In the recent Victorian Supreme Court decision of Central Cleaning Supplies (Aust) Pty Ltd v Elkerton and Young (in their capacity as joint and several liquidators of Swan Services Pty Ltd (in liquidation))[1], the Supreme Court considered the issue of whether the Plaintiff's credit application signed by Swan Services Pty Ltd (Swan Services) before 30 January 2012 was a 'transitional security agreement' within the meaning of that term in the Personal Property Securities Act 2009 (Cth) (PPSA).

Under the PPSA a "transitional security agreement" is defined as a security agreement that is in force immediately before 30 January 2012.  Any security interest in collateral provided for in a transitional security agreement is a transitional security interest (whether the security interest arises before, at, or after 30 January 2012) and was deemed to have been continuously perfected without registration during the two year transitional period (which expired at the end of January 2014).  

Facts

The Plaintiff was a supplier of cleaning equipment and products (Goods).  In September 2009, Swan Services applied for a 30-day commercial credit facility with the Plaintiff by completing and signing a credit application (Credit Application).  The Credit Application included a statement that the supply of Goods was governed by the Plaintiff's 'Standard Terms and Conditions'.  The Standard Terms and Conditions were not in evidence and it was not apparent whether, if they existed, they included a retention of title clause (ROT Clause).

Subsequently, the Plaintiff supplied Goods to Swan Services from time to time following the receipt of purchase orders. 

An invoice would be issued by the Plaintiff to Swan Services once the Goods had been delivered.  Each invoice contained a ROT Clause which provided that it was a condition of sale that "the Goods the subject of this sale remain the property of [the Plaintiff] …. until the whole of the purchase price has been paid by [Swan Services] to [the Plaintiff]". (emphasis added)

On 27 June 2013, the Defendants were appointed as liquidators of Swan Services (Liquidators).

The Plaintiff claimed that a number of invoices remained unpaid in respect of cleaning equipment supplied to Swan Services in the period between November 2012 and May 2013 (Equipment).  It sought the return of the Equipment on the basis that the ROT Clause had been incorporated into the Credit Application and therefore it had a transitional security interest under the PPSA which at that time was not required to be registered on the Personal Property Security Register (PPSR) in order to be perfected. 

The Liquidators rejected the Plaintiff's claim on the basis that the Plaintiff's security interest in the Equipment was not a transitional security interest and had therefore vested in Swan Services pursuant to the provisions of the PPSA following the appointment of the Liquidators because the security interest had not been registered on the PPSR and was therefore unperfected.

The Plaintiff appealed against the Liquidators' decision.

Outcome

Justice Ferguson accepted that the ROT Clause had been incorporated into the supply contracts between the parties through a course of dealing and that the Plaintiff therefore had, at least prior to the Liquidators' appointment, a security interest in the Equipment.

However, her Honour upheld the Liquidators' decision, finding that the relevant security interests were not transitional security interests and, having not been perfected through registration on the PPSR, had vested in Swan Services.

Justice Ferguson concluded that the ROT Clause (which gave rise to the security interest) could not have been incorporated as a term of the Credit Application as the clause was too late in time, coming as it did, after the Credit Application had been signed.  Her Honour therefore rejected the Plaintiff's argument that the Credit Application was a "transitional security agreement" as it did not provide for the granting of a security interest in the Equipment. 

Her Honour also considered that in this case, having regard to the form of the Credit Application, the nature of the arrangements between the parties and the wording of the ROT Clause, it was the intention of the parties that each purchase order gave rise to a separate contract for the sale of Goods and therefore a separate security agreement.  One of the key factors that her Honour took into account in forming that view was the fact that the ROT Clause which appeared on the invoices included the following statement "Goods the subject of this sale remain the property of [the Plaintiff]" (emphasis added). 

It was therefore unnecessary on the facts of this case for her Honour to consider whether the Credit Application could have been a transitional security agreement had it included the ROT Clause. Justice Ferguson did however indicate that while the Credit Application did not on its terms operate as an overarching supply agreement, had the Credit Application included a ROT Clause to the effect that "title in all goods whenever supplied was retained by [the Plaintiff] until payment in full was made", it would not have mattered that the purchase orders and invoices had been issued after 30 January 2012.  This was because under section 308 of the PPSA, transitional security interests can arise after 30 January 2012 if a transitional security agreement 'provides' for the granting of the security interest.

Summary

While this decision does not directly resolve the issue of whether credit applications entered into before 30 January 2012 containing ROT Clauses are in fact transitional security agreements, Justice Ferguson's statements in this case, along with statements made by Justice Beech of the Supreme Court of Western Australia inIndustrial Progress Corp v Wilson[2] suggest that they could be, depending on the circumstances. The Court will take into account the wording of the terms of the credit application as a whole (including the retention of title clause itself) and the nature of the trading relationship between the parties.

We expect that suppliers and insolvency practitioners will continue to debate this issue unless or until a superior court in Australia is in fact required to squarely decide the issue.

Implications for Suppliers

  • Suppliers will only have a security interest in the goods supplied by them if the relevant contract for the sale includes a ROT Clause. 
  • If a ROT Clause has not been incorporated into the relevant contract, suppliers will have no rights to the unpaid goods in the event of the insolvency of their customer.  Suppliers should consider including a ROT Clause in order to minimise the impact of insolvency of their customer.
  • Including a ROT Clause into supply agreements is however not enough and the security interest created by the ROT Clause must also be registered on the PPSA with the correct descriptions and within the timeframes prescribed by the PPSA in order for the supplier to obtain the maximum protection that it can under the PPSA.
  • Suppliers relying on ROT Clauses included in credit applications signed before 30 January 2012 should review their registrations and consider whether the security interests have been properly described as either transitional security interests or non-transitional security interests (as appropriate) and whether the registrations were made within the relevant timeframes.  If the security interest has not been properly described or has been registered outside the relevant timeframes, suppliers may need to take additional steps in order to protect their position going forward.