The PPSA and unfair - Dentons
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Retention of title, the PPSA and unfair
preferences: something for everyone?
Scott Guthrie DENTONS
Australia’s insolvency regime elevates secured credi- entirely fatal to a defence to an unfair preference claim
tors to an exalted position. Instead of being left to by a liquidator in respect of payments made by an
participate in any available return with other unsecured insolvent customer prior to liquidation.
creditors on a pari passu basis, secured creditors have
the advantage of resorting to their security in the hope of Elkerton — a prologue
using it to recover most, if not all, of their debt. Since the decision of the Court of Appeal of Victoria
Prior to the introduction of the Personal Property in Central Cleaning Supplies (Australia) Pty Ltd v
Securities Act 2009 (Cth) (PPSA), a retention of title Elkerton (in his capacity as joint and several liquidator
(ROT) creditor was in a particularly advantageous of Swan Services Pty Ltd) (in liq))3 (Elkerton), it is likely
position. Such a creditor could rely on their contractual that many practitioners assumed that the default legal
rights (retaining title to goods delivered until paid) to position in the context of an ROT arrangement under the
retrieve identifiable stock upon the insolvency of its PPSA was settled.
customer and resell it elsewhere. The facts in Elkerton can be briefly stated. Prior to
The PPSA inexorably altered this position by requir- the commencement of the PPSA, the ROT creditor’s
ing an ROT creditor to also register its interest in customer had executed a credit application which pro-
personal property so as to maintain its secured status in vided that any future supply of goods would be on terms
an insolvency context. That is because an ROT arrange- that payment was not due for 30 days and that future
ment is now defined as a security interest under the supplies would be subject to the creditor’s standard
PPSA.1 terms and conditions. Those terms and conditions included
A failure to register (and thereby perfect) interests in an ROT clause. Deliveries were thereafter made before
collateral (eg goods and stock) can have fatal conse- and after the commencement of the PPSA.
quences for an ROT creditor. Section 267 of the PPSA A liquidator was appointed to the creditor’s customer.
provides that in circumstances where an external admin- The creditor sought to rely on its ROT clause to compel
istrator (including a bankruptcy trustee, but not a receiver) the liquidator to allow it to reclaim its stock delivered
is appointed, any unperfected security interest “vests” in following the commencement of the PPSA. There was
the insolvent estate of the debtor. one problem with that approach: the creditor had not
In other words, an ROT creditor’s assertion to own- registered its security interest (that is, the ROT terms of
ership of goods is no longer enough in the event of the trade) on the Personal Property Securities Register
debtor’s insolvency. Its interest in the goods delivered (PPSR). The liquidator asserted that s 267 of the PPSA
must also be registered. But when does that interest operated to vest the stock in the insolvent estate of the
arise? Is it upon each supply of goods, requiring multiple debtor.
registrations? Or can an ROT creditor register an interest Transitional provisions delay operation of the
created by one overarching agreement that will apply to PPSA
all future supplies? However, the PPSA contains transitional provisions
A recent decision of the District Court of Queensland, which provided creditors with a 2-year moratorium
Trenfield v HAG Import Corp (Australia) Pty Ltd2 period within which to comply with the PPSA in respect
(HAG), considered these very issues and illustrates a of arrangements in effect prior to the commencement of
number of important concepts. Firstly, the specific terms the PPSA, but having effect after it. Broadly speaking,
of an ROT arrangement are critical in determining when within that window of time, transactions now caught by
a security interest is created and therefore when it must the PPSA were to have legal effect as though the PPSA
be (or is capable of being) registered. Secondly, and just was never enacted for a period of 2 years. Relevantly, all
as significantly, a failure to register (and thereby perfect) the deliveries of stock in Elkerton were made within the
an otherwise operable security interest may not be 2-year transitional period.
98 australian banking and finance August 2018The question for the Court of Appeal in Elkerton was: On first principles then, in order for the arrangement
were the deliveries made after the commencement of the between debtor and creditor to be a “security agree-
PPSA subject to a security interest provided for by a ment” providing for the ROT creditor’s security interest,
pre-PPSA agreement? If so, the old law would apply and the debtor’s offer to be bound by the terms and condi-
the ROT creditor would have been able to simply rely on tions of trade had to be accepted by the creditor. In
its contractual rights retaining ownership until paid, Elkerton, the Court of Appeal determined that accep-
without the need to also register that interest. tance occurred by way of conduct. As the court stated:
As the Court of Appeal observed, the answer to that Central’s acceptance of Swan’s application for credit was
question involved a consideration of two things: the an acceptance by conduct. The relevant conduct was the
relevant provisions of the PPSA; and the terms and delivery of the equipment which Swan had ordered, and the
conditions of trade between creditor and debtor. The sending of the invoice confirming that the supply was on 30
critical provisions of the PPSA are those defining a day credit. By that conduct, Central signified its acceptance
of Swan as an account customer. The sending of the invoice
security interest and a security agreement. They provide was the critical step, of course, as it was the first commu-
relevantly as follows: nication confirming that credit was being provided.
A security interest means an interest in personal property On this analysis, the first supply of equipment operated to
provided for by a transaction that, in substance, secures establish a supply agreement between Central and Swan. In
payment or performance of an obligation …4 accordance with the express terms of the credit application,
… the agreement governed all future supplies of equipment.8
security agreement means: The result of this analysis was that the credit appli-
(a) an agreement or act by which a security interest is cation, taken together with the terms and conditions of
created, arises or is provided for; or
(b) writing evidencing such an agreement or act5 [empha- trade, operated from the date of the first supply as an
sis added]. overarching security agreement. As the first supply of
As the creditor had argued that its interest was stock occurred prior to the commencement of the PPSA,
provided for by a transitional security agreement, those the security agreement was therefore transitional and the
definitions were also relevant.6 They largely mirror the ROT creditor did not need to register its interest in the
definitions above by requiring any agreement in force stock for its ROT clause to operate as effective security
prior to the commencement of the PPSA to have the during the 2-year transitional period.
same characteristics as a security agreement which
provides for a security interest, and to have continued Amerind — accepting Elkerton
application post the commencement of the PPSA. Elkerton was cited with approval in Re Amerind Pty
Ltd (recs and mgrs apptd) (in liq)9 (Amerind). In that
The importance of contract law in interpreting case, an ROT creditor sought to argue (contrary to the
PPSA “agreements”, especially concepts of offer finding in Elkerton) that each supply of goods repre-
and acceptance sented a fresh opportunity to register its interest in those
Accordingly, for the creditor to succeed in establish- goods. The ROT creditor made multiple supplies of
ing that its arrangements had the benefit of the transi- goods pursuant to a post-PPSA agreement which included
tional arrangements, it needed to establish that the an ROT clause. However, the creditor did not register its
debtor became bound to its ROT conditions (ie that security interest until the eve of the insolvency of its
which provided for its security interest) prior to the customer.10
commencement of the PPSA and that those terms and The creditor argued that there was no overarching
conditions applied to goods delivered after the com- security agreement providing for a security interest in
mencement of the PPSA during the 2-year transitional future deliveries, but rather that a security interest came
period. As the Court of Appeal observed, that issue into force each time that an order was placed, requiring
could only be decided by considering the precise nature and permitting ongoing consecutive registrations on the
of the agreement between creditor and debtor. PPSR. On that basis, the creditor argued that its belated
In undertaking that analysis, the Court of Appeal registration was not late vis-a-vis its final delivery of
rightly noted that the credit application was simply that: stock because registration (and thereby perfection) occurred
an application for credit on 30-day terms. It was a within the time mandated by the PPSA.
unilateral act by the customer offering to be bound to the As to that argument, the Supreme Court of Victoria
creditor’s terms of trade. As the court observed: “the stated as follows:
mere signing of the credit application did not create a
Elkerton stands for the proposition that an agreement which
contract, and its lodgment with [the creditor] did not imposes [ROT] terms in respect of future supplies is an
impose on [the creditor] a contractual obligation to do agreement by which a security interest is provided for
anything.”7 irrespective of individual dealings with orders and invoices.
australian banking and finance August 2018 99Here, the amended terms imposed the [ROT] terms directly preferential payments of an unsecured debt. Insolvency
and immediately following their acceptance by Amerind was not contested, nor did HAG Import assert that a
upon all future supplies. They are the relevant “security good faith defence was open to it.
agreement” and are the “source” of the claimed security
interest.11 Elkerton distinguished
The court followed Elkerton in finding that the effect As might be expected, HAG Import relied on Elkerton
of the relevant contractual arrangements was that a in arguing that the credit application between it and
security interest was created upon the first supply of Lineville was an offer by Lineville to acquire goods on
goods and that registration in respect of the last supply credit, an offer accepted when HAG Import made the
of goods was thereby ineffective as against the external first supply (pre-PPSA) incorporating its standard terms
administrator (because it was too late).12 and conditions. HAG Import thereby contended that the
credit agreement and terms of trade constituted a secu-
rity agreement providing for a future security interest
HAG — Elkerton and Amerind (that is, an ROT in goods delivered) and that as the
distinguished on contractual principles agreement and interest had been created prior to the
The recent decision by McGill SC DCJ in HAG is, introduction of the PPSA (as the first stock had been
however, a stark reminder that each contractual arrange- delivered then), the benefit of the transitional provisions
ment will need to be considered according to its specific applied.
terms in order to determine the outcome of the interplay In other words, HAG Import contended that as its
between the law of contract and the PPSA. security interest was properly registered as a transitional
In HAG, the District Court also had cause to consider security interest, the goods had not vested in the insol-
arrangements entered into prior to the introduction of the vent estate of Lineville. However, in distinguishing the
PPSA between a creditor (HAG Import Corporation decision of Elkerton, the District Court declined to find
(Australia) Pty Ltd (HAG Import)) and an insolvent that the credit agreement signed by Lineville constituted
company (Lineville). Again, a relevant issue was whether an offer by it capable of acceptance by HAG Import
those arrangements continued to apply post the intro- when it first delivered goods pursuant to its standard
duction of the PPSA, thereby affording them the protec- terms and conditions. As McGill SC DCJ stated:
tion of the transitional provisions. In my opinion the credit application in the present case was
The essential facts were as follows. Prior to the not an offer, and it was therefore not something capable of
introduction of the PPSA, Lineville completed a credit being accepted by conduct by the defendant. So far as the
applicant was concerned the document was simply what it
application whereby it applied for credit with HAG
said it was: a request for credit, an admission that it was
Import. The application was: familiar with the defendant’s terms and conditions and an
acknowledgement that it knew that those were the terms on
… expressed as a request for credit, an admission by
which the defendant will deal if it chooses to deal with the
[Lineville] that it has been provided with the defendant’s applicant, unless it changes those terms and conditions,
standard terms and conditions, and an acknowledgment that which it can do at any time. It is simply an evidentiary
they may be changed at any time. It does not say that either document, an admission that the applicant knows of those
party promises to do, or not to do, anything. When read terms and knows that those are the only terms on which the
with the 2011 terms and conditions,13 it does contemplate defendant will supply goods to the applicant.
that a security interest will arise in the future in favour of I have particular difficulty identifying any consideration
the defendant in respect of goods supplied by the defendant provided by the defendant. I find it impossible to characterise
to [Lineville] on those terms and conditions.14 a mere supply of goods after receipt of this document as
amounting to an agreement on the part of the defendant to
HAG Import’s terms and conditions were amended
provide any particular credit to the applicant in the future …
after the commencement of the PPSA to include an ROT Overall it appears to me that the arrangements put in place
clause. HAG Import then registered a purchase money by the defendant have so carefully excluded any commit-
security interest (PMSI) which stated that the registra- ment at all by it to a person in the position of the company
tion was transitional. By doing so, HAG Import was that I am unable to identify any consideration given for any
implied promise in the credit agreement application by the
asserting (contractually) that the post-PPSA terms were company that goods to be supplied to it will be on the
simply an amendment of a pre-PPSA security agreement standard terms and conditions in force from time to time.
creating a security interest in goods. On that basis the situation here was factually distinct from
Within the relation back period following the liqui- that in [Elkerton]15 [emphasis added].
dation of Lineville, HAG Import received payment of Put another way, McGill SC DCJ did not consider
almost $700,000, reducing Lineville’s indebtedness to it that the arrangements between Lineville and HAG
to less than $400. The liquidators sought to recover these Import amounted to an overarching security agreement.
payments as preferences on the basis that they were That was because his Honour did not consider that the
100 australian banking and finance August 2018credit application constituted an offer capable of accep- The liquidators’ contentions
tance. His Honour therefore considered that each supply The liquidators advanced three main contentions as to
of goods was itself a security agreement creating a why the character of the payment ought to be assessed at
security interest which required registration following the date of the winding up. Firstly, as a matter of
each delivery of stock. construction, it was submitted that s 588FA(1) contrasts
The practical effect of this finding was that the two outcomes: what occurred (the payment) and what
purported registration of HAG Import’s security interest would have occurred in a winding up — thereby
as a transitional interest was defective and of no effect. requiring an assessment to be undertaken at the point of
Given the liquidation of Lineville, the security interest winding up.
vested in the insolvent estate of Lineville.16 However, Secondly, the term “unsecured” identifies a class of
that was not the end of the matter, as discussed imme- creditors at the time of the winding up. The unfair
diately below. preference regime is designed to ensure parity between
unsecured creditors of the same class — again a process
undertaken during a winding up. Thirdly, it was said that
In the context of a claim by the liquidator to an interpretation should be preferred which gave effect
recover payments made by the company as to parliament’s intention, namely, that the holder of a
unfair preferences, did it matter that the defective security interest ought to forfeit benefits that
ROT creditor had not perfected its interest? would have otherwise been available to it had it com-
The finding by the District Court that HAG Import’s plied with the provisions of the PPSA.
security interest was unperfected did not entirely resolve HAG Import’s contentions
things as between the liquidators and HAG Import. As HAG Import argued that s 267 of the PPSA operates
noted earlier, on its face, s 267 of the PPSA obliterates to simply declare that an unregistered security interest
rights in collateral in respect of unregistered interests. vests in an external administrator, but says nothing about
But, in an insolvency context, does the later vesting of the character of payments received prior to that time.
an interest effect the characterisation of a payment when They contended that the character of the payments
made pursuant to a valid, but unperfected, security received should be assessed when payment occurred and
interest? Put another way, is the payment received an at a time that the security was valid and enforceable
unsecured payment (triggering a potential preference vis-a-vis the company.17
claim) or a secured payment? McGill SC DCJ held that:
It was not in dispute that at the time of each of the … the natural reading of s 588FA(1)(b) is that it refers to a
impugned payments that HAG Import had the benefit of debt which was unsecured at the time the creditor received
security in the form of its ROT clause. A question payment in respect of it. Section 588FA(1) makes a
became: at which date does one assess the character of comparison between the amount in fact received by the
creditor under the relevant transaction and the amount that
the payments received when determining whether or not would be received if the creditor were to prove for the debt
a payment is an unfair preference? At the date of in a winding up of the company, on the basis that the
payment, or at the date of the later winding up? transaction was set aside. That is a comparison which
Section 588FA of the Corporations Act 2001 (Cth) involves a consideration of the situation at two different
times. That follows particularly from the fact that the
establishes the parameters of an unfair preference. It
section uses the present tense “owes” rather than the past
relevantly provides as follows: tense “owed”, which would have been appropriate if the
provision had been speaking of an analysis of the transac-
(1) A transaction is an unfair preference given by a
tion retrospectively from the time of the winding up. The
company to a creditor of the company if, and only if:
present tense suggest that the issue of whether the debt is
(a) the company and the creditor are parties to the unsecured is to be determined by reference to the situation
transaction (even if someone else is also a party); at the time of the transaction. The comparison which the
and section requires is between the amount the creditor in fact
(b) the transaction results in the creditor receiving from received, because the transaction did take place, and the
the company, in respect of an unsecured debt that the amount the creditor would receive in the hypothetical
company owes to the creditor, more than the creditor situation where the debt had not been paid and the creditor
would receive from the company in respect of the had to prove for it in the winding up of the company.
debt if the transaction were set aside and the creditor To the extent that this causes difficulty as a result of the
were to prove for the debt in a winding up of the operation of the PPSA, it is because the legislature in the
company; PPSA chose to provide in s 267 for vesting of the security
even if the transaction is entered into, is given effect to, or interest in the grantor, rather than to provide that (for
is required to be given effect to, because of an order of an example) in the event of a winding up the security was
Australian Court or a direction by an agency [emphasis void18 [emphasis added].
added].
australian banking and finance August 2018 101Accordingly, at the time of payment, HAG Import transaction were set aside and the creditor proved instead in
had the benefit of a valid security vis-a-vis Lineville. As “a winding up”. Why should that not be taken at face
value? ... I see no reason not to conclude that the best
noted above, the unfair preference provisions only apply
evidence of what a creditor would receive in “a winding
to payments received by unsecured creditors. This in up” is what unsecured creditors did receive in the winding
turn raises yet another issue concerning the value of the up that followed and which has given rise to the proceeding
security held by a secured creditor. in which the transaction under scrutiny is impugned.21
However, as McGill SC DCJ noted, Walsh v Natra
What was the value of the security? was not a case concerned with the issue of valuing a
Section 588FA(2) provides as follows: security interest; it was concerned with the time at which
payments ought to be assessed to determine whether
For the purposes of subsection (1), a secured debt is taken
to be unsecured to the extent of so much of it (if any) as is they were preferential or not. Furthermore, the issue as
not reflected in the value of the security. to value was to be determined by reference to subs (2)
and not subs (1) of s 588FA. As his Honour noted:
The liquidators contended that the amount secured at
the time of the payments to HAG Import was greater … the natural reading of s 588FA(2) is that it is concerned
than the value of the security held. The difference was with the effect of a payment received by the creditor, and
the most obvious time to determine that is the time when
said to represent the receipt of an unfair preference. That the payment was received, so that is the interpretation
required a consideration of two issues: how should the supported by the actual words of the section. In my opinion
security be valued, and how should payments be allo- therefore the security has to be valued at the date of each
cated? For the sake of brevity, consideration will only be particular payment, in order to perform the calculation
given to the first issue. required by subsection (2).22
As there was no evidence before the court as to the Accordingly, despite the fact that HAG Import’s
value of the stock, essentially the contest reduced to two security interest had vested, as the liquidators were
issues: at what date should the stock be valued, and seeking to recover payments made to it, HAG Import
should the stock be valued at the retail or wholesale was able to rely on its security in existence at the time of
price? payment and was therefore only exposed to the differ-
As to the latter issue, the court held: ence between the payments received and the value of its
security as at the date of those payments. In other words:
… that the value of stock sitting in a warehouse would
necessarily be the wholesale value rather than the retail something for everyone.
value, because such value was only realisable by a sale on
a wholesale basis. The value of the security must be the Conclusion
value to the creditor. As the submissions for the plaintiffs HAG is an important case for a number of reasons.
pointed out, if the defendant had exercised its security in
relation to the goods supplied on the terms and conditions Firstly, it is a salutary reminder that in determining
including [an ROT] clause, the result would have been that whether a security agreement creates a security interest,
the defendant retook possession of the goods, which would primacy must be given to the specific contractual terms
then be available to it to resell, on a wholesale basis. The of each arrangement. Put another way, despite the
equitable charge would be enforced by judicial sale, nec- position adopted by the Court of Appeal of Victoria in
essarily on a wholesale basis19 [emphasis added].
Elkerton, it may not always be the case that arrange-
On what date should the stock be valued? ments between a creditor and debtor meet the underlying
As to the date at which the goods should be valued, requirements of a contract: namely, offer and accep-
the liquidators contended that it should be at the date of tance. Drafters of commercial ROT arrangements will
the winding up, relying on authorities such as Walsh v need to carefully ensure that arrangements with custom-
Natra Pty Ltd20 (Walsh v Natra). The issue in that case ers meet this minimal requirement so that terms of credit
was whether payments received by a creditor for the can operate as an overarching security interest requiring
purposes of determining whether they were preferential only one registration at or before the time of the first
should be assessed at the date of a hypothetical winding delivery of goods.
up on the date of payment, or at the date of the actual Secondly, the decision is an important reminder that
winding up which ensued. The court there held that the s 267 of the PPSA has prospective application only. It
relevant date was that of the actual winding up because: declares that unregistered security interests vest at the
date of the appointment of an external administrator. It
… s 588FA(1)(b) does not require consideration of a says nothing about the security position vis-a-vis a
hypothetical winding up as at the date of the payment
which is impugned. The comparison it draws is between the creditor with an unperfected but otherwise valid security
amount which the creditor receives by way of the impugned interest in effect at the date of payment. This is an
payment and the probable return to the creditor if that important distinction for liquidators to keep in mind,
102 australian banking and finance August 2018particularly in circumstances where they are contemplat-
ing unfair preference recoveries against creditors with Footnotes
the benefit of an unperfected ROT clause. The underly- 1. PPSA, s 12(2)(d).
ing security interest is not inapt to operate as security in 2. Trenfield v HAG Import Corp (Australia) Pty Ltd [2018] QDC
107; BC201840308.
respect of payments received, at least to the extent of the
3. Central Cleaning Supplies (Australia) Pty Ltd v Elkerton (in
value of the security.
his capacity as joint and several liquidator of Swan Services
Thirdly, the case identifies what some might consider Pty Ltd) (in liq)) (2015) 321 ALR 181; 296 FLR 25; [2015]
a perverse outcome in a liquidation scenario. The holder VSCA 92; BC201503669.
of an unregistered security interest will be able to assert 4. Above n 1, s 12(1).
as between it and the company the benefit of security in 5. Above n 1, s 10.
respect of payments received. However, the beneficiary 6. The PPSA defines the terms “transitional security agreement”
of such an interest who is not paid prior to liquidation is and “transitional security interest”. In the interests of brevity,
they are not reproduced in this article.
in a far worse position. The effect of the appointment of
7. Above n 3, at [30].
an external administrator is to vest the collateral in the
8. Above n 3, at [33]–[34].
insolvent estate and leave the creditor to prove as an 9. Re Amerind Pty Ltd (recs and mgrs apptd) (in liq) (2017) 320
unsecured creditor for all its debt. FLR 118; 121 ACSR 206; [2017] VSC 127; BC201701878.
Finally, the decision confirms that in terms of valuing This is the first instance decision. The issue was not considered
security of an ROT creditor, absent expert evidence to by the Court of Appeal.
the contrary, the value is likely to be the wholesale, and 10. A late registration of a security interest does not trigger the
not retail, value as “the value of the security must be the operation of s 267 (as it is concerned with unregistered
interests only). However, a security interest registered out of
value to the creditor.” The date of valuing that security
time and within 6 months of the appointment of an external
is, however, the date of payment and not the later date of
administrator also vests in the insolvent estate: Corporations
the winding up of the company. Act 2001 (Cth), s 588FL.
11. Above n 9, at [523].
Scott Guthrie 12. For the reasons in above n 10.
Partner 13. That is, conditions operating prior to the commencement of the
Dentons PPSA.
scott.guthrie@dentons.com 14. Above n 2, at [13].
www.dentons.com 15. Above n 2, at [24]–[26].
16. Above n 1, s 267.
17. Above n 1, s 19.
18. Above n 2, at [49]–[50].
About the author
19. Above n 2, at [57].
Scott Guthrie is a Partner in Dentons’ Restructuring & 20. Walsh v Natra Pty Ltd (2000) 1 VR 523; 156 FLR 227; [2000]
Insolvency team in Brisbane. Scott draws on his 21 years VSCA 60; BC200002135.
of expertise to advise clients in the finance, insolvency 21. Above n 20, at [31].
and property industries. 22. Above n 2, at [60].
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