In Hussain v CSR Building Products Limited; In the matter of FPJ Group Pty Ltd (in liquidation) the Federal Court held that a retention of title (ROT) clause secures the purchase price of the goods it covers, and that payment of that price will not be an unfair preference since the creditor has not received payment of an “unsecured debt” within the meaning of section 588FA of the Corporations Act 2001 (Cth).

The liquidator of FPJ Group Pty Ltd (Company) had brought an unfair preference claim against CSR Building Products Limited (CSR), which had previously supplied building goods and materials to the Company on credit. The relevant credit agreement, and all of the invoices issued by CSR to the Company, contained an all monies ROT clause.

One of the grounds on which CSR defended the claim was that the payments received in reduction of the outstanding purchase price during the relation back period were for debts secured by the operation of the ROT clause.

Justice Edelman found that an ROT clause is to be considered “security” for the purposes of an unfair preference claim for the following reasons:

  1. Neither s588FA(1)(b), nor the Corporations Act 2001 (Cth) generally, defines the term “unsecured debt”. 
  2. The authorities on the interpretation of ROT clauses establish that an ROT clause can be described as a “security”.
  3. The 2010 amendments to the Corporations Act 2001 (Cth), introduced to create greater consistency with the Personal Property Securities Act 2009 (Cth) (PPSA), provide a definition of “security interest”, which provides context for the interpretation of “unsecured debt”.  The second reading speech noted that the amendment would “ensure the Corporations Act treats property provided by a supplier on a ‘retention of title’ basis is secured property”.

The timing of the credit agreement in this case meant that the ROT clause could only be a “transitional security interest” under the PPSA, and so could not be a “security interest” for the purpose of s51 of the Corporations Act 2001 (Cth).  However, this did not prevent the ROT clause from “negating” the unsecured nature of the debts owed by the Company to CSR.

  1. Other provisions of the Corporations Act 2001 (Cth) treat ROT clauses as securing debts, including the definition of ROT clause under s9, and provisions relating to the powers of administrators under s442CC.

Nor did it matter that at the date of winding up the company had sold all of the goods and materials that were subject to CSR’s security. At the time of sale of the goods and materials a trust over the proceeds was created, defeasible only upon payment for the goods. The value of the security was equal to the amount of the payments received by CSR, so that when CSR lost title to the goods or their proceeds on receipt of payment, the net receipt to CSR from the transaction was $nil.

Ultimately Justice Edelman held that the ROT clause was an effective defence to the unfair preference claim (the liquidators also failed because they had not proved insolvency at the time of the payments).

The important message for creditors and liquidators alike is that ROT clauses can be raised in defence to an unfair preference claim, and that the introduction of the PPSA has strengthened that defence.