Suppliers beware, practitioners take note: taking free of security interests in the ordinary course

December, 2014

Summary

On 17 December 2014, the Supreme Court of Victoria handed down its judgment in the matter of Warehouse Sales Pty Ltd (In Liquidation) and WHS2 Pty Ltd (In Liquidation) [2014] VSC 644.  The decision addressed some novel points of law arising out of the Personal Property Securities Act 2009 (Cth) (PPSA).

Whilst the case is more cause for concern for suppliers supplying on retention of title terms, it does provide clarity for insolvency practitioners dealing with competing priority interests in goods supplied to the company, including where those goods are provided to one entity in a group but ultimately on-sold, or otherwise held, by another entity in the group.

Facts

Warehouse Sales Pty Ltd (in liquidation) (WHS) sold white and brown goods from various suppliers. WHS2 Pty Ltd (in liquidation) (WHS2) was a subsidiary company of WHS that operated a store also selling white and brown goods.

Goods were supplied on credit to WHS under retention of title terms. The terms provided that ownership remained with the supplier until full payment in full had been made by WHS. Arrangements with all of the suppliers except for Panasonic Australia Pty Ltd (Panasonic) expressly authorised WHS to on-sell the goods in the ordinary course of business, even if the supplier had not been fully paid. The contract with Panasonic, in contrast, provided:

Sale of the Goods to a third party for further resale is not permitted unless the Buyer and Panasonic have entered into a current distribution Agreement.

The suppliers registered security interests over the goods they supplied on the Personal Property Securities Register (PPSR).

WHS sold goods to WHS2 at cost price, which was recorded on a running account between the entities. WHS would then provide WHS2 with a monthly tax invoice and statement which recorded the amounts payable for the stock purchased by it. There was no contractual relationship between WHS2 and any of WHS’ suppliers.

The Liquidators sought judicial guidance in relation to goods in the possession of WHS and WHS2 as at the date of their appointment and sold in the following three scenarios:

Scenario 1 – sale by WHS to its retail customers.

Scenario 2 – sale by WHS to WHS2.

Scenario 3 – sale by WHS2 to its retail customers.

Decision

The decision focused on two key sections of the PPSA:

(a)   Section 32(1)(a)(i) of the PPSA: this section provides that where a secured party expressly or impliedly authorises a dealing giving rise to the proceeds, that party’s security interest over the particular collateral will not then automatically extend to proceeds in the collateral; and

(b)   Section 46 of the PPSA: this section provides that buyers ‘take free’ of security interests when the relevant personal property is purchased or leased in the ‘ordinary course of business’.

Scenario 1

Justice Sifris stated that customers paying in full or in part would be protected by section 32(1)(a)(i) of the PPSA because of the express authority provided by the suppliers for the on-sell of their goods before any payments were made to that supplier.  Customers of WHS, it followed, then took the relevant goods free of any security interest under section 46(1) of the PPSA.

However, customers who purchased the goods pursuant to a layby arrangement would be precluded from relying on the above provisions of the PPSA because the goods were not ‘sold’ until payment was made in full. In interpreting the relevant provisions of the PPSA, Sifris J relied on the provisions of the Goods Act 1958 (Vic) in determining whether a person was a ‘buyer’ of personal property which had been ‘sold’ under s 46 of the PPSA.  As a result, goods purchased by way of layby remained in the possession of WHS and subject to the supplier’s security.

Scenario 2

The critical question in relation to the sales by WHS to WHS2 was whether these sales were of the kind comprising the ‘ordinary course of business’ of WHS and therefore specifically authorised by the suppliers. This was critical in determining whether s 32(1) of the PPSA, and indeed s 46 of the PPSA, would give WHS2 the contemplated ‘buyer’s protection’ under the PPSA.

Sifris J concluded that the assessment was ‘a mixed question of fact and law’ and ‘is not free from difficulty and minds may differ’.  His Honour ultimately held that the sales by WHS to WHS2 were in the ordinary course of business because:

  1. the business engaged in the sale of goods to not only ‘mum and dad’ retail customers but also to other individuals / entities at discounted rates and sometimes at cost price;
  2. the sales were not unusual or extraordinary in nature; and
  3. the transactions were consistent with the business operations of WHS.

The position with Panasonic was held to be different because there was an express prohibition on the sale to WHS2 and therefore s 46(2)(b) of the PPSA precluded WHS2 from taking unencumbered title.

Scenario 3

Following the reasoning in the above scenarios, it was held that retail customers of WHS2 took the goods free from any security interest, provided that they had not entered into a layby arrangement or those goods were not supplied by Panasonic.

Conclusion

There is a fine balance between protecting the interest of secured parties on the one hand and permitting commerce to proceed expeditiously on the other. This decision may also provide practitioners some guidance appointed over corporate groups where assets are being transferred within a corporate group on whether those assets have in fact passed free of prior security interests.

The PPSA provisions were designed with the aim of both enabling effective security interests to prevail but also protecting bona fide purchasers without notice of those prior registered security interests.  It is clear that in the latter case, buyers for value will take personal property free of a supplier’s security interest provided that the sale was in the ordinary course and the supplier expressly authorised this type of disposal.

Contact Mills Oakley

Ariel Borland | Partner
T: +61 3 9605 0015
E: aborland@millsoakley.com.au

 

 

nirupa-manoharan

Nirupa Manoharan | Special Counsel
T: +61 3 9605 0808
E: nmanoharan@millsoakley.com.au

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