Innocent Hotelier Trapped by Corporate Failure

In a bitter example of how an innocent party can be left to carry the financial can following a corporate failure, the owner of a hotel who paid £110,000 for diesel powered generating equipment has received judicial sympathy but ended up with neither the goods nor his money.

In a set of circumstances which the High Court described as ‘on any view unfortunate’, the supplier had gone into creditors’ voluntary liquidation shortly after the purchase price for the equipment was paid. The hotelier put forward arguments in contract and under the Sale of Goods Act 1979 in a bid to recover his money or gain possession of the goods.

However, the Court found that the supplier had in fact never had good title to the equipment which it had purported to sell. Although it had agreed to purchase the equipment from a third party with a view to onward sale to the hotelier, that had been on the basis that ownership of the goods would not pass until the third party was paid in full.

That sum was never remitted and, on that basis, the Court found that the goods had remained the property of the third party and were never the supplier’s to sell. On the facts of the case, it was an inevitable consequence of the supplier’s liquidation that either the hotelier or the third party would suffer substantial loss.

However, the Court noted that the solution lay in established principles of contract law, which provided a mechanism for resolving precisely such issues. The hotelier’s broader arguments under the Sale of Goods Act were contrary to the ‘plain construction’ of the Act and that was fatal to his claim.

Insolvencies can be expected to rise for a period after the economy starts to grow again, as firms fail because they cannot finance their increased working capital requirements.

If you are contracting to buy a major piece of equipment, we can review the contract terms to make sure that you are protected in the event that the supplier becomes insolvent before title to the goods passes to you.