In the tangled web of the Personal Property Securities Act 2009 (Cth) (PPSA) one issue which has only recently been considered in a decided case is when personal property may be taken free of a security interest in the “ordinary course of business”.

What does the PPSA say?

Section 46(1) of the PPSA provides that a buyer or lessee of personal property takes that personal property free of a security interest if the personal property was sold or leased in the ordinary course of the seller’s or lessor’s business of selling or leasing personal property of that kind.

This then leads to the question of what is meant in this context by the phrase “in the ordinary course of business”?

Exceptions to taking free

It is helpful to understand what is meant by this phrase by reference to relevant exceptions. Under section 46(2) of the PPSA, a buyer or lessee will not take personal property free of a security interest where:

  • the personal property may, or must, be described by serial number, and the buyer or lessee holds the personal property as either inventory or on behalf of a person who would hold the collateral as inventory; or
  • the buyer or lessee buys or leases the personal property with actual knowledge that the sale or lease of the personal property would constitute a breach of a security agreement that provides for the security interest.

What have the courts said about when property is taken in the “ordinary course of business”?

In the case of Re Renovation Boys Pty Ltd [2014] NSWSC 340 administrators were appointed to Renovation Boys Pty Ltd (Company) which sold household products. At the time of administration stock worth over $1,500,000 remained in outstanding orders. Many of the orders were fully paid for by customers who had not received the goods. Much of the stock had been allocated to specific customers by the Company’s internal inventory system.

The issue which arose was who owned the stock.

For stock which had been paid for in full by customers and was not under any registered security interest in favour of a supplier, it was held that title to the goods passed to the customers and the goods were to be distributed to the specific customers.

Where the Company had insufficient capacity to fulfill all orders, the goods were to be distributed to the customers on a proportional basis.

There was a further category of stock – that stock where suppliers had registered a security interest over the goods as a conditional sale agreement under section 12(1) of the PPSA.

The court ordered that the administrators were justified in transferring the title to these goods to the associated customers by reason of section 46 of the PPSA because there were no circumstances that indicated:

  • the stock was sold to the Company other than in the ordinary course of the Company’s business; or
  • there was no evidence that customers would have had actual knowledge that the purchase of this stock would be in breach of a security agreement.

Goods supplied on retention of title terms

In the matter of Warehouse Sales Pty Ltd (in liq) & Lewis and Templeton v LG Electronics Australia Pty Ltd & Ors [2014] VSC 644, Warehouse Sales Pty Ltd (WHS) and its subsidiary WHS2 Pty Ltd (WHS2) (which were in liquidation) sold similar goods.

Goods were supplied on credit to WHS on terms that ownership remained with the supplier until those goods were paid for in full, but with an authorisation for WHS to sell these goods at any time to retail customers. The suppliers registered security interests on the PPSR over all goods supplied to WHS.

The liquidators sought judicial guidance regarding two key scenarios where goods were in the possession of WHS and WHS2.

Scenario 1

Scenario 1 concerned sales by WHS to retail customers.

Under section 32(1)(a)(i) of the PPSA, where a secured party authorises a dealing in the property giving rise to the proceeds, that party’s security interest will not automatically extend to the sale proceeds. It followed that customers were entitled to take these goods free of any security interest as it was clear that the goods were sold in the ordinary course of WHS’ business.

Scenario 2

Scenario 2 concerned sales of goods by WHS to WHS2 at cost price, and where those goods had been on-sold by WHS2 to its retail customers.

These sales were also considered to be in the ordinary course of business because:

  • both WHS and WHS2 were engaged in the business of selling goods of that kind and there were no factors suggesting that the sales were of an unusual or extraordinary nature;
  • sales by WHS to WHS2 of goods which WHS2 then sold to customers were merely a different method of selling the same goods, and were no less a part of WHS’ ordinary business despite only forming a small part of it;
  • it is the seller’s way of doing business that is relevant - sellers may do business in a way that is inconsistent with general industry practice;
  • the fact that sales by WHS to WHS2 were for below market value was not determinative.

Key takeaways

  • Section 46 of the PPSA provides a valuable protection for buyers and lessees of property sold to them in the ordinary course of business of an entity.
  • The interpretation of the phrase “ordinary course of business” is not static, and will depend on the circumstances.
  • Courts have been willing to give a broad interpretation to the meaning of the “ordinary course of business”.