Retention of title (ROT) clauses offer vital protection to business owners who sell goods on credit. Without an ROT, if a buyer becomes insolvent after receiving your products but before paying in full, you could end up in a long line of unsecured creditors.
The Personal Property Securities Act (PPSA) has substantially changed how retention of title arrangements work. Before the PPSA came into effect, if a company was placed in liquidation or receivership, suppliers of goods had significant rights if the terms of sale included an effective retention of title clause. In the case of liquidation and receivership, those rights often included the right to retake possession.
The PPSA has altered the position in some respects, where a supplier is now only entitled to reclaim goods if the supplier’s interest in them has been ‘perfected’. If an external administrator is appointed to a purchaser company and the security interest has not been perfected, then the supplier cannot reclaim the goods and the security interest vests in the purchaser company.
What is a Retention of Title Clause?
Definition and simple purpose
A retention of title clause lets sellers keep legal ownership of goods even after delivery until specific conditions are met – usually full payment. The buyer may have physical possession of the items, but legal ownership remains with the seller until the buyer has fulfilled their payment obligations.
The purpose is clear: to specify exactly when ownership moves from seller to buyer in a transaction. This clarity helps prevent disputes, especially if the buyer can’t pay or faces insolvency.
How it protects sellers in credit transactions
Retention of title clauses give businesses that supply goods on credit a safety net. You can recover your goods if a customer doesn’t pay or goes bankrupt, instead of waiting in line with other unsecured creditors. Without this protection, you’d likely get little or nothing of what customers owe you during bankruptcy proceedings.
These clauses benefit buyers too. Customers with poor credit ratings can still purchase goods because sellers are protected from default risk.
The clauses work best when:
- Goods remain identifiable
- They haven’t mixed with other materials
- No resale to third parties has occurred
Types of ROT Clauses
Title clauses come in different forms, and each type gives you unique ways to protect your business interests when supplying goods.
Specific Goods Clauses
A basic ROT clause will state that legal ownership, or title, to the goods will not pass to the buyer until the buyer has paid for the goods.
All Monies Clauses
This type of ROT clause reserves title in all goods supplied to the buyer until the buyer has settled all outstanding invoices to the seller.
Regardless of the type of ROT clause used, unless it is incorporated into the contract between the buyer and seller, it will be unenforceable.
This means that the seller’s trading terms must have been communicated to the buyer before the contract is made. If the first time the buyer sees the Terms of Business is on the back of an invoice, it is too late.
How the PPSA Affects ROT Clauses
The Personal Property Securities Act (PPSA) has changed how retention of title clauses work in Australia. These changes are significant to protect your business interests properly.
What is a security interest under PPSA?
Your retention of title clause becomes more than ownership under the PPSA—it’s classified as a “security interest.” The law treats ROT clauses as secured loans, whatever the property’s title holder might be. The buyer becomes the owner who grants security back to you as the supplier.
Perfection
Perfection is a key concept under the PPSA. It is a means by which the holder of a security interest (the secured party) can protect its security interest.There are three methods of Perfection:
- Possession of the security property.
- Control of the secured property (in the case of a limited class of property).
- Registration of a financing statement (ie PMSI – Personal Money Security Interest) on the PPSR – Personal Property Security Register.
PMSI and super priority
Under the PPSA, ROT suppliers enjoy the benefit of a Purchase Money Security Interest (PMSI) super priority. Super priority is only available in respect to PMSIs, which include a security interest taken in collateral, to the extent that it secures all, or part of its purchase price. However, registration is key, so suppliers must ensure they comply with all relevant timeframes.
Why registration timing matters
Registration timing is a vital part of the process. You must register before delivering goods to keep PMSI super priority for inventory. Non-inventory items need registration within 15 business days after the customer gets possession.
Your unregistered security interest might face these issues if you don’t register properly:
- Lower priority than earlier registered interests
- “Vesting” in the buyer during insolvency, making you an unsecured creditor
Super Priority In Respect of Unpaid Goods Only
A security interest is only a PMSI to the extent that it secures unpaid amounts. Once goods have been paid for, they may well be caught by the residual security interests arising under an all-monies ROT, but this intent is no longer a PMSI, and is not afforded the super priority available to PMSI holders.
This means that ROT suppliers will not have recourse to all previously supplied goods, notwithstanding that the supplier has an all-monies ROT clause incorporated into their contracts with customers. The ROT supplier will only achieve PMSI super priority for goods that have been supplied and which have not been paid for.
This is a significant departure from the previous law in regard to all monies ROT clauses. It means that although suppliers have security over all goods supplied, they will only have priority over a bank’s prior-registered all-assets charge to the extent of the ROT goods which have not been paid for.
Further, there is an interest issue with regard to the effectiveness of a security interest. The registration of a security interest is defective if it indicates that the security interest in the collateral is ‘a purchase money security interest (to any extent) [and] the security interest is not a purchase money security interest (to any extent) in the collateral’.
Additional registration required for security over goods paid for
As mentioned, where an all-monies ROT is registered as a PMSI, the registration is ineffective as to goods already paid for.
ROT suppliers can lodge a separate registration for their non-PMSI interest by way of a GSA (General Security Agreement), but, as previously indicated, there may be other prior-registered secured parties, such as a bank holding an all-assets charge.
Case law
In Central Cleaning Supplies (Aust.) Pty Ltd v Elkerton [2014], a number of issues were discussed in respect to the validity of a creditor’s retention of title claim, not to mention the age-old issue of ‘incorporation’.
Background
Central Cleaning Supplies (Aust.) Pty Ltd (“Central Cleaning”) supplied cleaning equipment and products to Swan Services Pty Ltd Swan74).
In September 2009, Swan was issued with a credit application to sign that, amongst other things, provided a 30 day credit term and included a statement that the supply of goods was governed by Central Cleaning’s ‘Standard Terms and Conditions’.
From this date forward, Central Cleaning supplied Swan with cleaning products and equipment from time to time. It is important to note that printed at the bottom of the relevant invoices was a retention of title ‘condition of sale’. It stated that the goods were the subject of the particular invoice, and remained the property of Central Cleaning until the whole of the purchase price had been paid in full by Swan.
Incorporation
The Central Cleaning credit application included the following:
‘The supply of goods by [Central Cleaning] is governed by [Central Cleaning’s] standard Terms and Conditions as enforced from time to time. The Standard Terms and Conditions may override any terms and conditions of purchase used by [Swan Services]….’
Central Cleaning supplied goods between November 2012 and May 2013, whereby the following process was followed:
- Swan ordered goods by issuing a purchase order that set out:
- Site and delivery address.
- The goods required, including product codes, descriptions, quantities, prices (exclusive and inclusive of GST), GST amounts, totals excluding GST
- The identity of Swan’s personnel placing the Purchase Order
- The date of the Purchase Order
- The Purchase Order number
- Central Cleaning delivered the goods within four weeks of receiving the Purchase Order to the applicable site, rendering a delivery docket to the applicable site supervisor.
- After the goods were delivered, Central Cleaning rendered an invoice to Swan.
It was held that the ROT condition was incorporated into the separate contracts (invoices). That did not assist Central Cleaning because those contracts came after 30 January 2013 (introduction of the PPSA); it was those separate and distinct contracts that provided for the security interests, and the transitional provisions did not serve to protect them.
Registration
It was held that goods were supplied under ‘separate contracts’ post 30 January 2012, given the deficiencies in Swan’s credit application. So, to effect security, Swan would have had to register each invoice on the PPSR.
His Honour Ferguson J held that the Credit Application did not include a term in which title in the goods is retained until payment for them had been made. It therefore followed that the Credit Application agreement was not a transitional security agreement because it did not provide for the granting of a security interest. Therefore, Central Cleaning could not rely on the transitional provisions of the PPSA that would have resulted in perfection of its security interests without the need to take any steps.
Need More Information?
SV Partners has extensive experience in assisting their clients with the PPSR. If you would like some assistance with a PPSR matter, please contact one of our advisors on 1800 246 801.
FAQs
A retention of title (ROT) clause is a contract term stating that a supplier keeps legal ownership of goods until the buyer has paid in full. Even though the buyer has possession, title does not pass until payment is complete. Under the PPSA, a retention of title clause is treated as creating a security interest over the goods.
Yes. Including a retention of title clause in your terms is not enough on its own. To properly protect your position and gain priority over other creditors, you generally need to register your security interest on the PPSR.
If you do not register, you may be treated as an unsecured creditor if your customer becomes insolvent. This can mean losing the right to recover your goods or receiving little to no return in an insolvency process.
No. They must be properly incorporated into your contract and clearly agreed to by the customer. Poorly drafted or loosely applied terms may not be enforceable, and this can weaken your PPSR position.
Registrations can last for several years or even indefinitely, depending on how they are set up. It is important to choose the correct duration and to renew registrations where needed.