I hadn’t realised until recently how long it’s been since I’d
posted on the subject of (Unfair) Preference Claims.
However, there have been some developments since that time,
including a particularly interesting legal judgement recently, and an update is
appropriate.
For a refresh on the basics, you can find my earlier post here.
In this post, I’m going to be looking at:
- The standing of a Retention of Title clause when it comes to determining whether a payment was secured or not; and
- The Corporations Act’s problem with Transitional security interests.
New light was potentially shed on the options for mounting a
defence against a liquidators’ preference claim in Justice Edelman’s ruling in
Hussain v CSR Building Products Limited regarding the payments made by FPJ
Group Pty Ltd.
The ruling runs to some 248 numbered paragraphs and covers
many aspects of the standard preference claim defence available to suppliers –
running account, good faith and the test for insolvency – but what concerns us
here is the Judge’s conclusions regarding the role an unregistered Retention of
Title clause played in determining whether the supplier, CSR, received payments
in respect of an “unsecured debt”.
Justice Edelman found that there were sufficient references
in the Corporations Act to a Retention of Title right being, in substance, a
form of security that, while in the circumstances CSR may not satisfy the
definition of a ‘secured creditor’, their Retention of Title right was
sufficient to render the debt they were owed ‘not unsecured’.
It will be interesting to see to what extent this view is
allowed to stand unchallenged because it certainly seems to run counter to a
line liquidators have been taking with the, apparent, support of section 51 of
the Corporations Act.
Section 51 is one of the relatively recent additions to the
Corporations Act brought in to harmonise with the introduction of the PPSA. It’s
a very short section and states:
“ In this Act:"PPSA security interest " (short for Personal Property Securities Act security interest) means 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.”
Effectively, the Corporations Act is acknowledging that the
holder of a security interest that is recognised as such under the PPSA will be
deemed to be a secured creditor. But it
also goes on to say ‘except for
transitional security interests’.
While this aspect of the Corporations Act does not impact
upon a creditor’s status when pursuing outstandings upon the appointment of a
liquidator, it has been used to impact upon a supplier’s rights to
retain alleged preferential payments.
When a supplier seeks to defend themselves against a
liquidator’s preference claim by asserting they were a secured creditor, the
liquidator will, invariably, reject the defence on the basis that their PPSR
registration was lodged as ‘Transitional’.
This has given rise to a widespread call from intermediaries,
brokers, and other assorted advisors, that suppliers should lodge fresh
non-transitional registrations to secure their interests.
While this may not hurt (and may improve a supplier’s
chances of a successful outcome) there is an element of confusing the wrapping
for the gift.
The Corporations Act does not exclude security interests registered
as transitional; it excludes security interests that are
transitional. Registering an interest as
non-transitional does not suddenly make that underlying interest non-transitional
just as attempting to perfect a non-transitional security interest with a
transitional registration will not meet with success.
So, while transitional registrations are to liquidators as
red rags are to bulls, putting non-transitional registrations in place will
certainly be a good idea, for liquidators who take the trouble to look closely,
they may not be sufficient.
However, for those liquidators, there is always the ruling
of Justice Edelman to fall back on!
