On 17 December 2014, his Honour Justice Sifris handed down his decision in Warehouse Sales Pty Ltd (in liq) & Lewis and Templeton v LG Electronics Australia Pty Ltd & Ors  VSC 644. One of the questions in the case was whether security interests arising under the Personal Property Securities Act 2009 (Cth) (PPSA) had been extinguished as a result of the goods being sold in the ordinary course of business.
Background and summary of findings
Warehouse Sales Pty Ltd (in liquidation) (WHS) was in the business of selling white and brown goods that it sourced from various suppliers through stores in Victoria. The suppliers sold the goods to WHS on credit subject to retention of title terms. The suppliers had registered their security interests on the PPSR. The sale terms provided that ownership in the goods remained with each supplier until payment in full had been made. However, the trade terms of each of the suppliers (except for Panasonic Australia Pty Ltd (Panasonic)), allowed WHS to sell the goods in the ordinary course of business. The Panasonic terms were different. They allowed WHS to dispose of the goods in the ordinary course of business to bona fide consumers for value without notice of the rights of Panasonic, but prohibited the goods being sold to a third party for further re-sale.
WHS on-sold some of the goods to a subsidiary, WHS2 Pty Ltd (in liquidation) (WHS2), which operated a store in Wodonga also selling white and brown goods to retail customers. A running account was operated which recorded goods supplied by WHS to WHS2 for sale in the Wodonga store. WHS issued monthly statements to WHS2, who paid WHS when funds were available. At the time of the appointment of the liquidators, WHS2 owed WHS about $2.1M. The goods were recorded in WHS2's books as assets of WHS2.
At the time of liquidation, WHS remained in possession of some of the goods obtained from its suppliers. As for the goods on-sold to WHS2, some had been sold to WHS2's retail customers and the unsold goods remained in the possession of WHS2 at its Wodonga store.
There were three different ways the retail customers of WHS and WHS2 purchased goods, namely cash on delivery, cash in advance of delivery and layby. At the time of liquidation, some of the customers had paid in full, some had part paid and others had not made any payment.
The table below identifies some of the questions raised in the case and provides the answer given by the Court. The reasons for each answer are summarised further below:
Click here to view the table.
Relevant provisions of the PPSA
The case considers s32 (continuation of security interest in collateral, and attachment to proceeds) and s46 (taking personal property free of security interest in ordinary course of business) of the PPSA which are set out below.
32(1) Subject to this Act, if collateral gives rise to proceeds (by being dealt with or otherwise), the security interest:
A) continues in the collateral, unless:
i.) the secured party expressly or impliedly authorised a disposal giving rise to the proceeds; or
ii) the secured party expressly or impliedly agreed that a dealing giving rise to the proceeds would extinguish the security interest; and
B) attaches to the proceeds, unless the security agreement provides otherwise.
46 (1) A buyer or lessee of personal property takes the personal property free of a security interest given by the seller or lessor, or that arises under section 32 (proceeds--attachment), 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.
(2) Subsection (1) does not apply if:
A) in a case in which personal property of that kind may, or must, be described by serial number--the buyer or lessee holds the personal property:
i) as inventory; or
ii) on behalf of a person who would hold the collateral as inventory; or
B) in any case--the buyer or lessee buys or leases the personal property with actual knowledge that the sale or lease constitutes a breach of the security agreement that provides for the security interest.
For reasons outlined in the decision, Sifris J was of the view that it was necessary to refer to the Goods Act 1958 (Vic) (Goods Act) in determining whether a person was a "buyer" of goods that had been "sold" under s46 of the PPSA.
Sales by WHS to its retail customers
It was held that none of the suppliers retained a security interest in goods sold by WHS to its retail customers as those sales were authorised by all suppliers. Sales were found to have taken place where:
- the goods had been paid in full, either by cash on pick up or cash before delivery; or
- there had been part payment.
For those goods paid in full, under the Goods Act, there had been a sale because there was an unconditional contract for the sale of specific goods in a deliverable state. For partly paid goods, the property in the goods passed at the time the contract was made and there had been a sale even though the time for payment had been postponed.
However, the same could not be said for goods placed on layby. Under the WHS terms and conditions, WHS retained ownership in those goods until paid in full. Having regard to the Goods Act, the laybys were agreements to sell, with the property in the goods not passing until payment in full had been made. As the laybys had not become sales, the goods on layby remained subject to the suppliers' security interests.
Sale by WHS to WHS2
It was held that the suppliers (except for Panasonic) did not have a security interest in the goods sold to WHS2, as:
- the Court found that goods sold to WHS2 were sold in the ordinary course of business of WHS; and
- sales in the ordinary course of business were permitted by the suppliers.
When assessing whether a sale by WHS to WHS2 was "in the ordinary course of business", Sifris J cited two High Court insolvency cases which had confirmed the meaning of that phrase in the insolvency context. However, whilst found to be useful, his Honour regarded the enquiry in an insolvency case to be different to an enquiry under the PPSA. His Honour went on to look at a number of Canadian and New Zealand authorities which considered the meaning of the phrase under their equivalent of the PPSA. Ultimately, his Honour found that the sales to WHS2 were in the ordinary course of business of WHS for reasons including:
- WHS was engaged in the business of selling white goods and this was not limited to sales to retail customers;
- the mode of selling to WHS2 was regularly engaged in and was no less part of the ordinary business of WHS than retail sales to customers;
- the goods sold to WHS2 were part of the primary line of business of WHS and the only difference was price and quantity compared to retail sales; and
- no factors were present which suggested the sales to WHS2 were unusual.
Accordingly, with the exception of Panasonic, it was held that the suppliers' security interests did not continue in the goods under s32 of the PPSA as the suppliers expressly authorised the disposal of the goods in the ordinary course of business. However, Panasonic retained its interest in goods sold to WHS2 as Panasonic prohibited a sale to a third party for on-sale.
Section 46 of the PPSA also applied to sales to WHS2 (except for Panasonic goods) as the goods were sold in the ordinary course of business. Section 46(2)(b) protected Panasonic as it provides that the 'taking free' rule in s46 will not apply where the buyer is aware that the sale breaches the security agreement. WHS2 knew that the Panasonic terms and conditions had the effect of prohibiting sales from WHS to WHS2.
Sales by WHS2 to its retails customers
Putting aside the Panasonic goods for the moment, the retail customers of WHS2 who purchased other goods were protected, as they took the goods free of any security interest pursuant to s46. However, the goods subject to layby remained the property of WHS2 as there had not been any sale.
The Court considered that the position of retail customers of WHS2 who purchased Panasonic goods might be different. However, the Court was not asked to address the question. Nevertheless, given it is likely that the retail customers purchased the goods without knowledge of a breach of the Panasonic terms and conditions, it is likely that those customers would benefit from the 'take free' rule in s46 of the PPSA.
For Panasonic goods on layby, his Honour found that the goods remained subject to Panasonic's security interest, as there had not been any sale.
Take out from the decision
For those in the business of supplying goods which are subject to a security interest under the PPSA, regard should be had to the type of sales the customer will be permitted to conduct. As is clear from this case, a sale in the ordinary course of business is not necessarily limited to a sale to retail customers. If a supplier does not intend for its customer to have the ability to on-sell to a third party for re-sale, then the supplier should consider prohibiting transactions of that kind in the terms and conditions of supply.
It is also interesting to note that Sifris J held the view that there was no reason that the State-based sale of goods legislation could not be applied to consider the meaning of existing concepts referred to in the PPSA. In reaching that view, his Honour emphasised that the PPSA is not a code and looked at s254 of the PPSA, which provides that it is to operate concurrently with the laws of the Commonwealth, State and Territory law and the general law.