In the recent Federal Court decision of Hussain v CSR Building Products Limited, in the matter of FPJ Group Pty Ltd (In Liq) [2016] FCA 392, his Honour Justice Edelman determined that a retention of title clause had the effect of causing a debt to be “secured” preventing the possibility of an unfair preference claim under s 588FA of the Corporations Act 2001 (Cth) (Act).

The facts

FPJ Group Pty Limited (in liquidation) (Company) was involved in the business of buying building supplies from suppliers and on selling the supplies to builders.

On 26 September 2010, the Company entered into a credit agreement with CSR Building Products Limited (Supplier) (Agreement). The Agreement included the following retention of title clause:

You agree that any goods you receive remain the property of CSR until CSR receives payment for them.

Between January 2014 and June 2014, the Company made 18 payments totaling $153,554.35 for the building supplies supplied by the Supplier pursuant to the Agreement (Payments).

On 18 July 2014, the Company was wound up in insolvency.

The liquidators of the Company (Liquidators) contended that the Company was insolvent as at 21 November 2013 and therefore, the Payments constituted unfair preferences pursuant to s 588FA of the Act, insolvent transactions pursuant to s 588FC of the Act, and voidable transactions pursuant to s 588FE of the Act.

The Liquidators relied on two expert witnesses in respect of the Company’s solvency, one of whom, Mr Ross, was also a liquidator of the Company and a plaintiff in the proceedings.

Sections 588FA and 588FC of the Act

Section 588FA(1)(b) of the Act provides that a transaction is an unfair preference if it, among other things, results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor more than the creditor would receive from the company in respect of the debt, if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company.

Section 588FC of the Act provides that a transaction of a company is an insolvent transaction of the company if (a) it is an unfair preference given by the company; and (b) the company is insolvent at the time the transaction is entered into.

Insolvency of the Company

In considering the solvency of the Company with respect to s 588FC(b) of the Act, although the Company was not in a particularly strong financial position at the relevant time in question, on the evidence, his Honour considered it extremely difficult, if not impossible, to draw an inference of insolvency at any time prior to late-May 2014.  As a result, his Honour considered the Company was not insolvent at the time of the Payments.

In respect of Mr Ross’ expert evidence, while the Court was satisfied Mr Ross approached his evidence with honesty, the Court was not satisfied he was an independent witness.  The Court noted that he was not merely a plaintiff in the proceedings, but had done considerable work which would not be remunerated if the Liquidators were unsuccessful in the proceedings.

Did the retention of title clause secure the debt?

Despite forming the view that the Company was solvent at the relevant times, his Honour nevertheless proceeded to consider whether the debt owed by the Company to the Supplier pursuant to the Agreement was an unsecured debt for the purposes of s 588FA of the Act.

As outlined above, s 588FA(1)(b) of the Act only relates to unsecured debts. If the retention of title clause within the Agreement had the effect of making the Supplier’s debt a “secured debt”, then the Payments could not possibly amount to unfair preferences under s 588FA.

Then Judge considered a number of authorities regarding the origins of the Rompala or retention of title clause.  Such clauses arose to protect the unpaid seller of goods from the consequences of the buyer’s insolvency by keeping the title in the goods with the supplier until they were paid for by the customer. Based on the authorities, his Honour concluded that it was long established that a retention of title clause could be described as a “security”.

His Honour then considered the broad meaning of “security interest” contained in s 51A of the Act, which ultimately references the Personal Property Securities Act 2009 (Cth) (PPSA). In particular, s 12 of the PPSA provides that retention of title arrangements comprise security interests.

Finally, his Honour found that in certain sections of the Act, a retention of title clause is treated in the same way as a “security interest”. For example, s 442CC of the Act concerns the proceeds of the sale of property by an administrator, which is subject to a “possessory security interest”, “PPSA retention of title property”, and “property subject to a retention of title clause”.  Section s 442CC of the Act confirms that a debt to which a retention of title clause is not an “unsecured debt”.

Based on the above factors, the Judge found that a retention of title clause had the effect of rendering a debt to which it relates a secured debt, thus avoiding the operation of s 588FA(1)(b) of the Act.

Insolvency practitioners should tread carefully when pursuing unfair preference claims involving payments subject to a valid retention of title clause, or otherwise risk their claim being dismissed.

If you would like any further information on this case, please contact us.