20 Mar 2014

Register retention of title clauses on the Personal Property Securities Register correctly

by Greta Burkett

Suppliers relying upon their retention of title clauses to create "transitional security interests" must still ensure they're registered correctly.

A recent case has held that a seller's assumption that it was protected by the transitional provisions in the Personal Property Securities Act 2009 (Cth) (PPSA) was incorrect (Central Cleaning Supplies (Aust) Pty Ltd v Elkerton [2014] VSC 61).

The case has given a useful reminder of how crucial it is to identify security interests and to determine whether they are "transitional" under the PPSA.

Although the transitional period under the PPSA has now expired, the Court's findings in the case may help suppliers in determining whether their trading terms give rise to "transitional security interests" and whether they have made a correct registration on the Personal Property Securities Register (PPSR).

How the PPSA works

Under the PPSA:

  • if a supplier supplies goods subject to a retention of title clause that clause will create a security interest in its favour;
  • to protect that security interest, the supplier must "perfect" it;
  • if the supplier has not perfected its security interest and its customer is placed into administration or liquidation, the supplier's security interest will "vest" in the customer. If that occurs, the goods will become available to the customer's creditors as a whole (including the supplier, but only on an unsecured basis) even though they are owned by the supplier;
  • if an agreement which provided for a security interest was in force immediately before 30 January 2012 and continued to be force after that date then, during the "transitional period", that security interest was "temporarily perfected". That meant that those security interests were taken to be perfected by operation of the PPSA even though they were not registered on the PPSR. Those security interests were therefore protected (and did not vest) if the customer went into administration or liquidation.

The supply arrangement and retention of title clause

Central Cleaning Supplies (Aust) Pty Ltd sold cleaning equipment to Swan Services Pty Ltd.

In September 2009, Swan Services signed a credit application. That application confirmed that:

  • the supply of goods between Central Cleaning and Swan Services would be governed by Central Cleaning's "Standard Terms and Conditions"; and
  • Central Cleaning would give Swan Services 30 days to pay for any goods.

The credit application did have Central Clearing's "Standard Terms and Conditions" attached to it.

Central Cleaning supplied goods to Swan Services over a period of time. They developed a practice so that:

  • Swan Services would order goods by sending a purchase order to Central Cleaning; and
  • Central Cleaning would deliver goods and then issue an invoice to Swan Services. Each invoice included a "retention of title" clause (ROT Clause) which stated that the goods to which that invoice related remained the property of Central Cleaning until they were paid for in full.

Central Cleaning did not make any registration on the PPSR in relation to the security interests created by the ROT Clause.

After 30 January 2012, Central Cleaning supplied some goods to Swan Services, but Swan Services did not pay for them.

On 22 May 2013 Swan Services went into administration, and subsequently into liquidation.

Central Cleaning claimed the goods which had not been paid for from the Liquidators and asked for their return. The Liquidators refused to return them – they argued that Central Cleaning's security interest was not perfected and therefore it had vested in Swan Services when it went into administration. Central Cleaning appealed to the court to reverse the Liquidators' decision.

What – if any – interest did Central Cleaning have?

The key issue in the case was whether Central Cleaning had a transitional security interest. That depended upon whether its security interest was provided for in the credit application, giving it a transitional security interest, or in each invoice. If Central Cleaning's security interest was in each invoice, it would not have had a transitional security interest in the goods.

What the Court held

The Court held in favour of the Liquidators and dismissed Central Cleaning's application. It found that the ROT Clause:

  • created a security interest over the goods in favour of Central Cleaning;
  • was contained in each invoice as a "Condition of Sale"'; and
  • did not form part of Central Cleaning's "Standard Terms and Conditions" and therefore was not incorporated into the credit application.

The words "goods the subject of this sale" contained in each invoice were interpreted to infer that the parties intended each invoice to create a separate contract of sale (and a separate security agreement) for the goods supplied under that invoice (Sales Contract).

Each Sales Contract entered into after the 30 January 2012 was held not to be a transitional security agreement. Central Clearing's interests within them were therefore not temporarily perfected.

Those interests had therefore vested when Swan went into administration, and, as a result, the Liquidators' decision not to return the goods to Central Clearing was correct.

Lessons for suppliers of goods who want to have a security interest in goods supplied

  • Courts will carefully consider the contractual terms of each arrangement to determine which documents create the "security agreement" between the parties.
  • If a seller has the benefit of a retention of title clause, it must make a registration on the PPSR against its customer. Failure to do that may mean that it loses goods which it has supplied to that customer but which have not been paid for. The fact that the seller has title to those goods will not protect it.
  • Although temporary perfection for transitional security interests no longer applies, it remains important to determine whether or not a commercial relationship which existed before 30 January 2012 gives rise to any transitional security interests. Where a Court finds that a security interest is not transitional, a registration which indicates that it is transitional may be ineffective and may lead to the same consequences as shown in this case.

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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.