Now you own it, now you don’t: retention-of-title supply arrangements

A recent decision of the Supreme Court of New South Wales in Metal Manufacturers Pty Ltd trading as TLE Electrical v WesTrac Pty Ltd [2024] NSWSC 144 (WesTrac decision) has highlighted some of the challenges faced by suppliers who seek to rely on retention of title (ROT) security interests in their supply contracts. These challenges can arise even when the supplier correctly documents the ROT terms and perfects their security interest by registering on the Personal Property Securities Register (PPSR).

The WesTrac decision also provides some helpful guidance around a couple of aspects of the Personal Property Securities Act 2009 (Cth) (PPSA) that have not received much judicial attention to date.

ROT supply arrangements generally result in the supplier having a security interest in the goods supplied. The ROT security interest typically secures the purchase price of the goods supplied and the supplier will have a “purchase money security interest” (PMSI) to the extent it does this. If they are registered correctly on the PPSR, PMSIs have a super priority over other security interests in the goods supplied, regardless of the order of registration. ROT security interests can also secure other obligations of the customer but the PMSI super priority does not apply in respect of these obligations.

What happened

The case involved a familiar fact scenario:

• Verdia entered into a contract with WesTrac to design, supply and install a solar photovoltaic system at WesTrac’s premises (Verdia/WesTrac contract). This contract provided that title to all goods supplied would pass on delivery to WesTrac (i.e. there was no security interest in favour of Verdia);
• Verdia then entered into a contract with SES under which SES would perform part of the design, supply and installation works (Verdia/SES contract), including providing the solar panels comprising the solar photovoltaic system. This contract provided that title to the equipment would pass to WesTrac (not Verdia) on full payment for the equipment by Verdia. The Court’s decision does not analyse whether SES had a security interest as against Verdia or if any such security interest was perfected;
• SES entered into a contract with Metal Manufacturers under which Metal Manufacturers would supply solar panels required for the solar photovoltaic system (Metal Manufacturers/SES contract). Under this contract, title to the solar panels did not pass to SES until Metal Manufacturers was paid. Metal Manufacturers registered its PMSI correctly against SES;
• Metal Manufacturers delivered the solar panels to WesTrac’s premises, as directed by SES, and invoiced SES. SES did not pay the invoices;
• WesTrac paid Verdia for the solar panels delivered to WesTrac’s premises in accordance with a milestone payment due under the Verdia/WesTrac contract. The next day, Verdia went into administration and subsequently into liquidation. WesTrac was not aware of Metal Manufacturers’ role in relation to the supply of the solar panels until after Verdia went into administration;
• Verdia did not make any payments to SES under the Verdia/SES contract.

Metal Manufacturers sought a declaration from the Court that it had a first ranking security interest over the solar panels and an order for WesTrac to return them.

What did the Court do?

The Court held that the original collateral (i.e. the solar panels) – the subject of Metal Manufacturers’ ROT security interest – had given rise to “proceeds” by being dealt with. This meant the security interest attached to those proceeds but it did not continue in the original collateral because Metal Manufacturers had expressly or impliedly authorised the disposal giving rise to the proceeds. This was a straight-forward application of s32(a)(i) of the PPSA.

However, the Court treated the payment by WesTrac to Verdia as the “proceeds”, overlooking s31(3)(a) of the PPSA which requires the grantor of the relevant security interest (SES) to have an interest in the proceeds. SES did not have an interest in the payment made by WesTrac to Verdia. The account receivable due to SES by Verdia for the supply of the solar panels under the Verdia/SES contract constituted the proceeds. The Court’s conclusion that Metal Manufacturers’ ROT security interest did not continue in the panels once they gave rise to proceeds should not be affected by this oversight.

Although it did not need to do so because it found s32(a)(i) of the PPSA applied to end Metal Manufacturers security interest in the solar panels, the Court considered if Verdia, as a buyer of the solar panels in the ordinary course of the SES’s business, took the solar panels free of Metal Manufacturers’ security interest, applying s46 of the PPSA. If Verdia “took free” because of s46, WesTrac argued it would also take free.

The Court found s46 did not apply because the solar panels were not “sold” to Verdia under the Verdia/SES contract. There was an agreement to sell but no sale. The Court opted to follow the decision of the Supreme Court of Victoria in Warehouse Sales Pty Ltd (in liq) v LG Electronics Pty Ltd [2014] VSC 644 when it concluded “sold”, as used in s46, has the same meaning as under applicable sale of goods legislation. 

The Court also found that although a transferee of collateral that is subject to an existing security interest may become a new “grantor”, within the meaning of that term in s10 of the PPSA, if the security interest remains attached to the collateral after the transfer, the security agreement remains the agreement between the original grantor and the secured party. Section 20 of the PPSA does not require the transferee to sign or adopt a security agreement with the secured party. This was a rejection of WesTrac’s argument that, had Metal Manufacturers’ security interest continued in the solar panels, WesTrac would not have been bound by that security interest because WesTrac had not signed or adopted a security agreement with Metal Manufacturers. It is very helpful to finally have some judicial interpretation of this aspect of s20.

Because Metal Manufacturers’ security interest was restricted to the proceeds, it was not necessary to determine whether WesTrac had acquired title to the solar panels under the Verdia/WesTrac contract. Nevertheless, the Court determined, applying s28(2) of the Sale of Goods Act 1923 (NSW), that SES had been entrusted with the possession of the solar panels by Metal Manufacturers, Verdia acted in good faith and without notice of Metal Manufacturers’ security interest in the panels in entering into the Verdia/SES contract, and Verdia therefore acquired title to the panels from SES. Verdia was, in turn, able to transfer title to WesTrac under the Verdia/WesTrac contract.

Metal Manufacturers argued that the Verdia/WesTrac contract and the Verdia/SES contract were contracts for the supply of services rather than the sale of goods but this was rejected by the Court. Metal Manufacturer’s argument was aimed at preventing WesTrac from being able to rely on ss32 and 46 of the PPSA to defeat Metal Manufacturers claim to have a continuing security interest in the solar panels and to prevent WesTrac relying on the sale of goods legislation to claim title to the solar panels.

Lessons for suppliers

The security and title risks associated with layered supply or project documents and sub-leasing/hiring arrangements always requires careful analysis and appropriate credit assessments for each participant in the supply chain.

Suppliers involved in the supply of high-value equipment and goods should identify the end user or buyer and each participant in the supply chain and consider if one or more of the following is necessary and feasible:

• direct delivery and payment arrangements with the end user;
• acknowledgements from each supply chain participant regarding the continuity of the supplier’s security until full payment has been received by the supplier;
• ensuring each participant in the supply chain maintains appropriate security in the equipment or goods against their particular counterparty, ensuring a fully secure security chain, and the assignment of those security rights to the ultimate supplier.

If you have any questions about retention of title security interests on your company’s supply contracts, please contact Partner Craig Wappett – banking and finance lawyer specialising in securities law, restructuring and insolvency.