Since the Personal Property Securities Act 2009 (PPSA) came into effect on 30 January 2012, we have seen an increase in creditors attempting to establish themselves as ‘secured’ creditors under the Unfair Preference regime, by way of ‘Retention of Title’ (ROT) clauses in their terms of trade. This is because liquidators can only bring an unfair preference claim against creditors in respect of payments made in respect of unsecured debts. The purpose of a ROT clause is to secure payment for goods supplied by preventing title of the goods from passing to the buyer until payment for the goods is made.

But how effective are ROT clauses in securing debt?

The mere existence of a ROT clause in a party’s terms of trade does not automatically result in security over the goods supplied. The parties must take steps to give effect to the ROT clause by treating the goods supplied as though they were subject to a ROT clause. This includes, for instance:

1. ensuring the goods supplied are kept separate from other goods supplied by third parties, and that they remain identifiable;
2. ensuring a separate account is established and maintained with respect to proceeds of the subsequent sale of the goods to third parties; and
3. taking steps to register the security interest on the Personal Property Securities Register (PPSR).

In Harris Scarfe Ltd (In Liqudiation) v Chicago Boot Co. Pty Ltd [2011] SASC 27 Sulan J considered whether goods supplied by Chicago Boot Co. Pty Ltd to Harris Scarfe Ltd were subject to a ROT clause having regard to the trading relationship between the parties and the steps each party had taken to give effect to the ROT, and ultimately concluded that:

“…[the parties] did not act in accordance with the retention of title terms. At all times, they conducted their business on the basis of a creditor and debtor relationship. At no time did Chicago Boot claim title of the goods it delivered to Harris Scarfe. Harris Scarfe did not store the goods separately, nor did they account to Chicago Boot for sales to third parties. The parties at no time treated the goods as if they were subject to retention of title.[1]

 … Even when Chicago Boot was threatening to issue a statutory demand, there was never any claim that title in the goods had not passed. I conclude that the goods were not subject to retention of title [2] … I conclude that Chicago Boot has received an unfair preference in respect of the payments, as alleged.” [3]

While many trade creditors allege they are secured parties by virtue of a ROT clause in their terms of trade, a lot of the time the parties to the transaction never act in a manner consistent with the existence of a ROT clause. Sometimes trade creditors act entirely inconsistent with the existence of a ROT clause, by demanding payment for goods supplied and threatening debt recovery action, instead of taking steps to return to the site to collect the supplied goods.

Generally, in the context of the building and construction industry, shortly after the supply of goods (depending on the nature of the goods supplied) the goods are mixed with other goods, installed or affixed to property, and as such the goods cease being chattels and become fixtures or are otherwise no longer identifiable. Any personal property security interest created by operation of a ROT clause, capable of being registered on the PPSR, is thereby extinguished and/or title in those products passes (in circumstances where the property is on-sold to a third party).

More often than not, by the time a creditor receives payment for the goods supplied these goods have been well and truly incorporated into a building structure (sometimes by the creditor themselves, if they also perform the labour in respect of installing the goods supplied) with the result being that any security interest under the ROT clause had extinguished. The result of this is such that, at the time the creditor received the payment, they were not in fact secured by virtue of the ROT clause.

Even if a party has taken steps to give effect to a ROT clause and/or registered their security interest on the PPSR, this does not necessarily mean that any payments made were in respect of a “secured debt” or they are a ‘secured party’ and immune from preference claims. Trenfield & Ors v HAG Import Corporation (Australia) Pty Ltd [2018] QDC 107 considered this point and the principles derived from this case can be summarised as follows:

1. A recipient of an unfair preference may assert to be a secured creditor even if the security interest was not registered on the PPSR[4]
2. In order to determine whether a payment is against a secured debt, it is necessary to value the security as at the date of each payment, not the date the winding up commenced[5]
3. The value of the goods is the wholesale price of the goods[6];
4. Payments are made against unsecured debts first even if a portion of the debt is secured[7];
5. On that basis, if the unsecured debt is more than payment received, the payment will be a payment solely against an unsecured debt and constitute an unfair preference payment.[8] This concept is outlined as follows:

“At that date the debt owed by the company to the defendant was $703,634.07, of which $417,047.07 was unsecured under subsection (2). Hence, the whole of the payment of $100,000 that day is to be treated as a payment in respect of that unsecured debt.”[9]

As such, security interests created under ROT clauses in terms of trade (registered or not) will not always be effective in fending off liquidators’ preference claims. In the building and construction industry, they will often not be effective in achieving security at all. It depends on whether the parties have taken steps to give effect to the ROT clause, and if so, it will then be a matter of considering the value of the party’s security against the total amount of the debt at the time the payment was made, in order to determine if the security was effective in actually securing the debt (and to what extent).

If a liquidator is pursuing you or your company in relation to a preference claim, please get in touch to discuss your options. Our lawyers have extensive experience acting for both liquidators and creditors in relation to preference claims, and can advise you of your options, propose effective strategies, and assist you obtaining a commercial resolution.

[1] [2011] SASC 27 at [133]

[2] [2011] SASC 27 at [134]

[3] [2011] SASC 27 at [136]

[4] [2018] QDC 107 at [54]

[5] [2018] QDC 107 at [60–61]

[6] [2018] QDC 107 at [57]

[7] [2018] QDC 107 at [61]

[8] [2018] QDC 107 at [66]

[9] [2018] QDC 107 at [66]