The amendments to the Corporations Act 2001 made in December 2007 radically changed the law surrounding administrations and retention of title clauses.
The effect of the amendments is to prevent an administrator from being personally liable for selling goods that are the subject of a retention of title clause.
What is a retention of title clause?
A retention of title clause is a provision in a contract that prevents title in goods from passing until those goods have been paid for in full.
An 'all monies' retention of title clause provides that title in goods supplied will not pass until those goods have been paid for and all other amounts owed by the Company to the supplier have also been paid in full.
Retention of title clauses have been used to protect the interests of suppliers against a purchaser's insolvency.
The position prior to the amendments
Both the standard retention of title clause and the all monies clause, depending on their terms, may be effective in preventing title from passing to the Company.
As title has not passed, the Company does not own the property and an administrator, as agent of the Company, must hold the goods on trust for the supplier.
Prior to the legislative amendments, if an administrator had notice of the retention of title clause and went on to sell the goods which were the subject of the clause, the administrator could be held liable in conversion.
Significantly, an administrator was not entitled to be indemnified from the Company's assets to pay his or her liability arising from the sale of those goods. The right of the administrator to be indemnified would, at best, be limited to an equitable lien over the proceeds of sale of the goods.
An equitable lien would be of little comfort to an administrator if the goods were sold at a marked down price or liquidation value, as the liability of the administrator is measured by the market value of the goods at the time the goods were sold.
Despite the fact that the Company did not have title to the goods and the administrator could not lawfully sell the goods, section 440C of the Corporations Act 2001 prevented the supplier from repossessing the goods without the administrator's consent or leave of the Court.
Amendments to the law
The amendments to the Corporations Act effected by the Corporations Amendment (Insolvency) Bill 2007 give an administrator the right to use and sell property which is the subject of a valid retention of title clause.
The purpose of the amendments is to try to strike a balance between the interests of suppliers of the goods and the interests of other creditors of a company which is in financial trouble.
The effect of the amendments is to prevent an administrator from becoming liable in conversion for selling goods the subject of a retention of title clause.
The amendments also try to protect the rights of the supplier by requiring administrators to act reasonably when selling goods that are the subject of a retention of title clause.
Section 442C provides that an administrator must not dispose of property that is in the possession of the Company but is owned by someone else unless:
1. the sale is in the ordinary course of the Company's business;
2. the owner consents; or
3. with leave of the Court.
The Act further provides that the disposal of the property will still be in the ordinary course of business where the owner of the property which is the subject of a retention of title clause has made a demand for the return of the property.
The owner of the property is otherwise prohibited from taking possession of the property by section 440C.
Sale of property
Section 442CC of the Act provides that, if an administrator disposes of property that is the subject of a retention of title clause, then the administrator must set aside the net proceeds of the sale to the extent of:
1. the amount payable by the Company to the supplier for the property which has been sold; and
2. other amounts owed under the contract pursuant to which the supplier sold the property to the Company.
If the net proceeds are not sufficient to discharge these debts, then the amount that remains unpaid may be recovered from the Company as an unsecured debt.
Administrators are under an obligation to act reasonably when exercising the power of sale. An administrator's personal liability is limited to circumstances where the administrator does not act reasonably.
Administrators will not be personally liable to a creditor where the administrator sells property that is the subject of a retention of title clause in accordance with the provisions of the Act. The net proceeds of the sale, however, may be required to meet other amounts due under the contract (in addition to the purchase price).
More to come
Further reforms to the law relating to retention of title clauses are foreshadowed in order to ensure that an appropriate balance is struck between the owners of goods and other creditors.
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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.