Can a Liquidator Ignore ‘Retention of Title’ Claims and Keep Inventory when a Business is put into Liquidation?

What Happens to Inventory on Liquidator Appointment?

In an insolvent liquidation, the liquidator is appointed to ascertain the property owned by the insolvent company, realise that property and distribute it to creditors. Once appointed, the liquidator is entitled to take into their control and custody all of the assets that belong to the company (see section 474(1) of the Corporations Act 2001 (Cth)).

However, just because goods are in the possession of a debtor company at the time of liquidator appointment, it doesn’t follow that the debtor company (and as the agent of that company, the liquidator) owns those goods. Many suppliers of goods, aware of the risk of insolvency, supply goods with a ‘Retention of Title’ clause in the accompanying contract, meaning that they retain ownership (‘title’) with respect to the goods and can repossess them in the case of an insolvency event. Relatedly, it is common for these contracts to contain a clause allowing the supplier to physically enter the debtor’s premises and recover those goods. 

Whatever the legal status of the goods, once appointed, the liquidator will likely have custody of any inventory or its proceeds. This means, in practical terms, it will be up to the supplier to prove their claim to the liquidator. Therefore any supplier seeking to assert a security interest over those goods will need to have clear records with respect to those goods. Suppliers should consider sending those records to the liquidator upon appointment to provide evidence in support of their claim. 

Read more about the general impact of the appointment of a liquidator in The Ultimate Guide to Liquidation Part 2: Preparing for Liquidation.

How do Retention of Title Clauses Work? 

Before a supplier can actually claim goods or their proceeds (and have the liquidator hand them over), they will have to prove that an enforceable Retention of Title clause applies. Note, these clauses are also sometimes known as ‘Romalpa’ clauses after the key English case of Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676.

So what exactly is a Retention of Title clause? It is a provision in an agreement for the sale of goods on credit, which holds that title will remain with the seller/supplier of those goods until the full purchase price has been paid and/or other requirements have been met. 

Sometimes, the clauses extend further than the specific goods in question and on to the proceeds of the sale of the inventory, or, in the case of manufacturing, to any goods that are produced with that inventory. It is also possible for such a clause to be an ‘all monies’ clause. In this case, the supplier claims a right not just to the goods in question, but also to recovering any amounts up to the total of what they are owed.

Up until the Personal Properties Securities Act 2009 (Cth) (the PPSA) came into effect, these clauses were dealt with under the common law. However, now, in order to achieve full legal effect they must meet the requirements of that statutory regime (more on this below). 

Under the PPSA agreements containing Retention of Title clauses are usually known as ‘conditional sale agreements’.

What is the Impact of the PPSA?

In order to ‘perfect’ (ie. to finally ‘complete’) a security interest in personal property, such as a Retention of Title clause, it must be registered on the Personal Property Securities Register (PPSR). This is a relatively straightforward process, as the PPSR is effectively just a ‘noticeboard’. There are limited fields that need to be filled in by the secured creditor, and it is relatively easy to engage an agent to do this on one’s behalf. 

Importantly, however, perfection of a security interest under the PPSA is not required for that security interest to be effective or enforceable against a liquidator.Under section 19 of the PPSA, a security interest, in particular collateral, is enforceable against the grantor where that security interest has ‘attached’ to the collateral. This will occur under that same section as long as the grantor has rights in the collateral and value is provided for the security interest. 

It is worth noting also that a Retention of Title clause is classed as a ‘Purchase Money Security Interest’ (PMSI) under the PPSA (a category that also captures PPS leases and consignments). This means that, once perfected, the security interest generally has ‘super-priority’ over other secured creditors, even if their security interest was perfected first.

Can Payments Towards Inventory be Unfair Preferences?

On liquidation, in addition to gathering up existing property, the liquidator is tasked with seeking out any recent (or not so recent) transactions of the debtor company to determine whether any of them are ‘voidable’ in order to increase available funds for creditors. Perhaps the most common form of voidable transaction that liquidators seek to ‘claw back’ are ‘unfair preferences’ under section 588FA of the Corporations Act 2001 (Cth). These occur where the debtor has made payments to one unsecured creditor in detriment to the general pool of unsecured creditors. 

Unfair preference claims only apply with respect to payments of unsecured debts. There is no definition in the Corporations Act 2001 (Cth) of unsecured and secured debtors, however recent case law (see Trenfield v HAG Import Corporation (Australia) Pty Ltd [2018] QDC 107) confirms that a Retention of Title claim can be a secured debt, even where it has not been perfected. 

Note, however, that current case law holds that payments in excess of the secured debt may be ‘fair game’ for an unfair preference claim. This means it is essential for the secured creditor that there is secured collateral (for example, a supplier of building materials may find that they do not have secured collateral where those materials have been used in a development and turned into something else).

It is worth noting also that, even where a liquidator can prove an unfair preference, it may be possible to argue that any amount owed should be ‘set off’ against what the company in liquidation owes the debtor (see section 553C of the Corporations Act 2001 (Cth)). The status of the ‘set off’ defence to unfair preference claims is still relatively unsettled law (see, for example, the decision of the NSW Court of Appeal in Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd [2011] NSWCA 109).

For more information about unfair preference claims in general see What are Unfair Preference Claims by a Company Liquidator?.

Conclusion 

Retention of Title clauses can be a useful mechanism for suppliers of goods to protect themselves against the possibility of a debtor company’s insolvency. It is important that these clauses are protected by perfecting that interest on the PPSR. However, doing so will not always