In this case, liquidators of FPJ Group Pty Ltd (in liq) (FPJ Group) were unsuccessful in recovering unfair preferences from CSR Building Products Ltd (CSR) on several grounds, most notably that CSR was a secured party holding the benefit of a retention of title (ROT) clause. CSR was therefore immune from an unfair preference recovery claim.
An unfair preference occurs under section 588FA(1) of the Corporations Act 2001 (Cth) (Act) if the transaction results in the creditor receiving from the company, in respect of an unsecured debt, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in the winding up the company. Section 588FA(2) provides that a secured debt is taken to be unsecured to the extent of so much of it (if any) is not reflected in the value of the security.
FPJ Group was a building supply company. It entered into a credit agreement with CSR that contained a ROT clause in standard form which provided that all goods remained the property of CSR until CSR received payment in full. The agreement also provided for a charge over any interests in land which FPJ Group owned.
Justice Edelman of the Federal Court was required to determine whether a ROT supplier may hold a secured debt, consistently with the 2010 amendments of the Act which were introduced as part of the Personal Property Securities Act 2009 (Cth) (PPSA). This involved analysing the definitions of ‘PPSA security interest’ and ‘security interest’ in sections 51 and 51A of the Act.
His Honour recognised that the terminology of the Act was intended to make it consistent with the PPSA, including removing the distinction between different forms of security interest, to treat transactions that secure payment or performance of an obligation as security interests regardless of the form.1 By analogy, other sections of the Act treated ROT suppliers as secured (for example, section 442CC which had the effect of confirming that a ROT holder was not an unsecured creditor because the proceeds of sale were to be paid to satisfy the debt before secured creditors).2 Justice Edelman therefore concluded that the ROT clause conferred a security interest which meant the payments could not be attacked as unfair preferences because they were payments for secured debts.
Counsel for the liquidators then tried to argue that the payments could be unfair preferences to the extent the payments exceeded the value of the ROT supplies that had been retained by FPJ Group at the date of the winding up. This was rejected for several reasons,3 but most notably as the liquidators did not have appropriate records to show the value of the product supplied by CSR at the time of each of the payments so that the appropriate analysis could be made.
A contrary decision
Readers should also be aware of the decision of Blakely v Yamaha Music  VSC 231 (10 May 2016) where a summary judgment application by a defendant to an unfair preference claim asserting a complete defence based upon an ROT clause was refused as the court was uncertain whether the payments were made in respect of a secured, or unsecured, debt.
A point to remember
In determining whether a payment to a ROT creditor is in respect of an unsecured debt, liquidators will need to determine if there is any ROT product or traceable ROT product still in the possession or control of a company, as this will determine if the payment is secured or unsecured (and therefore potentially recoverable as an unfair preference).
This article has been prepared by Matthew Broderick, Partner.
1. See for instance s12 of the PPSA.
2. At .
3. Paras  – .