14 May 2015

PPSA retention of title decision overturned

The Victorian Court of Appeal has upheld an appeal and confirmed that a supplier was protected by the transitional provisions in the Personal Property Securities Act 2009 (Cth) (PPSA): Central Cleaning Supplies (Aust) Pty Ltd v Elkerton [2015] VSCA 92.

The case has implications both for how insolvency practitioners assess a retention of title claim that is registered as a "transitional security interest" on the Personal Property Securities Register (PPSR), as well as for how the courts are likely to treat "umbrella" security agreements more generally. It also reinforces the need for consistent and cohesive drafting in interdependent contractual terms.

Retention of title and the PPSA

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 part of the estate of the insolvent customer, to be dealt with by the external administrator in the ordinary course notwithstanding that they are owned by the supplier;
  • if an agreement which provided for the granting of a security interest was in force immediately before 30 January 2012 and continued to be force after that date, that interest was taken to have been "temporarily perfected" until 31 January 2014 by operation of the PPSA, even though the interest was not registered on the PPSR. Security interests with the benefit of such temporary perfection did not vest in the customer if the supplier's customer went into administration or liquidation.

Those practising in insolvency will have observed that during the PPSA transitional period, many suppliers sought, unsurprisingly, to invoke the protections of temporary perfection to remedy a failure to register upon discovering that their customer had entered external administration. In many instances, insolvency practitioners justifiably rejected those claims, and did so in reliance upon, inter alia, the Victorian Supreme Court judgment in Central Cleaning Supplies.

The supply arrangement and retention of title clause

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

On 3 September 2009, Swan signed a credit application. The reverse of the application form contained a list of "Credit Application Terms". Those terms confirmed that:

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

The credit application did not set out Central's "Standard Terms and Conditions".

Central did not sign the credit application. Instead, it supplied cleaning equipment and sent an invoice dated 4 September 2009 to Swan. The invoice contained a "retention of title" clause. That clause stated that the goods to which that invoice related remained the property of Central until they were paid for (ROT clause).

Central continued to supply goods to Swan over a period of time. They developed a practice that:

  • Swan would order goods by sending a purchase order to Central; and
  • Central would deliver goods and then issue an invoice to Swan. Each invoice contained an ROT clause in identical terms.

Central did not make any registration on the PPSR in relation to the arrangements.

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

Central had supplied goods to Swan prior to the appointment of administrators, but Swan had not paid for them.

In reliance upon its ROT clause, Central claimed the return of those goods from the liquidators. The liquidators rejected that claim. They argued that Central's security interest was not perfected and therefore it had vested in Swan when it went into administration. Central appealed the liquidators' decision to the Victorian Supreme Court.

Supreme Court judgment

The judge at first instance held that the ROT clause created a security interest. The ROT clause was contained in the invoices and not incorporated into the credit application. Each invoice created a separate contract of sale. Each contract of sale entered into after 30 January 2012 was not a transitional security agreement.

As a result, Central's interest in the goods which had not been paid for was not temporarily perfected under the PPSA. That interest had vested in Swan when it went into administration and therefore the goods formed part of Swan's insolvent estate.

Central appealed that decision.

Court of Appeal

The key issue in the appeal was whether a "security agreement":

  • was in force between Central and Swan before the PPSA registration commencement time (30 January 2012); and
  • provided for the granting of a security interest in the equipment supplied in the future.

The Court held that there was a security agreement between Swan and Central. That agreement was created by:

  • Swan signing the credit application; and
  • Central making its first supply to Swan and issuing an invoice dated 4 September 2009.

That security agreement (which was in force before 30 January 2012) provided for the granting of a security interest in all future supplies. It did so because:

  • Swan had, by signing the credit application, agreed to be bound by Central's "Standard Terms and Conditions" from time to time; and
  • even though they had not been included in the credit application, those "Standard Terms and Conditions" were set out in the first invoice, and they included an ROT clause. The same terms and conditions were included in all other invoices.

The security agreement was therefore a transitional security agreement. The security interests granted in respect of all goods supplied under that agreement were transitional and thus had the benefit of temporary perfection under the PPSA. Central was therefore entitled to rely upon its ROT clause and entitled to the goods which had not been paid for.

Significance of the judgment

In addition to being one of the handful of PPSA-related disputes which have reached appellate level, the judgment overturns the first instance decision on an issue which is germane to commercial transactions and the practice of insolvency practitioners.

Since the transitional period ended on 31 January 2014 ROT claims based on transitional security agreements are no longer temporarily perfected under the PPSA. Protection will only be afforded to ROT security interests if those interests are perfected by registration.

The issues raised in the Court of Appeal's judgment will, however, continue to be relevant to insolvency practitioners as regards their assessment of the validity of ROT claims which have been registered as transitional security interests. The judgment also examines the operation and effect of interdependent contractual terms in circumstances where the combined effect of those terms was critical for the protection of the supplier's security interest.

Lessons for insolvency practitioners

Insolvency practitioners who have relied on the first instance judgment may need to reconsider their approach to assessing ROT claims which have been registered as transitional security interests.

Credit applications that were signed and accepted (including by conduct) before 30 January 2012 may create transitional security agreements even if the goods being claimed were supplied under invoices issued after that date. By extension and analogy, for "umbrella" security interests created after 30 January 2012, guidance may be drawn from the judgment as to what is needed to ensure that a single agreement (albeit comprised in more than one document) can (if perfected) cover future supplies. When and how an agreement was created between the parties, and if that agreement provided for the granting of future security interests over the supplied goods, will be key. Each arrangement will need to be carefully assessed on its terms.

Lessons for commercial counterparties

For commercial counterparties supplying on credit terms, given that temporary perfection under the transitional regime is no longer available, the importance of prompt perfection to safeguard and ensure the priority of a security interest cannot be overstated.

The judgment also serves as a useful reminder of the need to ensure consistency and cohesion in commercial terms, particularly those terms which are interdependent. It underscores the importance of good drafting and taking proactive measures to perfect the security interests which arise in everyday commercial transactions.

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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.