Introduction

If a seller of goods goes into liquidation in the era of the Personal Property Securities Act2009 (Cth) (PPSA), whose interest in goods prevails in a contest between the liquidator, an unpaid supplier with retention of title (ROT) rights and a third party purchaser?

The PPSA came into operation just over 3 years ago and to date, the Courts seldom have been asked to consider its operation and effects.  Recently the Supreme Court of Victoria had occasion to deal with the operation of ROT clauses in supply agreements in the context of the PPSA.

In Warehouse Sales Pty Ltd (in liq) & Lewis and Templeton v LG Electronics Australia Pty Ltd & Ors1, the Court dealt with competing interests in goods of liquidators, suppliers and customers, when the retailers of the goods had gone into liquidation.  The Court had to determine whether under the PPSA, the registered security interests of suppliers, which had sold goods to a retailer subject to ROT provisions, trumped the interests in those goods of the liquidators or retail customers.

Facts

Warehouse Sales Pty Ltd (WS) carried on a business of selling white goods from retail stores in Victoria.  Its suppliers included well-known brands such as Electrolux, Panasonic and LG (Suppliers).

WS sold some of the goods to a subsidiary, WHS2 Pty Ltd (WS2).  WS2 operated one store selling white goods.  WS2 sold some of the goods to its retail customers.  The usual retail trade of WS and WS2 included selling goods to customers by cash on delivery, cash before delivery and lay-by.

The Suppliers supplied goods to WS on credit and their terms of trade included ROT clauses.  Generally, those clauses provided that ownership of goods remained with a Supplier until the goods were paid for in full by WS or until all debts owing by WS to the Supplier were paid in full.  Also, the terms of trade permitted WS to dispose of the goods in the ordinary course of its business.  WS2 made no purchases from the Suppliers and there was no contractual relationship between them.

ROT arrangements are a type of security interest covered by the PPSA.  The Suppliers had registered their security interests in the goods on the Personal Property Securities Register (PPSR).

WS and WS2 went into liquidation.  At that time, they each held stock of white goods obtained from the Suppliers.  At issue for the liquidators was whether the goods vested in the liquidators, and therefore could be treated as assets of the companies for the benefit of creditors of WS and WS2 generally; or if the security interests of the Suppliers prevailed, meaning that the goods must be returned to the Suppliers; or if retail customers owned goods they had purchased.  The liquidators applied to the Court for judicial advice.

The PPSA

The PPSA deals with the registration of, and priorities between, security interests in personal property (referred to as "collateral") on the PPSR.2  It does not determine title or ownership.  In general a security interest properly registered on the PPSR will prevail against a third party in possession of collateral, notwithstanding the third party's apparent ownership.

Relevantly to this case, in limited circumstances there are buyer protection provisions in the PPSA that protect bona fide purchasers for value without notice of a security interest.  For example:

  1. Under section 32, a security interest in collateral is extinguished if the secured party expressly or impliedly authorised the disposal of the collateral (and usually the security interest then attaches to the proceeds of disposal).
  2. Under section 46, collateral will be free of a security interest "if the personal property was sold…in the ordinary course of the seller's…business of selling…personal property of that kind".  (There are exceptions to this rule, which are not dealt with in this article.)

The Court took the view that the implementation of the PPSA did not mean that pre-existing sale of goods legislation should be ignored, providing there was no inconsistency.  Specifically, the operation of the Victorian sale of goods legislation – the Goods Act 1958 (Vic) – was not excluded, and was relevant to determine if a person was a "buyer" of personal property that has been "sold" (those terms are not defined in the PPSA and the PPSA does not deal with the sale of goods per se).

Issues and answers

The Court had to determine which party owned the goods sold or held by WS and WS2 – the Suppliers, the liquidators or the third party purchasers?  The Court considered three factual scenarios in which WS and WS2 sold goods and concluded as follows:

Scenario 1 – Sale by WS of goods purchased from the Suppliers to WS's retail customers

The Court held that the Suppliers did not have a security interest in goods sold by WS to its retail customers (other than lay-by sales).  Such sales were in the ordinary course of WS's business, and so were specifically authorised by the Suppliers in their terms of trade with WS.  It followed that the buyers took the goods free of the Suppliers' security interests.

Purchases on lay-by were different.  The Court said that under the Goods Act there was no "sale", because property in the goods did not transfer to the purchaser until full payment was made.  Accordingly, the Suppliers had a security interest in those goods (and WS still had possession).

Scenario 2 – Sale by WS of goods purchased from the Suppliers to WS2

The Court held that the Suppliers (other than Panasonic) did not have a security interest in the goods sold by WS to WS2.  Again, the goods were sold in the ordinary course of WS's business, and such sales were authorised by the Suppliers.

The Court focussed on the meaning of "in the ordinary course of business" in relation to sales by WS to WS2.  The phrase had not been considered in Australia under the PPSA.  Relevant factors were:

  • WS's business was selling white goods.  It did not sell exclusively to retail customers;
  • WS regularly engaged in sales to WS2, or through WS2 to retail customers.  The fact this was less frequent than sales by WS to customers was not significant;
  • WS's practice did not need to conform to industry practice – the specific seller's practice is relevant.

Panasonic was different to the other Suppliers because its supply agreement with WS stated that "Sale of the Goods to a third party for further resale is not permitted unless the Buyer and Panasonic have entered into a current distribution Agreement."  Accordingly, the sale of the goods to WS2 was not authorised by Panasonic and it retained a security interest in the goods it supplied to WS.

Scenario 3 – Same as Scenario 2 except with an on-sale by WS2 to its retail customers

The Court held that as the security interest (other than Panasonic's) was extinguished following the sale by WS to WS2, the goods were not subject to a security interest when sold to retail customers of WS2.  As such, sales by WS2 were not affected3 (except, again, for sales by WS2 by lay-by, as title in the goods did not pass to the purchaser before full payment).

Lessons

In the event of a wholesale customer entering external administration, an unpaid supplier of goods may be exposed to the competing claims of a liquidator or retail customers in respect of the goods.  Usually, a ROT clause, properly registered as a security interest on the PPSR, will protect the supplier.

In the slightly unusual circumstances of WS and WS2, Panasonic's position was best protected because its terms of trade expressly prevented WS from selling goods to a subsidiary for resale.  Such a restriction is desirable in light of the buyer protection provisions of the PPSA.  Also, longstanding concepts from sale of goods legislation – for example, whether or not there is a "sale" of goods, and if and when property in goods passes – may remain relevant in the PPSA era.