The PPSA significantly altered the law in relation to the taking, registration and enforcement of security interests. Retention of title ('ROT') creditors in particular were faced with an entirely new paradigm. Despite a contractual clause asserting ownership of identifiable goods until paid, the PPSA requires ROT creditors to also register their interest in those goods on the PPSR register. A failure to do so will mean that if its customer becomes insolvent, those goods will become part of the property of the insolvent estate (i.e. they will "vest") and the beneficiary of an ROT clause will be left to prove as an unsecured creditor.

But what of payments received by a ROT creditor prior to the later liquidation of a corporate customer? Does the later vesting of the ROT's creditor's interest in the goods affect the character of the payments received by the creditor prior to liquidation when the interest was otherwise valid as between it and its customer. These issues were recently examined in Trenfield v HAG Import Corp (Australia) Pty Ltd  ('HAG') whereby the liquidators of an insolvent customer sued the ROT creditor for alleged unfairly preferential payments.

Unfair preferences are defined by the Corporations Act 2001 (Cth) as arising where "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 a winding up of the company." The issue in HAG was whether payments received under an unregistered but otherwise valid security interest were payments received in respect of an unsecured debt. Put another way, if the debt was secured, then the unfair preference regime would only apply to any amount received in excess of the value of any security.

The Court found that the payments received were not unsecured, because the date for assessment of the character of the payments was when they were made and not at the later date of liquidation. At the time of payment, as between debtor and creditor, the security was valid (although unregistered). It only vested on the later event of insolvency. But that did not alter the character of the payments when made. In other words, the failure to register was not fatal in respect of payments received prior to vesting.

However, and as above, payments received in excess of the  value of any security were unsecured.  Absent expert evidence, the court found that the value of the security was the wholesale – and not retail – value of the goods as "the value of the security must be the value to the creditor". The ROT creditor's market for its goods was a wholesale market; valuing the goods at retail would therefore have reflected what the insolvent company might receive for them in the ordinary course of their business, and not their value to the creditor supplying the goods.

HAG is also a reminder that precedents must yield to the facts of each case and that the position of creditors and external administrators under the PPSA continues to evolve. (For example, the Court distinguished a Court of Appeal of Victoria authority concerning the contractual circumstances in which a security interest arises). This is an edited version of an article that appeared in the Australian Banking and Finance Law Bulletin. For those wishing to do a deeper dive on these issues, the link to the full article is here.

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