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What protection the law provides for a seller where a buyer becomes insolvent.

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Introduction

LA31710 Commercial Law 1 Assessed Essay Student No 001813779 S Co wishes to sell widgets to B Co. B Co uses widgets in its manufacturing process and also sometimes, itself, sells widgets. S Co is concerned that it will have to make the sale to B Co on credit and that B Co's financial position is not very strong. S Co has been advised that it can protect itself from B Co becoming insolvent before it pays for the widgets by means of a retention of title clause provided that it requires B to store the widgets it, S Co, supplies separately from those from other sources. Advise S Co as to the extent to which that advice is sound. This essay is concerned with what protection the law provides for a seller where a buyer becomes insolvent. It is section 19 (1) of the Sales of Goods Act 1979 that lays a varied foundation for protection for the buyer by means of fulfilling certain obligations.

Middle

The facts of Romalpa show that a Dutch company supplied foil to a UK company, on terms that the foil remained S's property until B had paid all debts due to S. Until then B was required to store the foil separately from its own property. The case went further where although B was allowed to manufacture products using the unpaid foil the products were to be transferred to S 'as surety'. Further if any of these products were resold to a third party S would have the right to receive payment. Three types of subject matter were established here in relation to the clause, these are; (i) right to the original, unused, goods themselves (ii) right to manufactured goods from the original items (iii) and right to the proceeds of any resold manufactured or original goods to third parties. In this essay scenario we are concerned with both the right that S Co has to the unused original goods and as B Co manufactures widgets also the items that they produce in their process.

Conclusion

It is important to note here that if in the instance of charge being created where it is a corporate buyer such as S co, the charge must be registered otherwise it will be void against a liquidator or creditor of the company.4This argument of creating a charge was rejected when sent to the Court of Appeal, and the seller succeeded in retaining property in the goods. The case itself seemed to unsettle the steady law of Romalpa, and although the basic rule that a simple retention of title clause works where the goods are original and unused until full payment is made, the position of items that are manufactured out of the goods still remained uncertain. It is important also to note that although a simple retention of title over unused goods may work, this is subject to the identification of the goods. 1 Aluminium Industrie v Romalpa Aluminium [1976] 1 WLR 676 2 Per Staughton J in Hendy Lennox Ltd v Grahame Puttick Engines Ltd [1984] 2 All ER 152 [1984] 1 WLR 485 3 [1984] 1 All ER 721 4 Companies Act 1985, s395

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