Recently, the Western Australian Supreme Court has, for the first time, considered the application of the Personal Property Services Act 2009 (PPSA) transitional provisions to supply of goods after 30 January 2012 under a credit application entered before 30 January 2012.

This provides important guidance in the ongoing development of securities under the PPSA.

Application of the Transitional Provisions

When the PPSA commenced on 30 January 2012, it marked a significant change to Australian securities law.  To aid businesses and individuals in their conversion to the new system, the legislature included in the PPSA a series of transitional provisions.  These provisions provide temporary protection (‘perfection’) to interests which arise under security agreements entered before 30 January 2012. 

For example, a lease of goods entered before 30 January 2012 would receive temporary protection (‘perfection’) until 31 January 2014. That is, the lessor would have until 31 January 2014 to protect its rights in accordance with the new regime. The intent of these provisions, as expressed in the Explanatory Memorandum1, was to “to preserve existing rights and priorities while ensuring a smooth transition to PPS law”.

Unfortunately, in practice the transitional rules gave rise to significant uncertainty, which has led to heated debate between legal practitioners, commentators, insolvency practitioners and creditors. 

The primary cause for uncertainty is the definition of a “transitional security agreement”.  Consider the following common situation. Supplier provides goods to Customer on a retention of title basis. That is, the Supplier retains ownership of the goods until it receives payment in full from the Customer. The Supplier and Customer entered into a Credit Application when their relationship started, before 30 January 2012. That Credit Application includes general terms and conditions to govern the future relationship of the parties, including a retention of title clause, but requires that specific orders be requested by a purchase order and supplied pursuant to an invoice setting out the details of the goods, quantity, price and delivery dates. The parties continue trading throughout 2012 and 2013 by purchase order and invoice. See Figure 1.

Click here to view Figure 1.

The current uncertainty concerns whether or not the Credit Application constitutes a ‘transitional security agreement’. That is, whether the date of the parties’ contract is the date of the Credit Application, or the date of acceptance of each purchase order by issue of the invoice. On one hand, the Supplier may argue that the Credit Application contains terms agreed to by the parties and, arguably, ‘provides for’ later security interests to arise under the purchase orders and invoices. On the other hand, the liquidator of the customer is likely to maintain that the Credit Application does not contain certainty of terms as to the exact products to be supplied, or their quantity unit price or delivery dates. Such certainty only arises upon the acceptance of the Purchaser order (ie offer) by the invoice (ie acceptance).

If the Credit Application complies with the definition of a ‘transitional security agreement’, the Supplier will receive temporary protection until 31 January 2014, even if it has not registered on the PPS Register. (Please note: The Supplier will still be required to register its rights before 31 January 2014 (at which point temporary transitional perfection ceases) to ensure continued transitional protection, to the extent available.)

However, if the Credit Application is not a ‘transitional security agreement’, no transitional protection is available to the Supplier and it may lose title the goods in question, notwithstanding questions of ownership, unless it has registered its rights on the PPS Register.

This topic has been agitated in many liquidations involving supplies on a retention of title basis, certain leases and certain bailment arrangements. 

Two Australian cases

Despite the debate, the matter remains unclear.  Most legal proceedings initiated to ventilate the issue have settled prior to trial. However, in 2013 two Australian Courts considered retention of title under the PPSA. Unfortunately, neither of the Courts was required to finally determine what is now commonly known as ‘the transitional issue’.  Nor, in our view, were they required to consider all aspects of the argument.  However, their comments may provide some guidance going forward.

Crossmark Asia Ltd v Retail Adventures Pty Ltd (administrators appointed)2  (NSW Supreme Court, February 2013)

Retail Adventures was the first Australian case to consider retention of title clauses under the PPSA.  Crossmark supplied goods to Retail Adventures for re-sale.  The relationship between Crossmark and Retail Adventures was governed by two pro forma invoices (PFI) issued in February and March 2012 which set out all the terms of the agreed supply, including the type of goods, quantity and unit price.  Retail Adventures then ‘drew down’ on the invoiced goods by purchase orders.  While the PFI dates meant that there was no scope to consider the PPSA transitional provisions, the Court did make comments arguably of relevance to the debate.

The Court agreed that the purchase orders were ‘merely administrative or mechanical steps in the implementation of each contract’ and that the PFIs were the date of the parties’ contract.  However, in reaching this decision the Court expressly noted that the contract (being the PFIs) contained the full terms of the parties’ bargain, including “settlement on property and price”.  In particular, “[i]t contemplated expressly that the obligation to deliver (ienot obligation to supply) would be triggered by the POs from time to time”. 

It is rare that a credit application or master supply agreement will identify the exact property, price and obligation to deliver specific goods.  On that basis, in many instances Crossmark is not determinative of the transitional issue.

Industrial Progress Corporation Pty Ltd v Wilson3  (WA Supreme Court, June 2013)

Wilson involved an application by a secured creditor to extend the operation of a caveat.  The secured creditor supplied goods to the Company under a retention of title clause set out in a credit application dated October 1998.  Specific goods were then ordered and supplied pursuant to invoices, including after 30 January 2012.  The secured creditor had not registered its rights.

The secured party sought to extend the caveat to land which was the subject of a guarantee.  The guarantor argued that the secured party should be refused leave to extend the caveat because it had not protected its rights under the principle security.  We address questions concerning the guarantee in a separate article.

Given the nature of the application, the Court was only required to consider whether the secured party had a reasonably arguable case that the credit application comprised a transitional security agreement.  The Court was not required to finally determine the issue.

After considering the applicable transitional provisions, the Court held that it was seriously arguable that the credit application formed a transitional security agreement, such that the 2012 supplies received transitional protection notwithstanding the creditor’s failure to register its rights.  Specifically, the Court considered that:

“The terms of the contract were, in substance, that the [creditor] would supply to the Customer goods on credit when requested to do so, on the standard terms and conditions that formed part of the credit application.”

Interestingly, in articulating this view, the Court did not expressly consider pre-PPSA case law concerning the date of a formation of contract.  It may be questioned, whether such consideration might have altered the outcome.

While these cases do not provide conclusive authority, it will be interesting to observe future Court decisions on this question.

What remains clear is that in addressing the transitional issue, it is necessary to consider the specific wording of the pertinent terms in the credit application / master supply agreement, together with the terms of the invoices and purchase orders, and the parties’ conduct.  While pre-PPSA common law on formation of contracts was not expressly considered in either case, these principles should also be taken into consideration when determining the date of the parties’ contract and, accordingly, whether transitional protection is available.

This article was written by Katherine Payne, Special Counsel and Ee Lynn Tan, Lawyer.

References

1 Personal Property Securities Bill 2009, Replacement Explanatory Memorandum, paragraph 9.3 at page 124

2 [2013] NSWSC 55

3 [2013] WASC 255

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