Retention of Old Titles: Pre-PPSA Retention of Title Agreements and Unfair Preferences
By christopher Pearce

The Personal Property Securities Act 2009 (Cth) introduced significant and sweeping changes to the classic understanding of a ‘security interest’. Gone are the days of merely charges or liens, and in their place an expanded concept of what can constitute a security interest. As the Act remains in its infancy, questions continue to arise as to its proper interpretation and operation. One such question which came before the courts recently was the effect of pre-PPSA transactions – particularly retention of title agreements or Romalpa clauses – and their interaction with the unfair preference provisions of the Corporations Act 2001 (Cth). This article will examine the two contrasting views reached by the Victorian Supreme Court in Blakeley v Yamaha Music Australia Pty Ltd and the Federal Court of Australia in Hussain v CSR Building Products Limited.

I Retention of Title Agreements and the PPSA

Under the Personal Property Securities Act 2009 (Cth) (‘PPSA’), retention of title agreements (“ROT’ agreements”)  are transactions which create a security interest, provided such agreements effectively secure payment or performance of an obligation. However, this has not always been the case. Before the introduction of the PPSA, ROT agreements or Romalpa clauses were a functional means of protecting the interests of a seller for the relevant period between delivery of the goods to the purchaser and payment of the contract price for those goods. ROT agreements achieved an outcome whereby the title of the goods would remain with the seller, despite acts such as delivery that would normally constitute a transfer of legal title. Critically, as ownership remained with the seller, it provided protection in the instance of a purchaser’s insolvency as the failure to complete payment for the goods prevented title passing from the seller’s hands. However, while a seller may have retained ownership over their goods, such agreements were not considered to provide them with an enforceable security interest. This position was substantially changed following the introduction of the PPSA. ROT agreements are now listed in s 12(2)(d) of the PPSA as examples of arrangements that may amount to a security interest, provided that they secure payment or performance in accordance with the requirements of s 12(1). 

The elevation of ROT agreements to the status of security interests under the PPSA creates a unique problem in the context of unfair preference claims brought under s 588FA of the Corporations Act (‘the Corporations Act’). While post-PPSA a creditor with rights under a ROT agreement that was perfected for the purposes of section 21 of the PPSA would undoubtedly hold a valid security interest, and thereby a defence to an allegation of unfair preferences, the question is less clear with respect to such an interest holder who acquired their interest prior to the PPSA. Do the creditors under these agreements have a secured interest, or are they merely creditors who received more than they ought to upon winding up of the company? This paper discusses two recent cases which came to opposite conclusions with respect to this question. In Hussain v CSR Building Products Limited (‘Hussain’), Justice Edelman in the Federal Court concluded that these agreements were secured interests, while in Blakeley v Yamaha Music Australia Pty Ltd (‘Blakeley’) Justice Gardiner concluded that only ROT agreements entered into after the PPSA took effect could be treated as security interests.  

This paper will begin by discussing the unfair preferences regime under the Corporations Act, before proceeding to provide a detailed analysis of the differences in reasoning provided in each of the two decisions. This paper will then turn to consider the merits of each decision, and whether either decision strikes an appropriate balance between achieving the PPSA’s goal of a functional approach to securities while also complying with the unfair preferences regime under the Corporations Act. Ultimately, this paper argues the view that the decision in Blakeley represents the preferable position. Justice Gardiner’s decision serves the dual purpose of acknowledging the changing nature of ROT agreements following the introduction of the PPSA, while also respecting the way in which the Corporations Act deals with those agreements in different ways depending upon the particular circumstances.  

II Retention of Title Agreements and Unfair Preferences

The elevation of ROT agreements to the status of security interests under the PPSA creates a unique problem in the context of unfair preference claims brought under s 588FA of the Corporations Act (‘the Corporations Act’). When payments are made by a company pursuant to a ROT clause, liquidators are able to rely upon the provisions of the Corporations Act to claw back such payments if the relevant agreement was not secured by some additional type of charge or other security. Relevantly, section 588FA of the Corporations Act provides that payments made to a creditor will be unfair preferences and amount to a voidable transaction, if the transaction would produce a result whereby the creditor received from the company, in respect of an unsecured debt, more than the creditor would receive from the company if the debt were set aside. Prior to the introduction of the PPSA ROT agreements would often fall foul of this rule if they weren’t accompanied by some additional form of security, as ROT agreements did not previously bear the character of a security interest. Importantly however, an unfair preference claim can be defeated by a creditor if they can establish that the relevant interest was in fact secured. The Corporations Act defines a security interest in s 51A as including a ‘charge, pledge or lien’, and was amended in 2010 to also extend “to a ‘security interest’ to which the PPSA applies”.  Pursuant to the Corporations Act, once a security interest within the meaning of s 51A has been established, the creditor will be a ‘secured creditor’ for the purposes of s 51E.

A      Blakeley v Australian Music Pty Ltd  

The decision of the Victorian Supreme Court in Blakeley argued but did not expressly hold that only ROT agreements which took effect after the introduction of the PPSA would provide a defence to an unfair preference claim. Blakeley as liquidator of Australian Music Pty Ltd brought an unfair preferences claim against Yamaha for a number of payments totaling in excess of $3 million. Yamaha argued that it had a registered PPSA interest, in the form of an all-monies ROT clause, over all products supplied by them to the Plaintiff and the proceeds arising from their sale. Crucially, the liquidators faced a strike-out application from the Defendants to dismiss the proceedings on the basis that the debts were in fact secured, so the decision arrived at was not a final determination, but rather a question as to whether there was an arguable position that the agreements were secured. 
In coming to his conclusion, Justice Gardiner noted that prior to the introduction of the PPSA, a ROT agreement gave the holder ownership of the goods and the right to take possession. His Honour referred to the High Court’s decision in Associated Alloys, which found that a reservation of title clause could not be registered as a charge under the (then) Corporations Act 1989 (Cth) as it would be ‘inconsistent with the will of the legislature’. Yet, as Justice Gardiner went on to note, this position has since been modified by the express elevation of ROT agreements to the status of security interests under s 12(2)(d) of the PPSA (where the criteria in section 12(1) are satisfied). He also went further, and commented that a party receiving payment in respect of a pre-PPSA retention of title provision, would not be receiving a payment as a secured creditor, but rather in payment of an unsecured debt susceptible to being characterised as a preferential payment.
In particular, his Honour noted that ROT agreements to secure repayment of the purchase price were a ‘statutory construct’ which fell under the category of Purchase Money Security Interests (“PMSIs”) in s 14 of the PPSA. That provision provides that a ‘security interest taken in collateral, to the extent that it secures all or part of its purchase price’ will be a PMSI, and obtain super-priority under the provisions of Pt 2.6 Div 3 of the PPSA provided it complies with the relevant registration requirements. In his view, these agreements were only to have effect in respect of deals “which took place after the PPSA was introduced.” Furthermore, his Honour concluded that PMSIs could only secure the unpaid purchase price of the stock itself, and not other debts owing to the creditor for other purposes. 
On this basis, his Honour concluded (but did not hold), that it was arguable that the PPSA only operated prospectively, and did not purport to create any security interest over goods supplied pre-PPSA. Thus, a supplier who received payment in respect of a pre-PPSA ROT agreement did so as an unsecured creditor, with the consequence that the payment was capable of characterisation as an unfair preference.
B    Hussain v CSR Building Products Limited 

Decided only a few days after, and without any reference to the decision in Blakeley, Justice Edelman in the Federal Court adopted an opposing view point in Hussain to the very same question. His Honour held that the PPSA had the effect of modifying the concept of a security interest under the Corporations Act, with the effect that a pre-PPSA ROT agreement provided a ‘secured debt’ sufficient to defeat an unfair preferences claim.  

In Hussain, the liquidators of a company named FPJ brought an unfair preference claim against CSR. CSR had supplied FPJ with building goods and materials on a number of occasions, subject to a credit agreement entered into in 2010. That agreement provided that FPJ “agree that any goods… receive(d) remain the property of CSR until CSR receives payment for them”. The total debt of $153,554 was comprised of 18 separate transactions; each repaid within different 45-day repayment windows. The liquidators brought a claim against CSR on the basis that the payments for those goods amounted to unsecured debts and therefore unfair preferences. However, akin to the position in Blakeley, CSR contended that those debts were secured debts by virtue of the ROT clause. 

In considering whether CSR had a relevant ‘secured debt’, Justice Edelman first noted that s 588FA(1)(b) of the Corporations Act did not define the meaning of an ‘unsecured debt’. However, drawing upon the decision in Romalpa, his Honour concluded that there was no uncertainty as to whether a ROT agreement could in fact be described as a security. His Honour pointed to amendments introduced in 2010, which modified the definition of a ‘security interest’ under the Corporations Act, consistent with the provisions of the PPSA. Relevantly, Justice Edelman drew from the words of the second reading speech of the Amendment Act, where the responsible Minister, Dr Craig Emerson, noted that the amendment would “ensure the Corporations Act treats property provided by a supplier on a ‘retention of title’ basis as secured property”, and that “treating such supplies as secured property is consistent with the PPS scheme’s approach of treating transactions that in substance secure payment or performance of an obligation the same way, regardless of the form of the transaction.” 

Yet, the definition of a ‘security interest’ under the Corporations Act does not extend to ‘transitional security interests’ under the PPSA. Relevantly, transitional security interests are defined under s 308 of the PPSA as being those interests provided for by a ‘transitional security agreement’ to which the Act would have applied. Given the timing of CSR’s interest, Justice Edelman examined whether it ought properly to be considered a ‘transitional security interest’, which would be beyond the scope of s 51A of the Corporations Act. As CSR’s credit agreement came into force on 26 September 2010, it was in force prior to the relevant commencement date of 30 January 2012 provided for by the PPSA. In accordance with ss 310(d) and 322(1) of the PPSA, the credit agreement acquired the character of a ‘transitional security interest’ on that date, and, consequently, was excluded by s 51A of the Corporations Act. 

However, in his Honour’s view, this did not prevent the interest from “negating” the unsecured nature of FPJ’s debts. His Honour pointed to the definition of a ‘security interest’ under s 51A of the Corporations Act which was amended to extend to ‘PPSA security interests’. Such interests are defined in s 51 of the Corporations Act as meaning those to which the PPSA applies apart from transitional security interests. Consequently, as s 12(2) of the PPSA explicitly refers to ROT agreements as examples of arrangements that may be in substance security interests, he concluded that the Corporations Act also embraced such agreements. 

In addition, his Honour was persuaded by a number of other provisions within the Corporations Act that treat ROT agreements as tantamount to security interests. For example, sections 442CB and 442CC permit an administrator the power to dispose of property and to recover the proceeds from the sale of that property in situations where it is subject to a security interest or ROT clause. Additionally, section 9 of the Corporations Act defines ‘retention of title clauses’ to extend to debts subject to such clauses. Ultimately, it was concluded that the ROT clause gave CSR a secured interest, providing a defence to the unfair preferences claim.

III Explaining the Different Outcomes

This section of the paper will examine the basis for the opposing outcomes in Blakeley and Hussain. The contrasting outcomes in each of these cases demonstrate the key importance of the individual judge’s approach to the PPSA as a whole, and the extent to which the particular judge is willing to embrace the Act’s functional approach to favouring form over substance. This is particularly clear in Justice Edelman’s decision in Hussain, which explicitly discusses the Act’s intention, and thereafter proceeds to focus upon the substantive effect of the relevant ROT clause. In doing so Justice Edelman’s discussion examined the nature of CSR’s ROT clause; before concluding that it was a transaction which, in substance, secured payment or performance as required by s 12 of the PPSA. It was this approach which led to his conclusion that the unfair preferences provisions of the Corporations Act were not intended to apply to any transaction which operated as a security interest. 

In comparing this approach to the decision in Blakeley, it is crucial to bear in mind that Justice Gardiner was dealing with an application for dismissal; an application which only required the Court to conclude whether there was an arguable case or not. Thus, the Victorian Supreme Court’s conclusion did not amount to a final determination on the issue of pre-PPSA security interests, but, rather, a conclusion that there was an arguable case that such interests are not subject to the unfair preferences scheme. Nevertheless, Justice Gardiner’s decision does appear to favour drawing a line in the sand between pre-PPSA and post-PPSA security interests in the context of unfair preferences. Arguably this dichotomy amounts to a rejection of Justice Edelman’s holistic view of the notion of a security interest, instead electing to treat pre-PPSA security interests as bearing an entirely different character to their post-PPSA counterparts. Although his Honour does acknowledge the changing character of ROT agreements under the PPSA, he readily adheres to the provisions of the Corporations Act in determining that pre-PPSA ROT agreements do not provide a creditor with a ‘secured debt’. However, again, it is noted that his Honour acknowledges that the question is ‘complex’ and ‘requires a good deal more evidence and analysis for a determination to be made’ on the issue. 

IV The Preferable Approach

Although each decision is not without its own merits, this paper argues that Justice Gardiner’s approach strikes a more appropriate balance between the changing role of PPSA security interests and the unfair preference provisions of the Corporations Act. 

While Justice Edelman clearly appreciated the need to recognise the functional approach to security interests in a post-PPSA age, arguably his attempt to give effect to this amounted to a circumvention of the provisions of the Corporations Act. His Honour’s conclusion was based upon the reasoning that the formation of the relevant security agreement, being a security interest arising under or provided for by a ‘transitional security interest’, did not prevent it from ‘negating’ the unsecured nature of the debt. Yet, despite his Honour acknowledging that sections 51 and 51A of the Corporations Act bar the Act from extending to ‘transitional security interests’, his conclusion produced that exact result. The process of identifying additional provisions within the Corporations Act may have supported his conclusion that ROT agreements now bear the character of security interests, but it was unable to provide a satisfactory reason as to why such a conclusion should overcome the express exclusion against ‘transitional security interests’ in s 51A of the Act. Further, while the amendments in 2010 were expressed as an attempt to harmonise the provisions of both the PPSA and the Corporations Act, and to favour substance over form there was no suggestion that such an approach was to override the express provisions of the Corporations Act. 

Although Justice Gardiner’s approach may appear less willing to embrace the functional approach of the PPSA, it does so in in a way which does no offence to the provisions of the Corporations Act. His Honour recognised that ROT agreements would, if entered into after the PPSA, now create a security interest, but was not willing to endow pre-PPSA ROT agreements with the same attributes. It was also noted that had any further supplies been made after the commencement date of the PPSA the position would have altered, and those supplies which would have been subject to the same ROT agreement would have amounted to a security interest for the purposes of s 51A of the Corporations Act. However, on the facts of Blakeley no subsequent supply occurred, meaning the relevant transactions were all subject to the original all-monies retention of title clause and were thus made pursuant to a ‘transitional security interest’. This conclusion accords not only with the terms of sections 51 and 51A of the Corporations Act but also the Act’s treatment of PPSA ROT property in general.  

Although Justice Edelman’s approach did identify additional provisions within the Corporations Act which treat ROT agreements as security interests, he omitted elements of the Act which distinguish between when property subject to a ROT agreement will be considered ‘property of the company’. Importantly, s 51F of the Corporations Act defines ‘PPSA retention of title property’, as personal property used or in possession of the corporation over which the corporation is yet to acquire title. Crucially, the provision provides that any additional references to the ‘property of the company’ will not apply to ‘retention of title property’ unless provided otherwise expressly or by necessary implication. One such provision appears within Pt 5.3A of the Act and deals with the process of liquidation. Section 435B provides that for the purposes of that part, ‘property’ of the company includes ‘PPSA retention of title property’. The effect of these provisions, in this author’s view, is to maintain a strict separation between the treatment of PPSA security interests in certain circumstances. Thus, rather than the 2010 Amendments being read as favouring an unwavering embrace of the functional approach to the PPSA, such an approach can only be maintained where the relevant provision permits such an interpretation. 

Sections 51F and 435B provide an example of where such an interpretation is not only permitted but expressly stated. As Duggan and Brown note, the introduction of the ‘PPSA retention of title property’ definition was to protect against the changing nature of a PPSA ROT agreement. As PPSA ROT agreements are now treated as functioning as a security interest, the effect of the agreement has altered somewhat. Prior to the PPSA, a contract for supply of goods with a ROT clause would result in delivery to the buyer before payment was made and before title had passed, thereby granting the buyer lawful possession. In the absence of a clause in the supply contract that specified something different, the Sale of Goods Act 1923 (NSW) would provide that title was to pass when the parties intended it to, which would be upon delivery. Under the PPSA, the interest that the buyer holds in possessing the goods provides a proprietary interest in the goods sufficient for it to be capable of granting a security interest in the property, and the inclusion of a retention of title clause makes the transaction one that in substance secures payment of the price, and, therefore, a security interest for the purposes of section 12(1) of the PPSA.  Thus, the inclusion of a specific definition for ‘PPSA retention of title property’ was to confirm that such arrangements could function as security interests under the Act, thereby protecting the property from being distributed to other creditors in the insolvency process. The manner by which these provisions treat PPSA ROT agreements differently in certain circumstances would also suggest that the 2010 Amendments, although expressed to favour the functional approach of the PPSA, were not intended to override express provisions of the Act. Thus, as sections 51 and 51A expressly prohibit the definition of a ‘security interest’ from encompassing transitional ROT security agreements, the provisions should have been interpreted as such irrespective of how the agreements are treated elsewhere within the Corporations Act. 

V A Broader Application

Although the determinations made in each of the cases focused upon transitional ROT clauses, these decisions have the potential for a far wider impact. Although neither decision made reference to s 308(b) of the PPSA, the interpretation of that provision may be affected by the conclusions arrived at in the present cases. Relevantly, that provision extends the operation of the PPSA to “security agreements” which were made before the Act, but which continue to operate with respect to security interests created after the end of the PPSA’s transitional security interest window. Such an arrangement would be applicable in circumstances whereby parties were engaged in signed trading terms that contemplated a series of contracts of supply, and later supplies occurred after the conclusion of the transitional security interest date of January 2012. 

Further, on that basis the decision would not be limited purely to ROT agreements. Apart from transitional security interests expressly recognised under s 51A of the Corporations Act 2001 (Cth), being the charge, lien and pledge, there are other potential PPSA security interests to which this decision could extend. In particular, the decision could also extend to assets acquired by an insolvent company under hire-purchase, leasing or bailment arrangements. Both hire-purchase arrangements and leases of goods are listed in s 12 of the PPSA as examples of transactions which may amount to a security interest, assuming they secure payment or performance of an obligation. In the context of leasing arrangements, the potential for such transactions being caught is further extended by the inclusion of “PPS Leases” in s 13 of the PPSA. These transactions cover both leases and bailments for reward, and qualify as security interests under s 12(3) of the PPSA regardless of whether they secure payment or performance of an obligation.  Provided a leasing or bailment arrangement is for an indefinite term or for more than one year, and the lessor or bailor is regularly engaged in the business of leasing or bailing such goods, a PPS lease will arise. The likelihood of such leasing arrangements being caught has only increased in light of the Supreme Court’s recent decision in Forge v General Electric. There, Justice Hammerschlag concluded that a lessor would be ‘regularly engaged in the business of leasing goods’ if such leasing formed a “proper component” of the relevant business. Arguably such broad terms will increase the potential for leasing arrangements to qualify as PPS leases, and thereby transitional security interests, further extending the potential effect of Justice Edelman’s decision in Hussain. 

Conclusion

The decisions in Blakeley and Hussain highlight some of the teething problems which continue to arise in connection with the PPSA. Whether a liquidator ought to bring unfair preference proceedings against a creditor relying upon a pre-PPSA security interest raises a number of concerns. Ultimately, the resolution to this question would appear to boil down to the extent to which courts give effect to the intention of the 2010 amendments. As Justice Edelman noted in Hussain, the second reading speech for the 2010 amendments spoke of the need for ‘conceptual consistency’ within the law. Whether this is a goal which favours a holistic approach akin to Justice Edelman, over a more textual approach like Justice Gardiner remains unclear. Although this paper has favoured the approach taken by Justice Gardiner in Blakeley it must be emphasised that as Honour’s decision was in the context of a strike-out application it does not amount to a determination on the matter. Thus, as the only conclusive decision on the issue, the Hussain decision would dictate that ROT  clauses will provide a successful defence to an unfair preference claim, irrespective of whether such a clause was given effect to before or after the introduction of the PPSA. Further, as noted, there is the potential for this decision to apply to additional types of PPSA security interests, if such interests arise under transitional security agreements. Whether such an approach prevails in future decisions remains to be seen, but until such time as the question comes before the court for reconsideration pre-PPSA ROT agreements will pose continuing concerns for liquidators.