Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What is the effect of administration on retention of title clauses?

1. They are enforced

2. They are voided

3. They are suspended

4. They are amended

The correct answer is: They are suspended

Retention of title clauses, commonly used in sales agreements, allow sellers to retain ownership of goods until specific conditions, usually payment, are fulfilled. In the context of administration, which is a procedure aimed at rescuing a company facing financial difficulties, the impact on retention of title clauses is significant. When a company enters administration, the administrators take control over the company’s assets. During this process, retention of title clauses are generally considered to be suspended rather than voided or amended. This suspension allows administrators to manage the company’s assets and liabilities without immediately enforcing retention rights, giving them flexibility to assess the financial situation and potentially negotiate on behalf of the company. The rationale behind this suspension is that the primary objective of administration is to rescue the company as a going concern, which requires a careful approach to the existing contractual arrangements, including retention of title clauses. By suspending these clauses, administrators can assess the overall viability of continuing certain relationships with suppliers while working out how best to resolve the company's financial position. This situation is distinct from being enforced, where the rights would be fully upheld, or voided, which means they would have no legal effect. They are not typically amended either, as amendments would imply a negotiation or alteration of terms, which is not