want to complete profitable orders, and that conversation is commercial rather than legal.

And stop the direct debits. Money that leaves after the appointment does not buy you priority. It joins the pool.

Can we sue them for the money?

What you do instead is submit a proof of debt and take your place with the other unsecured creditors. The honest expectation for an unsecured claim in most administrations is a small dividend a long time later, and the prescribed part — the slice of floating charge realisations set aside for unsecured creditors — is usually what funds it. Plan the business on the assumption that the money is gone, and treat any dividend as a surprise.

What about goods they sent us that we have not paid for?

Now the clause runs the other way. If your supplier's terms contained a retention of title clause, the administrator will write and ask for the goods back, or ask you to pay for them. Whether that works depends on whether the goods are still identifiable, whether they have been used or incorporated into something else, and whether the clause was ever properly incorporated into the contract in the first place.

This is where a contract file earns its keep. A retention of title clause on the back of a delivery note, sent after the order was accepted on your terms, is frequently not part of the bargain at all. That is a paper question, and it is answered by reading what was exchanged and in what order, not by negotiating.

The tooling nobody thought about

Manufacturers lose more here than they lose on stock. Moulds, jigs, dies, test rigs and bespoke fixtures are routinely paid for by the customer and then left at the supplier's site for years, with nothing in writing about who owns them. When the supplier fails, the administrator's starting point is that everything on the premises is the company's asset.

Two lines in the supply agreement prevent it: a statement that title to tooling paid for by the customer passes on payment, and a right of access to remove it. A third line, requiring the tooling to be marked with the customer's name, converts an argument into an inspection. Getting those three lines into the contracts you already have is a morning's work before a failure and an impossibility after one.

What Dinmore Bell would do

We would read the order, the terms that actually applied and the delivery records, and tell you within a day or two which of the three positions you are in. We would write to the administrator on ownership and keep the correspondence running, submit the proof of debt, and handle the retention of title claim coming the other way. Where the sums justify it and the administrator refuses a proprietary claim, we take it up through commercial dispute resolution and instruct counsel where the point is worth arguing.

We would also do the unglamorous part: go through the rest of your supplier base and fix the same three clauses everywhere, so the next failure is a nuisance rather than a loss. That preventative work is most of what an outsourced General Counsel does in a business this size.

Where a specialist is needed

Formal insolvency work — challenging an administrator's conduct, applying to court for permission to bring proceedings, or acting on a claim against the directors personally — is conducted by instructed specialists whom Dinmore Bell prepares, coordinates and controls. The same applies to recovering a debt through court proceedings once permission has been given.

Put it in the next contract

Four provisions, and none of them is controversial in a negotiation:

Title to goods passes on payment, and the supplier will hold paid-for goods as bailee, marked and stored separately from its own stock. Title to tooling paid for by the customer passes on payment, with a right of access to remove it. Deposits and stage payments are held in a designated account until the goods are appropriated to the order. And a step-in right over any drawings, specifications or software needed to have the part made elsewhere.

None of that will save you from the loss of a supplier. All of it will change what you keep when one goes.