Secured or Unsecured - That is the Question
ROT clauses in Transitional Security Agreements and Unfair Preference Claims
There is little doubt that a retention of title (ROT) claim arising after the commencement of the Personal Property Securities Act 2009 (Cth) (PPSA) is prima facie a“secured debt” for the purpose of Section 588FA of the Corporations Act 2001(Cth) (Act) and therefore outside the scope of the unfair preference claim regime.
Whilst the law is unclear, in my opinion, it is arguable that a pre-PPSA ROT claim is not sufficient to constitute a security to defeat an unfair preference claim.
Let me explain.
The Corporations Act
The Act does not define “unsecured”.
A “secured creditor” is defined in section 51E of the Act to mean “a creditor of the corporation, if the debt owing to the creditor is secured by a security interest” (my emphasis).
The term “security interest” is defined in section 51A of the Act to mean:
- a PPSA security interest; or
- a charge, lien or pledge.
A “PPSA security interest” is defined in Section 51 of the Act to mean “a security interest within the meaning of the Personal Property Securities Act 2009 and to which that Act applies, other than a transitional security interest within the meaning of that Act.” (my emphasis).
Therefore, on a plain reading of the Act, a creditor asserting a security interest (including on a ROT basis) regarding a pre-PPSA transitional security agreement is not a “secured creditor” for the purposes of the Act and thus exposed to a Liquidator’s unfair preference claim.
Then came the case law.
The Case Law
The Federal Court and the Victorian Supreme Court recently came to different conclusions on the matter.
The Federal Court in Hussain v CSR Building Products Limited; In the matter of FPJ Group Pty Ltd (In Liq)  FCA 392 held that ROT clauses, even in relation to transitional security agreements, are ‘secured debts’ for the purposes of the unfair preference regime in the Act.
However, 3 days prior to the delivery of the Federal Court’s judgment, the Victorian Supreme Court in Blakeley v Yamaha Music Australia Pty Ltd  VSC 231 held that pre-PPSA ROT claims are ‘unsecured debts’.
So how can this be…
Hussain v CSR Building Products Limited
The Liquidator of FPJ Group Pty Ltd (company) brought an unfair preference claim against CSR Building Products Limited arising from the supply of building goods and materials to the company on credit.
One of the defences raised by CSR Building Products Limited was that the payments it received were in regards to secured debts by virtue of an all monies ROT clause.
Justice Edelman found that the ROT clause gave rise to a secured debt and constituted an effective defence to the Liquidator’s claim because, in short:
- there was no definition of “unsecured debt” in section 588FA(1)(b) or elsewhere in the Act;
- the case law regarding the interpretation of ROT clauses provide that an ROT clause may be considered a ‘security’;
- the second reading speech regarding the 2010 PPSA amendments to the Act provided that “[t]he third objective is to ensure the Corporations Act treats the property provided by a supplier on a ‘retention of title’ basis is secured property”;
- other provisions of the Act treat ROT clauses as securing a debt (see s9 and s442CC).
The Federal Court seems to have ignored the clear text of the Act.
I prefer the reasoning of the Supreme Court of Victoria in Blakeley below.
Blakeley v Yamaha Music Australia Pty Ltd  VSC 231
The Liquidators of Australian Music Pty Ltd claimed a number of payments as preference claims in respect of unsecured debts against Yamaha Music Australia Pty Ltd.
Yamaha brought an application to strike out the Liquidator’s claims on the basis that the debts were secured.
Whilst the decision of the Court was within the context of a strike out application, i.e. not a final determination, the Court held that:
- “The remedy of a supplier such as Yamaha, who traded under the terms of a Pre-PPSA retention of title clause and who was unpaid, was to enter and take possession of the property under the retention of tile provisions in the Terms of Trade.”;
- “However, a supplier such as Yamaha who receives payment in respect of a pre-PPSA retention of title provision is not receiving payment as a secured creditor, rather it is receiving a payment in respect of an unsecured debt, which is susceptible of being characterised as a preferential payment”;
- “…in these circumstances, the pre-PPSA stock belonged to Yamaha under the retention of title clauses that applied from time to time, but that when it received payment for that stock, it was not in the capacity of secured creditor”. (at paras 33 and 34 per Gardiner AsJ).
Therefore, the Victorian Supreme Court held, correctly in my view, that the relevant payments were liable to be set aside as preferential.
Where to from here?
Liquidators will find little comfort in the current state of the authorities.
What is clear is that irrespective of the decisions of the Courts in Hussain and Blakeley, there is a need for a clear authority across this issue.
Having said that, I prefer the Court’s reasoning in Blakeley because the decision of the Victorian Supreme Court is consistent with the PPSA amendments to the Act. Whereas the Federal Court has seemed to ‘gloss over’ the express wording in the Act regarding transitional security interests.
In my view, it is seriously arguable that in relation to pre-PPSA ROT claims, that ROT clauses are not effective security for the purposes of the unfair preference regime under the Act.
As always, however, it is important that each case be analysed on its own facts and that you seek legal advice where appropriate.