Can a retention of title clause constitute a security interest?
The recent case of Hussain v CSR Building Products Limited [2016] FCA 392 examined whether a retention of title clause in standard terms and conditions could constitute a security interest in order to prevent a liquidator from recovering payments made.
Under the Corporations Act 2001 (Cth), a liquidator may recover monies paid to a creditor if the payment constituted an ‘unfair preference’ if, among other things, there were reasonable grounds on which to believe the company was insolvent at the time of payment. However, an ‘unfair preference’ can only relate to an unsecured debt. The result is that where a debt is secured, it is irrelevant that the creditor had reasonable grounds on which to believe a company was insolvent, and the creditor will have the right to recover the debt.
In practical terms, this means that in order to make funds available to creditors on the winding up of a company, liquidators will often seek to recover payments from unsecured creditors. This can be a costly process for the unsecured creditor. Often, the unsecured creditor will have a retention of title clause in its standard terms and conditions, but it has been unclear whether this is sufficient to defeat a liquidator’s attempt to recover payments.
In this case, the Federal Court held that including a retention of title clause in standard terms and conditions is sufficient to give rise to a security interest and provide a defence to a recovery claim by a liquidator.
While the security interest arising from a retention of title clause does not need to be registered under the PPSA to defeat an unfair preference claim, this does not mean creditors should take a chance on recovery of debts. If you hold a security interest, this should be registered on the PPSA as a matter of course to ensure full protection of your right to recover a debt.
For more information, please contact:
Ali Erskine
Principal
T 03 5225 5208
E aerskine@ha.legal
or
Stephanie Davies
Senior Associate
T 03 5225 5229
E sdavies@ha.legal
