Limiting the scope of hussain v csr building products
Recently, a number of defendants have attempted to rely on unregistered retention of title (UROT) clauses in defending unfair preference[1]and insolvent trading claims[2] brought by Liquidators. By relying on UROT’s, the defendant’s argue that the debts the subject of the claim are secured debts and therefore cannot be clawed-back pursuant to ss 588FA and 588FF or 588M of the Corporations Act 2001 (Cth) (the Act).
There is a huge amount of commentary on the internet published by law firms, accountants and advisors around what a UROT means and how it can be registered. We have included some of this information in our guide to voidable transactions, but the basic idea is that:
- a retention of title (ROT) clause is a provision in a contract for the sale of goods, which means that the seller retains legal ownership (ie security) of the goods until certain obligations are fulfilled by the buyer – usually payment of the purchase price;
- following the introduction of the Personal Property Securities Act 2011 (Cth) (the PPSA), for a seller to retain legal ownership by way of an ROT, the seller must register their rights on the Personal Property Securities Register (otherwise called the PPSR); and
- the registered ROT is called a Purchase Money Security Interest (PMSI), however, if it is not registered, then (for the purpose of this article) it is called a UROT.
The Hussain v CSR Building Products decision
- On 18 July 2014, FPJ Group Pty Ltd (FPJ Group) was wound up in insolvency, following which the Liquidators sought to recover unfair preference payments from CSR Building Products Pty Ltd (CSR).
- The Liquidators alleged that CSR received 18 unfair preference payments totalling $153,554, pursuant to s 588FA of the Act.
- Amongst the myriad of defences raised by CSR, it attempted to rely upon UROT clauses to say that the debts the subject of the payments were secured debts, which cannot be clawed-back as unfair preference payments.
In making His Honour’s decision to conclude that the UROT were secured debts, two main issues were considered:
1. An unsecured debt is not defined in s 588FA(1)(b) of the Act and could encompass UROT
Due to ambiguity in the meaning of the term ‘unsecured debt’ in s 588FA(1) of the Act and prior contradictory cases suggesting differing definitions of a ‘secured debt’,[3] Edelman J had regard to the broad vs narrow scope distinction of the term, as stated in General Motors Acceptance Corp Australia v Southbank Traders Pty Ltd,[4] and the following examples:
- a guarantee from a third party has been held to be a secured debt;[5] and
- a conditional sale where title to the property does not pass to the purchaser until such time as the condition is satisfied was said to fit within the meaning of an interest which “secured the payment of a debt.”[6]
His Honour thereby concluded that the UROT could in fact fall within the definition of secured debts.
2. Treating ROT as securing a debt is consistent with the 2010 amendments to the Act
In 2010 a definition of “security interest” was introduced into s 51 of the Act by the Personal Property Securities (Corporations And Other Amendments) Bill 2010 (Cth), which provides that ROT arrangements constitute security interests.
His Honour considered that as the credit agreement between FPJ Group and CSR was entered into on 26 September 2010 and therefore during the two year transitional period (ie between 30 January 2012 and 30 January 2014),[7] the UROT would be regarded as a transitional security agreement in line with the PPSA.
Distinguishing Hussain v CSR Building Products
We submit that for the following reasons, Hussain v CSR Building Products can be distinguished from all cases brought in respect of voidable transaction or insolvent trading claims post-transitional period:[8]
- The transactions, which gave rise to the unfair preference claim in Hussain v CSR Building Products, were incurred during the two year transitional period. This had the effect of granting CSR temporary perfection as a transitional-PMSI holder,[9] as the UROT had commenced from 26 September 2010. Transactions incurred post-transitional period should be distinguished on this basis;[10]
- Later authority[11] supports the view that a UROT cannot be a secured debt as it needs to be a PMSI; and
- In order for Liquidators to be successful in pursuing an unfair preference, they must demonstrate that the payments gave the particular creditor a greater return that what they otherwise would have received in the Liquidation. The effect of the post-transitional period UROT, would mean that the creditor’s UROT would vest in the Liquidator (per s 267 of the PPSA) and therefore would have no greater right in the Liquidation than an unsecured creditor.
Note: Swan Services case
As a post-script to the above analysis, it was interesting to note that the defendant’s to an insolvent trading claim recently attempted to rely upon UROT’s in saying that many of the debts incurred were secured debts. The case was In the matter of Swan Services Pty Limited (in liquidation) [2016] NSWSC 1724, 193-196.
The defendant submitted in the case that the relevant loss or damage suffered by the UROT creditors should be assessed at the time of incurring the relevant debt. However, His Honour rejected that submission and said that the relevant loss or damages was incurred at the time the UROT vested in the Liquidator (per ss 267 and 267A of the Act).
His Honour unfortunately did not need to deal with this issue in much detail and provided no commentary on the arguments we have submitted above.
Takeaway
Following Hussain v CSR Building Products, creditors/directors can potentially enjoy a broader scope of defences to voidable transaction and insolvent trading claims brought by Liquidators. However, we submit that relying upon UROT’s to defend these claims should be limited (inter alia) to transactions occurred prior to 30 January 2014.
If you receive a demand from a Liquidator, we recommend that you seek professional advice immediately. At SV Voidables, our team of Expert Advisers can assist you with these claims.
By Nisha Mehrotra and Matthew Hudson of SV Voidables
[1] See for example Hussain v CSR Building Products Limited, in the matter of FPJ Group Pty Ltd (In Liq) [2016] FCA 392, 144-167 (Hussain v CSR Building Products).
[2] See for example In the matter of Swan Services Pty Limited (in liquidation) [2016] NSWSC 1724, 193-196.
[3] Hussain v CSR Building Products, 145.
[4] (2007) 227 CLR 305, 312.
[5] Singer v Williams [1921] 1 AC 41, 49.
[6] General Motors Acceptance Corp Australia v Southbank Traders Pty Ltd (2007) 227 CLR 305 citing s 3(1) of the Chattel Securities Act 1987 (VIC).
[7] Section 306(2)(b) of the PPSA.
[8] The post-transitional period commenced from 31 January 2014.
[9] Section 307 of the PPSA defines a “transitional security agreement” as a “security agreement that is in force immediately before the registration commencement time, and that continues in force at and after that time…”
[10] Section 322(1) of the PPSA provides: a “transitional security interest in collateral is perfected from immediately before the registration commencement time, whether the security interest arises before, at or after the registration commencement time…”
[11] Australian Music Pty Ltd (in Liquidation) v Yamaha Music Australia Pty Ltd [2016] VSC 231.
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