Help: the trustee is selling my stuff! (tips for suppliers in bankruptcy)

With the many bankruptcies in retail, retention of title is very hot. A retention of title is often included in a supplier's general terms and conditions. The meaning of a retention of title is that the goods delivered remain the property of the supplier until the relevant invoices are paid by the customer to the supplier.

Retention of title takes many forms, including limited and extended retention of title. Much has already been written about these. This blog addresses the question of what to do if the trustee in bankruptcy sells the goods delivered under retention of title as part of the continuation of the business or a restart.

Return of delivered supplies

In principle, retention of title gives the supplier the right to take back unpaid goods he has delivered, even in bankruptcy. Administrators often cooperate with this under the conditions that (1) a reasonable, cost-effective, estate contribution is paid and (2) the returned goods are credited at invoice value.

Sale of delivered stock and compensation for damages

However, a receiver may also choose, for example in the interest of a possible relaunch (preserving jobs and value), not to return the goods delivered under retention of title to the supplier, but to leave them in the stores for sale to customers or for sale to a relaunching party. If the supplier then demands return of its delivered goods, the trustee can order a cooling-off period. This will then greatly limit the supplier's right of repossession with retention of title.

The position of the trustee is characterized by the fact that in the performance of his duties he must always take into account various, often conflicting interests. He must primarily administer the estate for the benefit of the creditors, but he must also take into account the interests of the bankrupt and third parties, such as owners. Moreover, the trustee is expected to have an eye for interests of a social nature, such as business continuity and employment.

In this regard, it is generally accepted that the liquidator may sell third-party property during the cooling-off period in cases where there are compelling interests that override the interests of individual creditors/owners, as at issue here. Thus, the trustees are not acting unlawfully by the mere continuation of the sale.

It is generally accepted that the trustee must then pay reasonable compensation to the supplier if he sells the supplier's stock. After all, the supplier's property right is then infringed. The question naturally arises as to what constitutes reasonable compensation.

Reasonable (damages) compensation

Suppliers often take the position that they then want to be paid the invoice value (purchase price) of the stock sold by the receiver that was still their property. Recently, the District Court of The Hague gave a nice ruling on this issue in the Etam bankruptcy case.

The court ruled that the supplier cannot necessarily claim the invoice value (purchase value) of the inventory sold by the trustees. The court considered that compensation should be paid that, on the one hand, does not exceed the enrichment of the estate (the trustees) and, on the other hand, that compensation should not exceed the amount of the supplier's impoverishment.

To determine the supplier's impoverishment, according to the court, a comparison must be made between the actual situation in which the clothing was resold by the trustees and the case where the supplier as owner had recovered the clothing.

This means that a supplier will have to state and prove at what price it would be able to resell (to another retailer) the stock taken back into the market.

All kinds of circumstances are of course important here: think, for example, of a best-before date for food and beverages, but also think of fashion sensitivity of certain products or whether or not a new series of the product has subsequently come onto the market, or other technical developments, for example by competitors, as a result of which the stock has become worth less than it was at the time of purchase by the later bankrupt company. Also, depreciation may even have already occurred because the packaging is discolored, or has been damp.

It will also have to show what costs would be involved in recovering the stock from the bankruptcy. If that does not become or is not clear, the court can estimate those costs. This would have to include not only the supplier's own costs (such as transportation costs past the distribution center and the various stores) but also the costs that the trustees would have to incur to enable the retrieval of the stock by that particular supplier. The court lists as activities to be performed by the trustees the supervision by a representative of the trustees during the retrieval and the actions to be performed on site, such as sorting out (or having sorted out) per store and in the distribution center.

Conclusions

The first important conclusion from this judgment is that a supplier has no hard claim to the invoice value, the original purchase price, and thus will, in principle, have to take the so-called resale loss for its own account (unless it can recover that loss by other means). The supplier must state and prove how high the revenues (minus the costs) would have been, had he been allowed to take back his stock and resell it.

The second point of attention from this judgment is that receivers can and may indeed charge a reasonable (cost-covering) estate contribution for their costs in supervising the return of the stock delivered under retention of title. The Court of Haarlem had also previously determined this in a case between Heineken and a receiver, and this is also generally considered reasonable - and accepted as valid law.