Australia: Retention Of Title Rights Tempered – Tougher Trading Terms On The Way

Retention of title or 'Romalpa' clauses are standard fare in material supply contracts and arrangements. Recent changes in insolvency laws make them less reliable and as a consequence, terms of trade and credit arrangements are likely to toughen.

Retention of title clauses generally provide that despite delivery to the builder or to the site, title to the materials will not pass until payment is received. Often the retention of title is specified to continue until all debts owed to the supplier are satisfied.

Accordingly, should the builder become insolvent, the supplier is, in theory, entitled to repossess its materials, as opposed to waiting for a potentially much less favourable outcome of a deed of company arrangement or a disappointing dividend after a long liquidation process, assuming of course that there are any crumbs left for the builder and other unsecured creditors at all.

Under retention of title clauses, as title does not pass until payment in full, the builder does not own the property and an administrator, as agent of the company, must hold the materials on trust for the supplier. Until December 2007, if an administrator proceeded to sell materials which are the subject of a retention of title clause, the administrator could be held liable to pay the supplier damages for "conversion", (dealing with the materials inconsistently with the supplier's title to them).

Amendments to the Corporations Act 2001 effected by the Corporations Amendment (Insolvency) Act 2007 now give the administrator the right to use and sell property which is the subject of a retention of title clause. The effect of the amendment is to protect administrators from liability to claims as a result of the disposal of goods the subject of a retention of title clause.

The administrator may be an administrator of a company under administration or an administrator of a deed of company arrangement. Generally administrators are prohibited from disposing of property that is used, occupied by, or in the possession of the company but which is owned by someone else. However, s442C of the Companies Act 2001 expressly excludes from that prohibition disposal of goods:

• in the ordinary course of the company's business;

• if it is done with the consent of the owner; or

• with the consent of the Court.

Further, if the owner of goods the subject of a retention of title clause demands the administrator return its goods, disposal of those goods by the administrator after the demand does not mean that the disposal is not in the ordinary course of the company's business¹.

The administrator must act reasonably in disposing of the goods and the proceeds of sale must be set aside to the extent that they do not exceed the sum owed to the supplier. However, what is reasonable in the context of a company administration may represent a very different result to taking goods back and selling them to another customer at their full value.

The effect of the Corporations Amendment (Insolvency) Act 2007 is that where it suits an administrator of a company or deed of company arrangement not to return the materials, the supplier will lose control of the goods. Whilst the action taken by the administrator to dispose of the goods must be "reasonable" in the context of the insolvency administration that is by no means any assurance that the same return will be achieved, as if the supplier recovered and resold the goods to another.

The comfort extended by retention of title clauses has been eroded. This is likely to dampen materials suppliers' enthusiasm to extend credit. It also seems likely to increase the tendency to require credit arrangements to be backed by a third party or be secured by personal guarantee or other arrangements.

Footnotes

1 Section 442C(8).

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