Glossary
Retention of title clause
Retention of title clause (clause de réserve de propriété)
A retention of title clause delays the transfer of ownership of goods sold until the price is paid in full and allows the seller to reclaim them if the buyer defaults.
Definition
A retention of title clause suspends the transfer of ownership under a sale until the price is paid in full (article 2367 of the French Civil Code). The supplier remains the owner of the goods delivered as long as the invoice is unpaid. Retained ownership is ancillary to the receivable: when the seller assigns its receivable to a factor or to a Dailly assignee, the retention follows it. The clause is agreed in writing. To be enforceable in insolvency proceedings against the buyer, the writing must exist no later than delivery (article L. 624-16 of the French Commercial Code). A document governing a series of commercial transactions is sufficient. The seller then reclaims the goods that remain in kind at the opening of the proceedings. It reclaims goods incorporated into another asset if they can be separated without damage, and fungible goods of the same kind and quality held by the debtor. It claims the resale price that the sub-purchaser has neither paid nor set off on the date of the judgment, as well as the insurance indemnity subrogated to the goods (article L. 624-18). The insolvency judge (juge-commissaire) rejects the claim if the price is paid immediately. For an asset-based lender, these clauses reduce the value of the inventory it agrees to finance, because the goods subject to suppliers’ retention of title do not belong to the borrower.
Worked example
A manufacturer of electrical equipment buys €25m of components a year from a supplier whose general terms, accepted before the first delivery, contain a retention of title clause. Its inventory lender removes from the eligible base the €3m of components delivered and unpaid. If the manufacturer enters judicial reorganisation, the supplier reclaims the components still in stock and the price of the components resold in their original state that customers have not yet paid.
Points to check
- List the suppliers that sell under retention of title and the amount of inventory concerned.
- Check that your general terms of sale contain the clause and are accepted in writing before delivery.
- Negotiate with the lender how inventory under retention of title is treated in the eligible base: exclusion or a dedicated reserve.
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