Suppliers beware when making PPS registrations relating to ongoing supply arrangements

A person who has supplied goods on the basis that they will retain title to them until they have been paid for them, has a "security interest" in those goods.

The supplier cannot, however, rely on its title to protect its interest in the goods. Instead, the supplier must register its security interest on the PPS register.

If it incorrectly registers its security interest as a "transitional security interest", then (if its customer goes into administration or liquidation) it may lose its goods to the other creditors of its customer.

Trenfield v HAG Import Corporation (Australia) Pty Ltd [2018] QDC 107 again highlights that suppliers need to be careful when registering their security interests as "transitional security interests" on the PPS register.

What is a transitional security interest?

Under the PPS Act, a "security agreement" is an agreement by which a "security interest" is created.

To be a "transitional security interest" the security interest must have been provided for by a "security agreement" that:

(a)        was in force immediately before the PPS Act commenced on 30 January 2012; and

(b)        continues to be in force. 

Often supply arrangements involve a number of documents. They can include a credit application, terms and conditions of sale, a purchase order and an invoice.

Where a supply arrangement existed before the PPS Act came into force, the question often arises as to whether there was a single "security agreement" that governed all ongoing supplies or whether each purchase order created a separate security agreement (so that any order placed after the PPS Act came into force would not create a "transitional security interest").

According to the explanatory memorandum for the PPS Bill:

9.14     A security agreement would be able to expressly provide for ongoing supplies and therefore result in a series of security interests.  Provided the security agreement is in force prior to the registration commencement time and allows for future security interests to be granted, each security interest granted under that security agreement, regardless of whether it is granted before or after the registration commencement time, would be a transitional security interest.  The secured party to such an ongoing transaction would only need to register one financing statement to cover the ongoing transitional security interests.

9.15        Where there is no formal agreement providing for ongoing supplies, generally each supply would be considered to be a separate contract or security agreement.  Supplies made after the registration commencement time in this type of situation would each be made under a new security agreement.  Security interests made after the registration commencement time would not benefit from the protection provided in the transitional provisions.  The secured party to this kind of arrangement would need to register two financing statements; one to secure transitional security interests and a further registration to secure security interests arising after the registration commencement time. 

Trenfield

In the Trenfield case, the supplier (HAG Import Corporation (Australia) Pty Ltd) supplied goods to the customer (Lineville Pty Ltd (In Liquidation)). In 2011, Lineville completed a credit application. Over time HAG supplied goods to Lineville. Each supply was governed by HAG's terms and conditions (which included security interests in favour of HAG). In 2013, HAG made a registration against Lineville on the PPS register for "transitional security interests".

The court looked at the question of whether HAG's security interest was  a "transitional" one.

A similar question arose a few years ago in the Victorian case of Central Cleaning Supplies (Aust) Pty Ltd v Elkerton [2015] VSCA 92. In that case, Swan Services Pty Ltd made a credit application in 2009 to be an account customer of Central Cleaning Supplies. That application had some terms and conditions on the back of it, including a provision that any supply by Central Cleaning would be governed by Central Cleaning's standard terms and conditions (as in force from time to time). The following day Central Cleaning issued an invoice to Swan Services. The invoice set out Central Cleaning's standard terms and conditions (including a "retention of title clause" that created a security interest in favour of Central Cleaning). 

The court in that case held that, by itself, the credit application did not create an agreement (because, until accepted by Central Cleaning, the application itself did not oblige Central Cleaning to do anything). But when Central Cleaning made its first supply to Swan and issued its invoice, it accepted (by conduct) Swan's credit application to be an account customer and that acceptance created a "security agreement" that governed all future supplies between them (before and after the PPS Act commenced).  As the first supply to Swan took place before PPS Act commenced, the security agreement was "transitional".

So did a transitional security agreement exist in the Trenfield case as well? Unlike the court in the Central Cleaning case, the court in the Trenfield case held that the credit application did not create a transitional security agreement. The court did not think that the application constituted an offer capable of acceptance by the supply of goods and issuance of an invoice. Instead, it concluded that:

• the application was just a request for credit and only included an acknowledgement by Lineville that it was familiar with HAG's terms and conditions (rather than an undertaking to be bound by those terms); and 
• a separate contract came into existence each time HAG supplied goods to Lineville. The court held that the circumstances of the case were analogous to the second situation contemplated in the above extract from the explanatory memorandum.

This meant that there was no "transitional security agreement" between HAG and Lineville and HAG's registration was not effective.

Do not just assume that a transitional security agreement exists

The Trenfield case highlights that the courts will assess each case on its facts. 

Suppliers with pre-PPS Act supply arrangements should check their PPS registrations. If they only have registered a "transitional security interest" on the PPS Register (and not a non-transitional security interest as well), they run the risk that their registration may be challenged in the courts and held to be ineffective.