The rate of business failures is starting to rise above the low experienced over the last few years. Be warned. There are quite a few companies struggling and close to the brink of financial disaster. Also, although no longer a flood, there is a steady trickle of companies going, or which have gone, into receivership or liquidation.
A common feature of all these companies is that they have or had a pressing need to raise cash and it is likely that all their assets will be up for sale.
The problem is that very often not all assets used by struggling companies are owned outright, free from rights or obligations. Hire purchase, leasing and lending companies are likely to have their claims on the goods. And the bigger the asset (say, a fork lift truck), the more likely this is to be the case. This is not surprising as the most valuable assets are the most difficult to buy for companies which are short of cash or, if already owned, are likely to be put forward as security for increased borrowing.
The advice ‘buyer beware’ cannot be more appropriate when contemplating large purchases either from struggling companies or their receivers or liquidators. Almost certainly, if a company sells an asset it does not own or has pledged as security, the ‘buyer’ will not become the owner and is unlikely to obtain compensation from the seller. Equally, receivers and liquidators will not give any representations or warranties that goods are owned by the companies over which they have been appointed. Indeed, normally they seek an indemnity from a buyer in respect of any third party claims which may arise.
So how can a buyer protect his position? The first rule is to make enquiries of anyone who may know of a third party claim. Although receivers or liquidators would not sell goods which they did not believe were owned by the company, sometimes the position is unclear.
A potential buyer should ask whether they are aware of any dealings the company may have had with leasing, hire purchase or finance companies. When buying from the companies, ask them to give a warranty that the assets are theirs to sell and, wherever possible, obtain a written guarantee against loss from a director or similar officer.
Be warned: guarantees of this sort must be drawn up carefully if they are to be legally binding.
Searches can be made against the records of the company maintained by the Registrar of Companies. The register of charges should reveal the names of all banks and other institutions that have been given security at any time by the company. These may be contacted and asked to confirm that they have no claim over the assets you are intending to purchase.
Finally, what happens if following a purchase, a third party appears and claims the assets as theirs? Do not assume that their claim is valid. Although the principal rule is that no-one can sell what he does not own, there are some limited exceptions and it may be that you are able to take advantage of one of these.
Take for example the situation where Company A sells a truck to Company B, and delivers it before the price is paid. Company B, which is in financial difficulties, sells the truck to Company C. As long as Company C did not know of Company A’s rights over the truck, Company C can get good title to it. Company A would be left to pursue Company B in the courts for its unpaid invoice.
Equally, if Company B sells the truck to Company X, but the truck is still on Company B’s premises when Company B re-sells the truck to Company C, Company C would become the valid owner, as long as Company C was unaware of the previous sale to Company X.
Suppose in both of the above examples Company A is aware of the impending sale of the truck to Company C, but does nothing to protect its interests, allowing the sale to go forward. If this is the case, Company A may be prevented from claiming against Company C, who knew nothing of its entitlement to the truck.
Where a bank or other lender claims to have security over the asset, check to see whether the charge extends to what you have bought. Whilst large items of machinery (such as the truck) would normally be caught under bank lending documents, smaller items and, perhaps, such things as any specialised truck tools may not be caught and a buyer will become the true owner if the bank has done nothing to enforce its security before the sale.
A further area of great uncertainty arises where assets are subject to ‘title retention clauses’.
It is now almost universal practice that sellers of anything from a fastener press to a rivet gun will try to keep ownership even after delivery until they have been paid. Often these assets may be ‘bought’ by unwitting purchasers who may then find themselves embroiled in arguments with the original owners. In these circumstances, the buyer should not give up hope. For a title retention clause to be effective, it must satisfy various legal tests.
Was it part of the contract? Sometimes sellers include the wording on the delivery note - after the contract has been made. In this case, the clause will not be binding. In other cases, the clause may apply only to a particular shipment of goods (fasteners, for example), in which case the seller would have to prove that the goods he is claiming are represented by the unpaid invoice containing the title retention clause.
In other cases, there is an implied or express right for the buyer to sell to a third party. Again, in these circumstances, a seller would have difficulty pursuing a claim against the innocent buyer.
In summary, title retention clauses have to pass through various legal hoops to be effective and a buyer faced with a claim from someone claiming ownership should take expert advice before handing back the asset claimed.
All in all, buying second-hand equipment is a legal minefield that should only be entered by the wary and with a guide.
Douglas Preece is a corporate law partner at Fox Williams. In addition to mainstream corporate work, he advises companies and directors on insolvency-related issues.
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