Unfair preference claims and ROT creditors – how and when to value a security interest

Since the introduction of the Personal Property Securities Act 2009 (PPSA) on 30 January 2012, there has been (perhaps surprisingly) relatively little case law on its impact on unfair preference claims against creditors who were suppliers to an insolvent company on ‘retention of title’ (ROT) (or other security) terms. Notwithstanding this, cases have begun to emerge that provide some guidance to practitioners.

How has the law developed?

A short summary of the development of the law:

  • Pre-PPSA: a supply of goods on ROT terms was generally not a defence for the purposes of section 588FA. A debt owed to a supplier on ROT terms was an unsecured debt (Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (2000) 202 CLR 588) and it was necessary to look at the operation of the ROT clause between the parties (Dwyer v Chicago Boot Co Pty Ltd (2011) 82 ACSR 193). A supply of goods on ROT terms was not a ‘security’, but a matter of title to the goods.
  • 30 January 2012, the introduction of the PPSA:
    • did not make any consequential amendment to Part 5.7B of the Corporations Act;
    • defined a supply of goods on ROT terms as a ‘security interest’ (section 12(2)(d)). ROT suppliers may also register their interest under the PPSA as a purchase money security interest (PMSI), and obtain a ‘super priority’ (sections 14 and 62); and
    • a failure to perfect a security interest (relevantly, to register the ROT interest prior to the supply of goods) may result, among other things, in the security interest vesting in the company pursuant to section 267 PPSA.
  • 2015: the District Court of South Australia found, determining a ‘hypothetical question’, that the relevant date for determining the value of a security in an unfair preference claim was the date of the winding up. The decision was overturned on appeal, on procedural grounds (Tap Inn Pty Ltd v Matthews [2015] SASCFC 188).
  • 2016: Hussain v CSR Building Products Limited; in the matter of FPJ Group Pty Ltd (2016) 246 FCR 62 found that an unperfected ROT supply was a ‘security interest’ for the purposes of section 12 PPSA and a creditor who supplied on ROT terms was, on the face of it, a secured creditor for the purposes of s 588FA. However, the decision left open other issues for unfair preference claims, including what value might be ascribed to such a security for the purposes of s 588FA(2), and the time at which the value of the security must be assessed (Edelman J essentially rejected the argument that the security had no value on pleading grounds, while ultimately not determining the issue. He also noted (at [175] – [176]) that the liquidators had assumed the relevant date to determine the value of the security was the date of the winding up, but cast doubt on the correctness of that assumption).

How and when should a security interest be valued?

Following Hussain, it seems clear that a ‘security interest’ as defined in the PPSA, is a ‘security’ for the purposes of s 588FA. Pursuant to section 588FA(2) of the Corporations Act, a ‘secured debt’ is taken to be unsecured to the extent that so much of it (if any) is not reflected in the

value of the security. Several questions remain to be determined by a superior court, including whether such security has any value and the timing of any valuation.

In Trenfield & Ors v HAG Import Corporation (Australia) Pty Ltd [2018] QDC 107, the plaintiff liquidators sought to recover as unfair preferences five payments the second plaintiff made to the defendant between 21 June and 12 July 2013, pursuant to s 588FA of the Corporations Act 2001 (Cth). The facts of the case are typical of many creditor/debtor relationships arising from a supply of goods and may be summarised as follows:

· the defendant initially supplied goods to the company pursuant to terms and conditions (pre-dating the PPSA) that purported to grant a ‘security interest’ in the goods supplied. The court found (distinguishing the Victorian Court of Appeal decision in Central Cleaning Supplies (Aust) Pty Ltd v Elkerton [2015] VSCA 92, 296 FLR 25) that the agreement was not a transitional agreement, but was an equitable charge and a security interest;

· the defendant provided to the company new terms and conditions in 2013 containing a standard ROT clause (including both ROT and a grant of security over the proceeds of sale), that the court also found was not transitional but was a security interest;

· the defendant did not perfect its security interests by validly registering on the PPSR; and

· the company made five payments totalling just under $600,000 during the relation back period.

Does it matter if a security interest is perfected?

Following Hussain and Trenfield, the short answer is no, it does not matter for the purposes of section 588FA whether a security interest has been perfected – it is still, on its face, ‘security’. Although, one issue not expressly considered in either case is the effect of a PMSI ‘super-priority’ on the valuation of such a security interest, in the face of competing priorities (discussed further below).

At risk of over-simplifying the decisions, the justification for these findings is that a security interest is not void as between the parties merely by reason of the security interest being unperfected. It does not matter that the security interest vests in the company immediately before the appointment of external administrators (pursuant to s 267 PPSA), because at the time of the payments being made, there was an enforceable security interest between the company and the supplier.

When should the security be valued?

His Honour Justice McGill posed the question (at [39]): ‘Is whether the debt is unsecured to be tested at the time the payment was made or the time when the winding up order was made?’

His Honour dealt with the liquidator’s submissions on timing with some apparent sympathy, but ultimately found that the natural reading of s 588FA(1)(b) is that it refers to a debt that was unsecured at the time the creditor received the payment in respect of it and that, therefore, is the appropriate time to value the security.

What was the security of the valued?

His Honour found (at [56]) that, on the balance of the authorities, the effect of section 588FA(2) is that if the level of indebtedness at the time of the payment is greater than the value of the security, then the payment is to be taken to be first in discharge of that part of the debt that is unsecured.

In determining the value of the security, His Honour was faced with an absence of valuation evidence (both as to actual value and as to the appropriate basis for determining value) and insufficient stock-keeping records. He was nonetheless prepared to draw several inferences as to the value of the security.

In most, if not all, similar supply of goods scenarios, the relevant collateral is:

a) stock supplied and on hand; and/or

b) the proceeds of sale of stock.

Stock on hand

In relation to stock on hand (‘the value of stock sitting on a warehouse floor’), His Honour determined it was the wholesale value of the stock, as evidenced by the invoices from the supplier to the company, that was the measure of the value of the stock. Caution should be exercised in taking this as a statement of general principle. Although the court found that its value as a security could only be realised through a sale at wholesale prices, the court found that, on the evidence, it was only possible to determine the total value of the stock at its supply price, in circumstances where:

· it was impossible to match particular sales to particular items of stock; and

· it was only possible to draw broad inferences about costs associated with selling stock.

The company’s stock-keeping records were imprecise (although, it is suggested, likely to be better than in most similar cases). The company did not track stock sold in real time such that is was able to produce accurate daily records, but it did conduct fortnightly stocktakes.

His Honour therefore estimated the value of the stock on hand as at the date of each impugned payment by taking an average of stock on hand between stocktake dates (plus any further stock supplied during that period), to estimate sales. He then compared the stock on hand to the total level of indebtedness at the date of each impugned payment. To give an example from the decision (at [66]):

· stock on hand at 16 June (as per the stocktake) – $316,227

· stock as at 30 June (as per stocktake) – $233,232

· average daily reduction of stock – $5,928

· estimated stock level on 21 June (being the date of an impugned payment) – $286,587

· total debt owed to the creditor on 21 June – $703,634

· total value of unsecured debt on 21 June – $417,047.

The impugned payment on 21 June of $100,000 was therefore taken to be against the unsecured portion of the debt.

The court proceeded to adopt the same approach for each impugned payment, concluding that each of the payments was unsecured (save for one, when the total debt was reduced below the value of the stock, such that the payment was partly secured and therefore not a preference in respect of the secured portion only).

Proceeds of sale

Both versions of the creditor’s terms and conditions purported to give a security interest in proceeds of sale. The court determined, in light of both the wording of the respective terms and conditions and the definition of ‘proceeds’ in section 32 of the PPSA, that a security interest in the proceeds only arose to the extent that the proceeds were identifiable and traceable.

The company’s records did not record sales against stock. The company records only showed that, at a particular store, on any particular day, a particular amount had been taken in sales. The records did not show whether those sales were as a result of a sale of the creditor’s stock, or of some other supplier. The creditor could not establish any practical way of establishing that proceeds of sale were referrable to its stock. The proceeds were not identifiable.

Further, the proceeds of sale were paid into the company’s general account that was in substantial overdraft at all material times (see [64]: money paid into an overdrawn account cannot be traced, citing Williams v Peters [2010] 1 Qd R 475), and in any event was mixed with all other general income of the company. The company’s bank statements showed a regular pattern of daily withdrawals and payments. From time to time, funds were transferred into other accounts with a credit balance, but almost immediately withdrawn (or ‘speedily spent’). Accordingly, the proceeds were also not traceable and the security was limited to the wholesale value of goods supplied by the creditor and held by the company at the relevant time.

What is the effect of a PMSI?

The creditor in Trenfield did not have a perfected security interest and there is no mention in the judgment of a prior-ranking creditor. The decision proceeded without analysis of whether the value of the security would have been reduced by the claims of a prior ranking creditor. The court determined the face value of the security, and did not have to determine what, if any, equity there was in the security.

It is worth considering what, if any, effect a prior ranking creditor would have had on the above analysis of the value of security. It is submitted that the decision remains a good illustration of the valuation of security, even in circumstances where the supplier has a perfected PMSI.

If there are other, prior, secured debts and/or the value of the PMSI collateral is insufficient, then it is the equity in the collateral and not the face value that is relevant. For example, in Walsh v Natra (2000) 1 VR 523, the creditor had a second-ranking mortgage. The Victorian Court of Appeal determined that it was the value of the secured property after the first-ranking bank’s interest had been taken into account that determined the value of the security.

A supply of goods on ROT terms gives rise to a ‘purchase money security interest’ (PMSI) (section 14 PPSA) and can take priority over other security interests (a ‘super priority’) in the circumstances set out in section 62 PPSA.

However, the super priority only extends to the collateral (the inventory supplied) and, usually (but not necessarily), the proceeds of sale of that collateral. It is not uncommon in practice to see suppliers take (or purport to take), in addition to a PMSI, a general security interest in all present and after acquired property of the company to secure all other debts owed to them. Such an interest does not attract a PMSI super priority.

Therefore, if:

· a bank, financier or other creditor has a perfected prior ranking security interest; and

· the total of the priority creditor’s debt exceeds the total value of the assets of the company,


· to the extent the creditor has a PMSI in relation to the collateral, the exercise to determine the face value of the security (as occurred in Trenfield) should be conducted; and

· to the extent the creditor’s security interest is unperfected, or to the extent that the PMSI (after a Trenfield valuation analysis) is insufficient, then there is no equity in the collateral and the debt should be treated as unsecured.


In a climate where there are fewer and fewer assets available to liquidators in a winding up, to satisfy unsecured creditors and liquidators’ remuneration, unfair preference claims remain an important source of funding.

The PPSA has, on its face, narrowed the scope for successful unfair preference claims by ‘muddying the waters’ when considering whether a creditor is secured or unsecured. However, when liquidators closely consider the value of a security interest, they may find that in most cases a viable claim is still available to them. While the onus is on the liquidator to prove that a creditor is unsecured, if the evidentiary burden can be overcome, poor books and records may in fact assist the liquidator where an effect is that the stock and/or the proceeds of sale are unidentifiable and untraceable.