Terms of a security agreement held to be “central” to determining when a security interest arises

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By Ariel Borland, Partner and Nirupa Manoharan, Senior Associate

On 12 May 2015, the Victorian Supreme Court of Appeal (the Court) handed down its decision in Central Cleaning Supplies (Aust) Pty Ltd v Anthony Wayne Elkerton (In his capacity as joint and several liquidator of Swan Services Pty Ltd (In Liquidation) ACN 000 699 990) [2015] VSCA 92.

The liquidators asserted that Central Cleaning Supplies (Aust) Pty Ltd’s (Central’s) security interest vested in Swan Services Pty Ltd (In Liquidation) (Swan) immediately prior to the appointment of the liquidators to Central in May 2013 as it was non-transitional and was not registered on the Personal Property Securities Register (PPSR).  Central relied on the ‘temporary perfection’ afforded by the Personal Property Securities Act 2009 (Cth) (PPSA) for security interests arising prior to 30 January 2012 to argue that its interest was perfected and had therefore not vested.

The Court was asked to determine whether Central’s security interest in the items of equipment it supplied to Swan was ‘provided for’ by a pre-PPSA credit application entered into between Central and Swan in September 2009.

The Court held that Central’s credit application, which included an undertaking for Swan to be bound by Central’s standards terms of supply in respect of every future supply of equipment did, in fact, ‘provide for’ the granting of Central’s security interest in all of its future supplies to Swan.  Accordingly, Central’s security interest in respect of each supply of equipment to Swan was a ‘transitional security interest’ and afforded temporary perfection under the PPSA.

Importantly, the Court found that even though Central’s retention of title (ROT) clause was only contained in Central’s invoices and not the credit application, and notwithstanding that the ROT clause was expressed as applying to “particular goods ‘the subject of this sale’”, that ROT clause was still to be construed as being “provided for” by Central’s earlier credit agreement.  It was “immaterial that the credit application form did not set out Central’s ‘Standard Terms and Conditions’.’”

Another important element of the case was that the Court held that the act of Swan signing and lodging the credit application was not, on ordinary principles, the act which created a binding contract between Central and Swan.  The contract, on its terms, and therefore the security agreement, only became binding when Central accepted Swan’s application by its conduct in supplying the equipment to Swan.

Take away points

Central Cleaning confirms that a security agreement which creates or otherwise ‘provides for’ the granting of a security interest may be sufficient to cover future security interests.  A classic example will be where a supplier provides goods on the terms of a credit application drafted broad enough to ‘provide for’ additional security interests, and subsequently that supplier supplies goods pursuant to additional terms and conditions, such as those on the back of its invoices, which do not, on their face, appear to have been otherwise contemplated in the credit application.

In addition, the case highlights to insolvency practitioners the importance of paying close attention to the terms of a security agreement, particularly if that agreement appears to comprise a suite of documents, when considering the validity of a secured party’s security interest.

For further information, please do not hesitate to contact us.

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