In brief - Ensure that retention of title provisions are well drafted and registered
One of the most significant but under-reported changes brought about by the introduction of the Personal Property Securities Act 2009 (Cth) (PPSA) was that it fundamentally changed the security nature of a retention of title (ROT) arrangement.
ROT refers to an arrangement whereby a supplier supplies goods to a customer, and the supplier's terms of trade include a contractual provision that title in the supplied goods does not pass to the customer until such time as the supplier is paid for those goods. Typical embellishments to standard ROT provisions are that title in goods does not pass until the supplier is paid all money owed to it by the customer (All Monies clause), and that any monies received by the customer from a sale of goods subject to a ROT clause are held on trust for the customer, not mingled with the customer's general funds.
Suppliers can manage risk by registering security interest on the Personal Property Securities Register
Prior to the introduction of the PPSA, ROT was merely a contractual arrangement between the parties. The PPSA brought ROT provisions within the security registration system established by that Act.
A "security interest" is an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation, and specifically includes agreements to sell subject to ROT ( section 12, PPSA). This means that a supplier who includes ROT clauses in its terms of trade should ensure that each such arrangement is registered on the Personal Property Securities Register (PPSR). A failure to register a security interest on the PPSR does not invalidate the rights of the supplier, but it does have two very important ramifications:
- The rights of the supplier to enforce its security will be subordinated to a higher ranking (registered earlier in time) security interest covering the personal property of the customer (a priority problem).
- If the customer is wound up or has voluntary administrators appointed, the unregistered security interest vests in the customer. The customer loses its security interest in the goods subject to the ROT, but has a right to prove in the insolvent administration for compensation being the value of the goods, for what that is worth.
Retention of title as security interest may be a defence to a preference claim
Another effect of ROT arrangements now being security interests occurs in the case of liquidations, where the liquidator's ability to challenge some voidable transactions only applies to those involving unsecured creditors. One such example is the ability of a liquidator to bring an action against a creditor who has received preferential payments for orders for repayment of those monies to the company in liquidation.
Section 588FA of the Corporations Act 2001 provides that a transaction is an unfair preference if it 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 was set aside and the creditor were to prove for the debt in a winding up of the company.
Prior to the introduction of the PPSA, a supplier who had received payment from a customer prior to liquidation could only rely upon the standard defences to a preference claim; in essence, that the payments were received in good faith and where the creditor had no grounds to suspect that the company was insolvent; or seek to reduce the amount of the preference by applying the continuing business relationship (running account) "defence".
The definition of a ROT as a security interest means that the supplier is now a secured creditor to the extent of its ROT claim. In practice, this means that any potential preference claim against the supplier must be reduced by the value of the goods supplied to the company that remain covered by the ROT claim. This has been confirmed by the Federal Court in the recent decision of Hussain v CSR Building Products Ltd, in the matter of FPJ Group Pty Ltd  FCA 392, which specifically considered a ROT provision that enjoyed protection as a transitional security interest under the PPSA.
Registered retention of title provisions may protect suppliers from customers in liquidation
There are a number of technical issues that may complicate a potential situation. For example, any stock supplied prior to the introduction of the PPSA probably does not support a valid security interest (the situation in Blakely v Yamaha Music Australia Pty Limited  VSC 231), and the question of the value of ROT stock, including the appropriate date of valuation, remains unsettled.
What is clear is that a properly drafted and registered ROT provision can go a long way to optimising the outcome for a supplier when its customer is wound up.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.