Retention of title, the PPSA and unfair preferences: something for everyone? Scott Guthrie DENTONS Australia’s insolvency regime elevates secured credi- entirely fatal to a defence to an unfair preference claim tors to an exalted position. Instead of being left to by a liquidator in respect of payments made by an participate in any available return with other unsecured insolvent customer prior to liquidation. creditors on a pari passu basis, secured creditors have the advantage of resorting to their security in the hope of Elkerton — a prologue using it to recover most, if not all, of their debt. Since the decision of the Court of Appeal of Victoria Prior to the introduction of the Personal Property in Central Cleaning Supplies (Australia) Pty Ltd v Elkerton (in his capacity as joint and several liquidator Securities Act 2009 (Cth) (PPSA), a retention of title 3 (ROT) creditor was in a particularly advantageous of Swan Services Pty Ltd) (in liq)) (Elkerton), it is likely position. Such a creditor could rely on their contractual that many practitioners assumed that the default legal rights (retaining title to goods delivered until paid) to position in the context of an ROT arrangement under the retrieve identifiable stock upon the insolvency of its PPSA was settled. customer and resell it elsewhere. The facts in Elkerton can be briefly stated. Prior to The PPSA inexorably altered this position by requir- the commencement of the PPSA, the ROT creditor’s ing an ROT creditor to also register its interest in customer had executed a credit application which pro- personal property so as to maintain its secured status in vided that any future supply of goods would be on terms an insolvency context. That is because an ROT arrange- that payment was not due for 30 days and that future ment is now defined as a security interest under the supplies would be subject to the creditor’s standard PPSA.1 terms and conditions. Those terms and conditions included A failure to register (and thereby perfect) interests in an ROT clause. Deliveries were thereafter made before collateral (eg goods and stock) can have fatal conse- and after the commencement of the PPSA. quences for an ROT creditor. Section 267 of the PPSA A liquidator was appointed to the creditor’s customer. provides that in circumstances where an external admin- The creditor sought to rely on its ROT clause to compel istrator (including a bankruptcy trustee, but not a receiver) the liquidator to allow it to reclaim its stock delivered is appointed, any unperfected security interest “vests” in following the commencement of the PPSA. There was the insolvent estate of the debtor. one problem with that approach: the creditor had not In other words, an ROT creditor’s assertion to own- registered its security interest (that is, the ROT terms of ership of goods is no longer enough in the event of the trade) on the Personal Property Securities Register debtor’s insolvency. Its interest in the goods delivered (PPSR). The liquidator asserted that s 267 of the PPSA must also be registered. But when does that interest operated to vest the stock in the insolvent estate of the arise? Is it upon each supply of goods, requiring multiple debtor. registrations? Or can an ROT creditor register an interest Transitional provisions delay operation of the created by one overarching agreement that will apply to PPSA all future supplies? However, the PPSA contains transitional provisions A recent decision of the District Court of Queensland, which provided creditors with a 2-year moratorium Trenfield v HAG Import Corp (Australia) Pty Ltd2 period within which to comply with the PPSA in respect (HAG), considered these very issues and illustrates a of arrangements in effect prior to the commencement of number of important concepts. Firstly, the specific terms the PPSA, but having effect after it. Broadly speaking, of an ROT arrangement are critical in determining when within that window of time, transactions now caught by a security interest is created and therefore when it must the PPSA were to have legal effect as though the PPSA be (or is capable of being) registered. Secondly, and just was never enacted for a period of 2 years. Relevantly, all as significantly, a failure to register (and thereby perfect) the deliveries of stock in Elkerton were made within the an otherwise operable security interest may not be 2-year transitional period. 98 australian banking and finance August 2018 The question for the Court of Appeal in Elkerton was: On first principles then, in order for the arrangement were the deliveries made after the commencement of the between debtor and creditor to be a “security agree- PPSA subject to a security interest provided for by a ment” providing for the ROT creditor’s security interest, pre-PPSA agreement? If so, the old law would apply and the debtor’s offer to be bound by the terms and condi- the ROT creditor would have been able to simply rely on tions of trade had to be accepted by the creditor. In its contractual rights retaining ownership until paid, Elkerton, the Court of Appeal determined that accep- without the need to also register that interest. tance occurred by way of conduct. As the court stated: As the Court of Appeal observed, the answer to that Central’s acceptance of Swan’s application for credit was question involved a consideration of two things: the an acceptance by conduct. The relevant conduct was the relevant provisions of the PPSA; and the terms and delivery of the equipment which Swan had ordered, and the conditions of trade between creditor and debtor. The sending of the invoice confirming that the supply was on 30 critical provisions of the PPSA are those defining a day credit. By that conduct, Central signified its acceptance security interest and a security agreement. They provide of Swan as an account customer. The sending of the invoice was the critical step, of course, as it was the first commu- relevantly as follows: nication confirming that credit was being provided. A security interest means an interest in personal property On this analysis, the first supply of equipment operated to provided for by a transaction that, in substance, secures establish a supply agreement between Central and Swan. In 4 accordance with the express terms of the credit application, payment or performance of an obligation … 8 … the agreement governed all future supplies of equipment. security agreement means: The result of this analysis was that the credit appli- (a) an agreement or act by which a security interest is cation, taken together with the terms and conditions of created, arises or is provided for; or (b) writing evidencing such an agreement or act5 [empha- trade, operated from the date of the first supply as an sis added]. overarching security agreement. As the first supply of As the creditor had argued that its interest was stock occurred prior to the commencement of the PPSA, provided for by a transitional security agreement, those the security agreement was therefore transitional and the definitions were also relevant.6 They largely mirror the ROT creditor did not need to register its interest in the definitions above by requiring any agreement in force stock for its ROT clause to operate as effective security prior to the commencement of the PPSA to have the during the 2-year transitional period. same characteristics as a security agreement which provides for a security interest, and to have continued Amerind — accepting Elkerton application post the commencement of the PPSA. Elkerton was cited with approval in Re Amerind Pty Ltd (recs and mgrs apptd) (in liq)9 (Amerind). In that The importance of contract law in interpreting case, an ROT creditor sought to argue (contrary to the PPSA “agreements”, especially concepts of offer finding in Elkerton) that each supply of goods repre- and acceptance sented a fresh opportunity to register its interest in those Accordingly, for the creditor to succeed in establish- goods. The ROT creditor made multiple supplies of ing that its arrangements had the benefit of the transi- goods pursuant to a post-PPSA agreement which included tional arrangements, it needed to establish that the an ROT clause. However, the creditor did not register its debtor became bound to its ROT conditions (ie that security interest until the eve of the insolvency of its which provided for its security interest) prior to the customer.10 commencement of the PPSA and that those terms and The creditor argued that there was no overarching conditions applied to goods delivered after the com- security agreement providing for a security interest in mencement of the PPSA during the 2-year transitional future deliveries, but rather that a security interest came period. As the Court of Appeal observed, that issue into force each time that an order was placed, requiring could only be decided by considering the precise nature and permitting ongoing consecutive registrations on the of the agreement between creditor and debtor. PPSR. On that basis, the creditor argued that its belated In undertaking that analysis, the Court of Appeal registration was not late vis-a-vis its final delivery of rightly noted that the credit application was simply that: stock because registration (and thereby perfection) occurred an application for credit on 30-day terms. It was a within the time mandated by the PPSA. unilateral act by the customer offering to be bound to the As to that argument, the Supreme Court of Victoria creditor’s terms of trade. As the court observed: “the stated as follows: mere signing of the credit application did not create a Elkerton stands for the proposition that an agreement which contract, and its lodgment with [the creditor] did not imposes [ROT] terms in respect of future supplies is an impose on [the creditor] a contractual obligation to do agreement by which a security interest is provided for anything.”7 irrespective of individual dealings with orders and invoices.