25 July 2017

Commercial consignments and the PPSA

One of the great advantages of Retention of Title clauses (prior to the Personal Property Securities Act) was that registration was not required — indeed, it wasn’t even possible. Now, registration of Retention of Title (“ROT”) security interests is required, and the consequences for failing to register are severe. That is one of the reasons why the Personal Property Securities Act  (“PPSA”) was considered to be such an important reform.

I suspect that we may begin to see the emergence of consignment clauses as creditors seek to avoid the registration requirements of the PPSA. To understand why, we need to consider what a “consignment” is, what a “commercial consignment” is, and how the PPSA applies.

Understanding the terms

The PPSA applies to security interests. A security interest is defined under section 12(1) of the PPSA to mean:

“an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation.”

A consignment arrangement would not normally be considered a security interest.  As a consequence, it would not ordinarily require PPSA legislation.  It is widely accepted in both Australia and Canada that a true consignment is not a security interest because it does not secure payment or performance of an obligation.

Nonetheless, section 12(3) provides that the interest of a consignor under a commercial consignment is a security interest whether or not the arrangement, in substance, secures payment or performance of an obligation. Commercial consignments are considered further below.

Commercial consignment

Under section 10 of the PPSA a commercial consignment means a consignment in which:

  1. the consignor retains an interest in goods that the consignor delivers to the consignee;
  2. the consignor delivers the goods to the consignee for the purpose of sale, lease or other disposal; and
  3. the consignor and the consignee both deal in goods of that kind in the ordinary course of business,

but does not include an agreement under which goods are delivered to:

  1. an auctioneer for the purpose of sale; or
  2. a consignee for sale, lease or other disposal if the consignee is generally known to the creditors of the consignee to be selling or leasing goods of others.

These provisions were considered by the WA Supreme Court in Re Arcabi Pty Limited (Receivers & Managers Appointed) (in liq).  Arcabi was in the business of storing and selling rare coins and bank note under bailment and consignment arrangements with the third party owners of the goods.

The receivers appointed to Arcabi sought direction from the court in relation to the effect of these arrangements. The WA Supreme Court held, in relation to the consignment arrangements, that the consignment did not secure the payment or performance of an obligation where the obligation to pay under the consignment only arose after title in the goods had passed to a third party purchaser.

The court held that the effect of the requirement that both the consignor and consignee deal in goods of that kind in the ordinary course of business, is to exclude consignments by consumers of their property to a commercial consignee. The term “consumer” is not defined in the PPSA.

The court also considered the circumstances in which a consignee is generally known to its creditors to be selling or leasing the goods of others.  The court held that knowledge is not limited to knowledge of a particular creditor, but includes persons who may be expected to deal with the consignee as creditors. Knowledge may be established through objective evidence including signage at the consignee’s premises or proof of a general understanding in the community in which the consignee carries on business.

In this case the court placed significance on the fact that Arcabi advertised in its catalogue a category of consignment only goods, which included over 700 items. There was also a questionnaire presented to creditors, in which 84% indicated that they believed that Arcabi sold coins/notes on behalf of others.

On that evidence the court concluded that it was generally known to the creditors of Arcabi that it sold goods on consignment and therefore the arrangement was not held to be a commercial consignment.

Why does this even matter?

It matters for a number of reasons, all of which place the consignor in a privileged position.

If registration is not required, then the consignor is entitled to the return of its goods. Its rights are not affected by the claims of secured creditors. Its goods cannot be sold to fund the priority entitlements of employees, or the costs and expenses of insolvency practitioners (other than costs and expenses incurred in the care and preservation of the consigned goods themselves).

Registration is not without its benefits. Even if there is no security interest in respect of unsold consigned goods for the purposes of section 12(1) there could be an in substance security interest in relation to accounts payable by the purchasers of consigned goods once they have been sold or the proceeds of such accounts.  The terms of each consignment agreement need to be carefully considered to ascertain if this is the case.  If the agreement asserts an interest in sale proceeds, then that will amount to a security interest which is required to be registered under the PPSA.

If registration is required, it is worth noting that, under section 268(1) the vesting provisions of sections 267 and 267A do not apply to a commercial consignment if the interest:

            “does not secure the payment or performance of an obligation.”

In such cases however, consignors may still find that their interests are subject to the claims of creditors holding valid security interests.

To date, there has been very limited judicial consideration of this aspect of the PPSA. That is likely to change, as the professions adopt a more activist approach, and seek to test the limits of the legislation.

For more information or to discuss your personal circumstances, please contact Partner, Tim McGrath on 4036 9700.

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