INSOLVENCY AND CORPORATE RESTRUCTURING Jones Day Retention of title THE RECENT DECISION OF THE HIGH COURT IN assets) for £60,000. This money was placed on an Re CKE Engineering Ltd (In Administration) is a interest-earning account pending the determination update useful reminder of the basic principles that apply in of the Court as to the entitlement to the fund as relation to retention of title and, in particular, where between CKE and the company. goods of the same nature have been mixed with goods belonging to a third party. JUDGMENT The essential question before the Court was FACTS who owned the zinc. The issues were whether: Coseley Galvanising Ltd (the company) was placed (i) the fund was to be divided by reference to the BY KAY into administration on 17 November 2005. On ownership of the zinc or to the zinc and other MORLEY 10 March 2006, the company’s parent, CKE chattel assets; (ii) the company or CKE was the Engineering Ltd (CKE), was also placed into source of the 265 tonnes of zinc in the tank; and associate, administration. (iii) CKE had retained title to any zinc it had supplied. Jones Day Upon the appointment of administrators to the The judge summed up the basic principles of company, there existed on its premises a tank retention of title as follows: containing 265 tonnes of zinc. Of this amount, 217 tonnes had been supplied to the company by CKE and 1) Pursuant to s19 of the Sale of Goods Act 1979, 48 tonnes had been supplied by other parties. a seller of goods is entitled to retain title in the goods until it has been paid. Zinc supplied to the company was delivered in the form of solid zinc ingots. Upon receipt, the ingots 2) The point at which title passes from the seller to were deposited into a zinc tank and maintained in a the buyer is a matter of agreement between the molten state. Subsequently, the company added to parties, as a reservation of title is merely an the molten zinc a very small quantity agreement between the parties as to when title (approximately 1%) of other chemicals (principally should pass. nickel) including a chemical ‘brightener’. The zinc ingots were mixed in the tank with zinc ingots from 3) What the parties have agreed with regard to the different sources and possibly different grades, and passing of title is essentially a matter of with other chemicals. construction of the contract. As well as the documentation and communications between When zinc was recovered from the molten mass and the parties, the court will also consider the turned back into ingots, each ingot was worth practical consequences of the agreement. approximately 70% of the value of an original ingot (because it would not be one of the recognised 4) A key factor in determining a retention of title grades and would contain impurities). claim is the extent to which the goods supplied retain their identity in the buyer’s hands, for it is The retention of title clause in question provided as not possible to ‘retain’ title in something that follows: cannot sensibly be identified. ‘Until full payment has been received by [CKE] for 5) In determining whether goods retain their all goods whatsoever supplied (and all services identity, the judge cited the judgment of Bryson rendered) at any time by [CKE] to [the company]: J in Associated Alloys Pty Ltd v Metropolitan Engineering and Fabrications Pty Ltd at 209: a) property in the goods shall remain in [CKE] ‘The question whether goods which have been b) should the goods… be converted into a new used in some manufacturing process still exist product, whether or not such conversion in the goods produced by that process, or have involves the admixture of any other goods or gone out of existence on being incorporated in thing whatsoever and in whatever proportions, the derived product is, in my opinion, a question the conversion shall be deemed to have been of fact and degree not susceptible of much effected on behalf of [CKE] and [CKE] shall have exposition. When wheat is ground into flour, it is the full legal and beneficial ownership of the reasonably open to debate whether the wheat new products…’ continues to exist; when flour is baked into bread there is little doubt that the flour does By agreement between the company’s not… Where goods of a homogenous character administrators and the administrators of CKE, the are mixed, co-ownership might be a correct zinc tank and its contents were sold (with other conclusion… whether goods are reducible to the 84 The In-House Lawyer December 2007/January 2008
INSOLVENCY AND CORPORATE RESTRUCTURING Jones Day original materials is not just a matter of physics. as continuing to exist as zinc because the original Other perspectives have to be considered, materials remain sufficiently identifiable to permit including the economic perspective. The scraps recovery.’ of leather produced by cutting up a manufactured shoe could not in reality be An important issue for the judge was that the regarded as the original leather from which the molten mass remained substantially zinc and that it shoe was manufactured. The steel which would was physically possible to reduce the zinc to ingots be produced by cutting up a pressure vessel and again. If the zinc was reduced to ingots, it would flattening out the cylindrical parts would not be retain a substantial part of the value of the original the steel which Associated Alloys delivered constituent parts. Further, the judge considered it under the sale; it would be scrap steel.’ unlikely that the suppliers would consider that the zinc ingots had been consumed by conversion into a 6) The judge went on to distinguish between the molten mass. Rather than create a new product, the ‘blending’ and ‘commingling’ of goods. Where parties would consider that the raw material blending takes place, the resultant product is continued to exist, albeit in a different form. different in nature from both its original Accordingly, it was held that CKE owned constituents and, arguably, the original goods 217/265ths of the zinc in the tank and was entitled have either been consumed or destroyed. to receive the same proportion of the respective sale proceeds of the tank. 7) By comparison, commingling results in the production of a single bulk, any part of which is COMMENTARY commercially indistinguishable from its original The decision in this case highlights the fact that it constituents. Where goods of the same nature cannot be assumed that a retention of title clause and belonging to two persons have been will be defeated if goods supplied have been mixed commingled by agreement, so that the several with third-party goods. Further, it would appear that, portions can no longer be distinguished, the in such circumstances, a retention of title clause proprietors have an interest in common in will not be defeated even if it is not possible for the proportion to their respective shares. If there is a supplier of such goods to physically identify and diversity in quality in the goods mixed, the whole recover its goods in the same form. The crucial issue should be divided and the greater allowance for the judge in the CKE case was that the suppliers made to the owner whose substance is better or considered that their original goods continued to finer than that of the other. exist, albeit in a different form. In applying the above principles to the facts, the The basic principles that apply in relation to judge said that the parties knew that the zinc ingots retention of title where goods are mixed are would not, following delivery, be retained in their frequently misunderstood. There is a clear original form, but would be immediately added to distinction between goods that are mixed so that the zinc tank with zinc supplied by third parties. they become incorporated into the manufacturing process, and goods that are mixed but retain their Despite the conversion of the zinc ingots into a original identity or can be extracted from the molten mass, the judge saw no reason why the manufacturing process. respective suppliers of zinc could not agree that the contents of the zinc tank should be treated as In the well-known case of Borden (UK) Ltd v Scottish owned in proportion to their respective contributions Timber Products Ltd , resin was supplied to a to the tank. The judge found that there was: chipboard manufacturer. The resin was supplied on retention of title terms. However, the resin was ‘… no practical difficulty in the way of the parties incorporated into chipboard shortly after its treating an ingot of zinc (when added to the tank) delivery. Upon incorporation into chipboard, the identity of the resin was lost and the resulting chipboard was an entirely new product. Accordingly, the supplier’s retention of title claim was defeated. ‘As illustrated in the CKE Engineering case, the fact that a In Clough Mill Ltd v Martin , yarn was supplied on supplier’s goods are mixed with goods owned by a third party retention of title terms. The yarn supplied was subsequently incorporated into fabric. It was held will not necessarily defeat a supplier’s retention of title claim.’ that any claim by the supplier to the manufactured yarn was a charge void for non-registration. Gough and Oliver LJJ accepted in principle that the parties > December 2007/January 2008 The In-House Lawyer 85
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