Contract of Sale: Preserving 'Retention of Title' Rights Over Products Sold On Credit

Written on the 8th of February 2012

Many businesses supply goods on credit subject to 'retention of title' provisions in their sales agreements. This article discusses the effect of the Personal Property Securities Act 2009 registration system (effective 30 January 2012) on the enforceability of such provisions and the contract of sale.

What is a 'retention of title' provision?

In normal circumstances, title (more commonly referred to as ownership) in relation to the sale of goods passes to the buyer immediately. A typical transaction might take place in a shop, involving the exchange of money for a product, with the buyer becoming the owner of that product when the money has been given to the shop assistant.

Even if payment is not made immediately, contract law says that in most circumstances the buyer becomes the owner of a product when the agreement for sale (or sale agreement) is made. From the seller's perspective, ownership of the product is replaced by a debt owed to the seller by the buyer.

However, an agreement for sale can include a provision whereby the seller retains ownership until the agreed price for the product has been paid in full.

Are 'retention of title' provisions still effective?

Prior to 30 January 2012, such provisions were generally effective against other creditors of the buyer, subject to the agreement being proved... ie, subject to the seller having evidence of the arrangement. It is important to note that such provisions were not generally effective against a subsequent purchaser in good faith, such as where the initial buyer fraudulently on-sold the product to an innocent third party.

Now, from 30 January 2012, retention of title provisions can also be defeated by another creditor of the buyer, where that creditor registers their interest on the Personal Property Securities Register (the PPSR).

For example, you may sell a product on the basis that you retain title until payment has been made in full. The buyer takes possession of the product and takes it to their office. The next day the buyer enters into a credit agreement with a finance company, giving that company security over all of the assets of the buyer's business. The finance company registers a financing statement on the PPSR. A few weeks later the buyer's business goes into liquidation. According to the PPSR and the Act, the finance company is entitled to priority in relation to the product, and may therefore have possession of it... your 'retention of title' provision becomes worthless.

If you had registered your own interest in the product on the PPSR (within 15 days of the sale) that would have 'perfected' your security interest. The finance company's interest would then have been secondary to yours, and upon the buyer going into liquidation you would most likely have been able to recover your product from the liquidator.

What is a financing statement?

This is a standard form document described in section 153(1) of the Personal Property Securities Act 2009, that includes the following information:

- Details of the secured party (eg, the seller)
- Details of the grantor (eg, the buyer)
- The secured party's address for notices, and any relevant 'identifier'
- Description of the collateral (eg, the product supplied) and proceeds
- The date when the registration ends
- Indication of subordination... where some other interest has priority
- Whether the secured party's interest is a 'purchase money security interest'
- Other details prescribed in the Personal Property Securities Regulations 2010

What about products that were sold subject to 'retention of title' before 30 January 2012?

Section 322 of the Act provides that a security interest arising from a 'transitional security agreement' - eg, an agreement which was in force before 30 January 2012 in relation to collateral - is perfected without registration for up to 24 months.

However, as a transitional security interest is not recorded on the PPSR, it will not show up in a search of the PPSR. This raises the possibility of a liquidator selling or disposing of secured property because he or she is unaware of a relevant security interest. Recoverability of that property will then depend on whether the transitional security agreement complies with the Act's requirements in relation to signature/acceptance of the agreement and description of the collateral. The right to recover some items, such as inventory, may be lost once those items have been sold or disposed of by a liquidator.

Although this new regime addresses many shortcomings of the previous state laws, failure to perfect title by registration on the PPSR may now have disastrous consequences for a seller or lender. In particular, professional advice should be sought where it is intended to rely on the transitional arrangements in relation to significant transactions.

If you have any questions regarding this topic, please don't hesitate to call John Woodward (Partner) or Stephen Bourne on (02) 4904 8000 or email us. A member of our team will endeavour to respond to your enquiry within 24 hours.