20 May 2011

Retention of title as a defence to an unfair preference claim

by Paul James, William Frost

In the recent case of Dwyer & Ors and Davies & Ors v Chicago Boot Co Pty Ltd [2011] SASC 27, Chicago Boot claimed that certain payments made to it by two insolvent companies were not unfair preference payments, because of, amongst other defences, the purported application of a retention of title clause in relation to the supply of goods by Chicago Boot.

The Supreme Court of South Australia found that the parties' relationship was not conducted in accordance with the retention of title clause. As a result, it held that the retention of title clause failed as a defence to the liquidator's claim for unfair preference payments.

The case again highlights that where a retention of title clause is raised, courts will analyse the conduct between the parties, rather than solely applying the terms of the retention of title clause. It also underscores the care that companies must exercise in seeking to rely on a retention of title clause alone, and the care liquidators must take in assessing whether a creditor has a valid retention of title claim.

Background

Chicago Boot manufactures and supplies footwear products that include "Chicago Boot" and "Windsor Smith". The business of Harris Scarfe was conducted by a group of companies that included Harris Scarfe Wholesale Ltd ("HSW") and Harris Scarfe Limited ("HSL"). Chicago Boot had supplied its products to Harris Scarfe since the early 1990s.

On 31 July 2000, HSW drew a cheque payable to Chicago Boot for $43,540.10 in respect of a number of transactions in which goods had been supplied by Chicago Boot to HSW. The cheque was not sent to Chicago Boot until around 4 October 2000, when it was presented to Chicago Boot's bank.

Between 30 September 2000 and 15 February 2001, HSL drew five cheques totalling $273,261.23. The cheques were each withheld for a period by HSL after being drawn before being sent to and presented by Chicago Boot to its bank.

Upon the Harris Scarfe companies being placed into liquidation, the joint and several liquidators of HSW and HSL sought to recover these payments on the basis that they were unfair preference payments within the meaning of section 588FA of the Corporations Act 2001 (Cth).

Under section 588FA(1) of the Act, a transaction is an unfair preference given by a company to a creditor of the company if, and only if:

  • the company and the creditor are parties to the transaction (even if someone else is also a party); and
  • the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in the winding up of the company.

The liquidators alleged that the following payments constituted unfair preference payments:

  • payments to Chicago Boot totalling $273,261.23 made by HSL between 2 January 2001 and 22 February 2001 when HSL was unable to pay its debts as and when they became due and payable; and
  • payments to Chicago Boot totalling $43,540.10 made by HSW on 14 October 2000 when HSW was unable to pay its debts as and when they became due and payable.

Retention of title clause

Chicago Boot asserted (amongst other things) that it did not receive unfair preference payments within the meaning of section 588FA(1) of the Act because:

  • a retention of title clause existed in the agreement between the parties and this prevented HSW and HSL from acquiring a proprietary interest in Chicago Boot's supplied stock until they had paid for the stock;
  • its relationship with HSW and HSL was not one of creditor and debtor, but one of bailor and bailee; and
  • the alleged payments to Chicago Boot did not result in a decrease of the net value of the assets of HSW and HSL that were available to creditors by reason that all goods supplied by Chicago Boot were subject to the operation of the retention of title clause.

The retention of title clause was printed on the reverse of every invoice rendered on HSW and HSL by Chicago Boot and included the following terms:

  • ownership of the goods remains with Chicago Boot;
  • the relationship between the parties is fiduciary and the customer [being either HSW or HSL] holds the goods as bailee for Chicago Boot;
  • the customer has to separately store Chicago Boot's goods; and
  • the proceeds of any sale are to be paid into a separate account and records kept by the customer of any goods owned by Chicago Boot.

Having regard to the retention of title clause, Chicago Boot asserted that:

  • until it was paid in full, the goods the subject of the payments remained the property of Chicago Boot which was able to re-take possession of the goods;
  • the relationship between Chicago Boot and the relevant purchasing entity of Harris Scarfe (HSW or HSL) was that of bailor and bailee until property passed;
  • by receiving the payments, Chicago Boot did not recover more than it would have received if it were to prove in a winding up of HSW or HSL; and
  • therefore, the payments were not unfair preference payments within the meaning of section 588FA of the Act, because, at the time of the winding up, Chicago Boot was entitled to re-take possession of the goods towards which the payments were made.

Applicable legal principles

Justice Sulan reviewed the relevant authorities on retention of title and stated that the:

"common purpose of a retention of title clause is that goods are supplied to a company under a contract of sale in which, although the company is entitled to possession of the goods, the seller reserves the legal and beneficial title to the goods until the full price is paid".

In reviewing the retention of title clause, Justice Sulan stated, it is necessary to:

"consider any retention of title clause in the context of the totality of the contractual arrangements which existed between Harris Scarfe and Chicago Boot. The question which arises is: What was the substance of the agreement between the parties?".

Justice Sulan held that the retention of title clause provided "some evidence" of the intention of the parties. However, the manner in which the parties conducted their business relationship did not support Chicago Boot's claim that their intention was that the property in the goods was not to pass to HSW or HSL until payment had been made by either HSW or HSL, respectively. Given the emphasis placed by the Court on the conduct of the parties, it seems unlikely that the outcome would have differed had the parties executed a supply agreement including the retention of title clause.

Justice Sulan referred to the test espoused by Justice Cohen in Chattis Nominees Pty Ltd v Norman Ross Home Works Pty Ltd (Receivers appointed) (in liq) (1992) 28 NSWLR 338 (at 346-347) that, in determining the intention of the parties, the court will look at the transactions as a whole.

Conclusion

In this regard, it was necessary for the Court to determine whether the conduct of the parties was to deprive the retention of title clause of its intended effect. The following relevant factors assisted the Court reach its decision that the parties did not rely on the terms of the retention of title clause:

  • there was no separate storage of Chicago Boot's goods;
  • there was no separate account for the proceeds of sale of Chicago Boot's goods to third parties;
  • there was no record kept of the proceeds of sale;
  • the parties' conduct did not disclose a fiduciary relationship or that they were in the position of a bailor and bailee; and
  • Chicago Boot never sought to rely on the purported retention of title clause to claim that title had not passed to either HSW or HSL.

As a result, the Court held that the evidence as to the terms of trade between Chicago Boot and HSW and HSL was "less than satisfactory" and that it was not clear that the terms and conditions contained on the rear of the invoice were the terms and conditions that applied between the parties at the relevant time.

The Court found that the transactions amounted to unfair preferences and Chicago Boot had failed to prove any defences. In relation to the retention of title clause, the Court held that it did not provide a defence to the liquidators' claim that Chicago Boot had received unfair preference payments. Chicago Boot was ordered to pay the sum of $316,801.33 to the liquidators.

This article was first published in the Insolvency Law Bulletin 2011 Vol 11 No 8

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.