Retention of title: Is the debt secured or unsecured?

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, the Liquidators of FPJ Group Pty Ltd (In Liquidation ) ( “FPJ Group”) failed to recover unfair preferences from CSR Building Products Ltd (“CSR”). One of the main reasons is that a retention of title (“ROT”) clause had the effect of causing a ROT Suppler to become a secured party and was therefore immune from an unfair preference claim under Section 588FA of the Corporations Act 2001 (Cth) (“ the Act”).

It is noted that FPJ Group was a building supply company. On 26 September 2010, a credit agreement was executed between FPJ Group and CSR (“Agreement”). The agreement specifically mentioned the following in regards to the retention of title clause:

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

On 18 July 2014, the Company was placed into Liquidation. The Liquidators of the company contended that the company was insolvent in November 2013 and therefore, the payments totalling $153,554 (“the payments”) made to CSR between the periods January 2014 to June 2014 pursuant to the agreement constituted unfair preferences pursuant to S588FA of the Act. However, His Honour considered that there was no sufficient and clear evidence to substantiate that the Company became insolvent in November 2013. As a result, his Honour considered that the company was not insolvent at the time of the payments.

The Honour then proceeded to consider whether the debt owed by the company to CSR pursuant to the agreement was an unsecured debt for the purposes of Section 588FA of the Act. Pursuant to Section 588FA(1)(b), a transaction is an unfair preference if it results in the creditor receiving from the company, more than they would receive if the transaction were set aside, and the creditor were to prove for the debt in the winding up of the company.

As outlined above, Section 588FA(1)(b) of the Act only relates to unsecured debts. If the retention of title clause within the agreement caused the Supplier’s debt to become a “secured debt”, then the payments would not be considered as unfair preferences under Section 588FA.

Then his Honour considered the following:-

  1. Origins of retention of title clause.

His Honour looked into a number of authorities in respect of the origins of retention of title clause. Clauses contained in ROT were generally established to protect the seller’s interest in the goods sold to buyers in the case of the buyer’s insolvency by keeping the title in the goods with the seller until full payments were received. According to the relevant authorities, his Honour concluded that it was long established that retention of title clause could be described as a “security”.

  1. The broad meaning of “security interest”

Pursuant to Section 51A of the Act, which refer to the Personal Property Securities Act 2009 (Cth) (PPSA). In particular, pursuant to s12 (d) of the PPSA, a security interest includes an interest in personal property provided by any of the following transactions, if the transaction, in substance, secures payment or performance of an obligation. A conditional sale agreement (including an agreement to sell subject to retention of title) is identified in this Section.

  1. The meaning of an “unsecured debt”

Pursuant to Section 442CC of the Act, a debt to which a retention of title clause is not an “unsecured debt”.

In light of the above, the Judge concluded that a retention of title clause had the effect of rendering a debt a secured debt, thereby avoiding the operation of s 588FA(1)(b) of the Act.