The passing of ownership and risk 185Insolvency of the buyer or the seller
A person who has become insolvent has not got enough money to pay his or her debts. If
a company becomes insolvent it may be liquidated. This means that a liquidator will be
appointed to gather in any assets belonging to the company, and to pay any such assets to
creditors, before the company ceases to exist.
If a seller of goods becomes insolvent before the ownership of the goods has passed to
the buyer, then the seller’s liquidator will have no duty to deliver the goods to the buyer. If
the goods have already been delivered to the buyer then the seller’s liquidator will be able
to reclaim the goods from the buyer. The buyer will not have to pay for the goods, because
ownership has not passed to the buyer. However, a buyer who has paid any or all of the
price can only claim against the seller’s liquidator as an unsecured creditor. In practice, this
means that the buyer will certainly not get back all money which has been paid and may
get none of this money back.
If the seller becomes insolvent after the ownership of the goods has passed to the buyer
then the buyer, as owner of the goods, can keep the goods. The seller’s liquidator will, how-
ever, be able to sue the buyer for any amount of the price which has not yet been paid.
If the buyer becomes insolvent before the ownership of the goods has passed, then the
seller need not deliver the goods to the buyer and could reclaim the goods if they had
already been delivered. If the buyer has already paid any part of the price then the buyer’s
liquidator can reclaim this amount from the seller. However, if the buyer’s liquidator
chooses to pay the seller the full price then the seller must deliver the goods. (The contract
is not automatically terminated on account of the buyer having become insolvent.)
If the buyer becomes insolvent after the ownership of the goods has passed then the
buyer’s liquidator will be entitled to keep the goods. The seller can retain any part of the
price which has already been paid, but can sue for any outstanding amount only as an
unsecured creditor. (The seller is therefore most unlikely to receive payment in full, if receiv-
ing anything at all.)
Example
Steve has sold 100 tonnes of corn to Bill for £2,000 and Bill has paid £200 in advance.
Before ownership has passed to Bill, Steve becomes insolvent. Steve’s liquidator has no
obligation to deliver the goods and could reclaim the goods if they had already been
delivered. Bill has no obligation to pay the £1,800 which has not yet been paid. However,
Bill can only reclaim the £200 already paid as an unsecured creditor of Steve.Example
Steve has sold 100 tonnes of corn to Bill for £2,000 and Bill has paid £200 in advance. After
ownership has passed to Bill, but before the rest of the price has been paid, Bill becomes
insolvent. Steve cannot reclaim the goods from Bill’s liquidator as ownership had passed to
Bill. Steve can keep the £200 already paid and can sue Bill’s liquidator for the remainder of
the price (£1,800) as an unsecured creditor.It is important to realise that the rules relating to risk do not apply when the buyer or seller has
become insolvent. When the SGA 1979 talks of the risk it means the risk of the goods being
lost, damaged or destroyed. It does not mean the risk of one of the parties becoming insolvent.