Retention of Title Clauses & Liquidation

Retention of Title & Unfair Preference Claims

Retention of Title clauses may defeat an Unfair Preference Claim

When a company enters into liquidation, it’s liquidators will often seek to recover moneys paid to a creditor to the unfair advantage, or preference, of other creditors. Liquidators will be unsuccessful in making this claim, where the debt is secured. The decision of the Federal Court in Hussain v CSR Building Products Limited, in the matter of FPJ Group Pty Ltd (In Liq) [2016] FCA 392, discusses whether a retention of title clause in a credit agreement constitutes a secured debt. 

The case highlights key issues that creditors and liquidators should consider before making or resisting an unfair preference claim. While the case primarily considered the solvency of the company at the time of the payment, and how liquidators may establish the date that the company was deemed insolvent, the Court made substantial comments as to whether a retention of title clause secured a debt owing to a creditor.

Assessing whether a Retention of Title Clause is a Security Interest

FJP Group entered into a credit agreement with CSR that included a retention of title clause providing that any goods receive remain the property of CSR until CSR received payment for them. This clause arguably secures repayment of the debt by withholding title to the goods being supplied.

Under section 588FA(1)(b) of the Corporations Act 2001 (Cth) (“Corporations Act”) a payment to a creditor will only be an unfair preference if there is a transaction which results in

“the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside”.

(emphasis added)

The difficulty faced by the liquidators was that the Corporations Act failed to define what constitutes an unsecured debt.

In conjunction with reference to amendments to the Corporations Act made in 2010, introducing the concept of a “security interest”, and the wide interpretation that this term was intended to take through the Personal Properties Securities Act 2009 (Cth), the Federal Court held that a retention of title can accurately be described as a “security”.

The Federal Court also relied on the case which gives a retention of title clause its alternative name, the “Romalpa Clause” Case: Aluminium Industrie Vaassen BV v Rompala Aluminium Ltd [1976] 2 All ER 552, and sections 442CB and 442CC of the Corporations Act where administrators are required to treat property subject to a retention of title clause in an identical manner to a security interest on the Personal Properties Security Register.

Conclusion

Unfair preference claims can be expensive and time-consuming claims for liquidators to pursue, however creditors must remain vigilant when receiving payments from a company that shows signs that it is facing financial difficulty.

When deciding whether to pursue or defend an unfair preference claim, all parties should first undertake a thorough review of the circumstances of how the debt arose, whether the company in liquidation was solvent at the time of making the repayments and the specific clauses of any agreement which governs the repayment of debt.

top