Within a week, two courts have considered this question and reached opposite conclusions. The Federal Court says ‘no’; the Victorian Supreme Court says ‘yes’.
Why it matters
The issue is important to liquidators seeking to claw back preferential payments made to individual creditors before liquidation began, for redistribution on an equal basis to creditors generally.
The two cases both concerned liquidators wanting to claw back payments to retention of title suppliers. Section 588FA of the Corporations Act can allow clawback where a creditor received more than it would receive on a winding up, if the payment was ‘in respect of an unsecured debt’.
‘Unsecured’ is not defined in the Corporations Act, but there is a definition of ‘security interest’ in s51A. ‘Security interest’ means:
- a ‘security interest’ to which the PPSA applies, other than a transitional security interest; or
- a charge, pledge or lien.
So there is a dividing line. Pre-PPSA, security interest means ‘charge, pledge or lien’. Post-PPSA, security interest takes its expanded PPSA meaning. But transitional security interests – those which arose under pre-PPSA agreements – do not take the expanded meaning.
And ‘secured creditor’ is defined as a creditor whose debt is secured by a ‘security interest’: s51E.
There seems no doubt that a retention of title claim arising after the PPSA had commenced would be a secured debt. But what of pre-PPSA claims?
Hussain v CSR Building Products Limited  FCA 392
FPJ Group Pty Ltd had bought goods on retention of title terms from CSR before commencement of the PPSA, and went into liquidation. FPJ’s liquidators claimed payments to CSR were preferential payments ‘in respect of an unsecured debt’.
The Federal Court disagreed. CSR’s claim was for a transitional security interest which was outside the definition of ‘security interest’; but this did not determine the meaning of ‘unsecured debt’. ‘Secured debt’ could have different meanings in different contexts; retention of title effectively operated as security; and in this context, ‘unsecured debt’ should not be interpreted as including a debt that benefited from a retention of title arrangement which operated as security.
The court considered this interpretation consistent with the intent of the PPSA amendments, and that to hold otherwise would be inconsistent with their emphasis on substance over form.
Blakeley v Yamaha Music Australia Pty Ltd  VSC 231
Australian Music Pty Ltd had bought goods on retention of title terms from Yamaha, both before and after commencement of the PPSA, and went into liquidation. Australian Music’s liquidators claimed payments to Yamaha were preferential payments ‘in respect of an unsecured debt’.
Yamaha sought to have proceedings struck out on grounds that the debts were clearly secured. Being strike-out proceedings, the court did not have to make a final determination. The liquidators only had to establish an arguable position. The Victorian Supreme Court found the liquidators did have an arguable case that pre-PPSA transactions were unsecured.
The court said that before the PPSA, retention of title gave a creditor ownership of the goods, but that did not make it a secured creditor, and payments made to it were in respect of unsecured debts and therefore liable to be set aside as preferential.
Nothing in the PPSA amendments changed that. The PPSA provided for retention of title ‘by a statutory construct, to afford a security interest’, but the arrangements ‘only have effect in respect of dealings which took place after the PPSA was introduced’.
Both cases leave open scope for further development of the points they raise.
Hussein reaches a conclusion apparently consistent with the intent (or the vibe?) of the PPSA amendments, sweeping away distinctions of form over substance. But it does so by deciding not to adopt the clear dividing line that appears in the definition of ‘security interest’. This involves saying that the meaning of ‘unsecured’ in the phrase ‘the creditor … in respect of an unsecured debt’ is not determined by the meanings of ‘security interest’ and ‘secured creditor. That seems a surprising conclusion.
One might quibble with some of the language in the Blakeley, for example the potentially broad statement that PPSA provisions only have effect in relation to post-PPSA dealings (whereas the transitional provisions in the PPSA itself allowed pre-PPSA security interests a period of grace to become perfected, but then applied to them with full force).
But overall, Blakeley seems to give effect more fully to the intent of the PPSA-related amendments to the unfair preference provisions in the Corporations Act, which appeared to be to leave the position of pre-PPSA transactions untouched.
It is interesting to see such a clear division between courts on a PPSA related issue: one of the first times this has happened since introduction of the PPSA. Liquidators having to grapple with payments made to pre-PPSA retention of title creditors will not find the disagreement helpful.
Digest of PPSA cases
I have added both these case to my digest of reported Australian cases – please go to PPS cases for a link to the digest.