Foreword
This is Part One in Vincent Young's new PPSA Series.
If you supply or purchase goods on credit or are involved in hiring goods, it is critical that you understand the PPSA regime. These kinds of transactions are very commonly utilised in the construction industry.
If you don't fully utilise the PPSA, you are not adequately protected when things go awry.
Australia has followed the lead of other similar countries, including Canada and New Zealand, in developing a retention of title system which places utmost importance on registering your security interests on a publicly available register. If you do not register a security interest within the strict timeframes imposed by the Act, the effectiveness of your security interest can be compromised.
The Personal Property Securities Act 2009 (Cth) (PPSA) sets out the framework upon which this register is based.
This series will explore important recent cases which explain, clarify or challenge the PPSA's operation. Our Commercial and Insolvency Team is very experienced in dealing with the PPSA and security-based recoveries. If you find any of these articles interesting or if you have any questions arising from them, please contact David Greenberg, the head of our Commercial and Insolvency Team for more information.
Case
Metal Manufactures Pty Ltd trading as TLE Electrical v WesTrac Pty Ltd [2024] NSWSC 144.
Issue
Metal Manufactures supplied solar panels under a credit agreement for a project in Tomago. Its credit agreement was with a subcontractor and not the party which actually received the solar panels (WesTrac). The solar panels were supplied under a complex commercial arrangement in which four parties were ultimately involved.
The party which ultimately supplied the solar panels to WesTrac went into liquidation after receiving payment for them. Metal Manufactures' agreement was not with this company but with another intermediary as was its PPSR registration protecting its interest in the solar panels.
The Court had to determine whether Metal Manufactures was able to enforce its security interest against WesTrac, even though WesTrac had already paid a third party for the goods.
Background
WesTrac is a company which sells and hires out construction, mining and agricultural equipment. Its Head Office is based in Tomago, New South Wales in premises which it leases.
WesTrac wished to install solar panels at its Head Office. To do this, it engaged Verdia Pty Ltd (Verdia) to design, supply and install the solar power system. Verdia promised "good and clear title" to the solar panels in this contract which would pass to WesTrac on delivery.
Verdia decided to subcontract some of its work to Symmetry Electrical Services Pty Ltd (SES), who agreed to design, supply and install "all or part" of the solar power system. SES promised that title in the solar panels was "free of any encumbrance or defect in title" and would pass to Verdia upon payment in full for the solar panels.
SES purchased 3,030 solar panels from Metal Manufactures for $753,424.65 to do this work for Verdia subject to an existing credit agreement. Metal Manufactures had registered a Purchase Money Security Interest (PMSI) against SES on the PPSR two years earlier under the existing credit agreement.
Instead of supplying the solar panels to Verdia, SES delivered the solar panels directly to WesTrac at its Head Office. Verdia then installed the solar panels and WesTrac paid Verdia $700,202.91. Verdia went into liquidation sometime after receiving this payment. Needless to say, Verdia has not paid SES for the solar panels who, in turn, has not paid Metal Manufactures for their original supply.
Issues
Metal Manufactures sought a declaration from the Court that WesTrac either deliver the solar panels to it or, alternatively, damages for conversation of the solar panels (in case the solar panels had already been installed at WesTrac's Head Office).
Westrac
Security interest only continues in the proceeds
WesTrac's first main argument was that because it had paid for the solar panels and Metal Manufactures had agreed to SES selling the solar panels (which was not disputed), Metal Manufactures' security interest only continues in the $700,202.91 it paid to Verdia under section 32 of the PPSA.
WesTrac was a beneficial purchaser without notice
WesTrac's next main argument was that, as a beneficial purchaser without notice of the security interest, Verdia bought the solar panels from SES free of that security interest under section 46 of the PPSA. It was common ground that WesTrac did not have knowledge of the security interest, however it is not stated in the judgment whether Verdia had such knowledge.
Metal Manufactures
On the other hand, Metal Manufactures presented its argument in the following stages:
- SES did not have title to transfer to Verdia because of Metal Manufactures' registered security interest. SES therefore did not have title to pass to Verdia or WesTrac;
- therefore, the goods were not 'sold' for the purposes of section 46 of the PPSA;
- because the goods were not 'sold' by SES or Verdia, the agreement between Verdia and WesTrac was one for services only;
- because Verdia did not sell the goods to WesTrac, the money WesTrac paid to Verdia was for services only. The proceeds WesTrac paid to Verdia therefore did not amount to proceeds of the solar panel for the purposes of sections 31 and 32 of the PPSA; and
- accordingly, Metal Manufactures was entitled to enforce its security interest against WesTrac.
Decision
Justice Stevenson made the following findings:
- By referring to cases considering section 28 of the Sale of Goods Act 1923 (NSW) and similar legislation in other jurisdictions, the solar panels were not 'sold' by SES to Verdia, nor were they sold by Verdia to WesTrac. Accordingly, WesTrac's argument that Verdia took the solar panels free of Metal Manufactures' security interest failed.
- However, while there may not have been a "sale" between Verdia and WesTrac, Verdia's contract with WesTrac was for both the supply and installation of the solar panels. Accordingly, the $700,202.91 WesTrac paid to Verdia constituted "proceeds" of the solar panels. Accordingly, Metal Manufactures' security interest continued only in the proceeds held by Verdia's liquidators, rather than the solar panels themselves.
Metal Manufactures' claim against WesTrac therefore failed as its security interest continued only in the money paid to Verdia for the solar panels.
Key Takeaways
Cases such as these often involve tension between honouring the importance of maintaining the usefulness of registered security interests against the interests of a party who, through no fault of their own, have paid for their goods, but that payment has not been passed down the chain to the original supplier.
Suppliers should take care to include provisions in their credit agreements prohibiting purchasers from selling their goods to third parties except in the ordinary course of business.
Consideration should also be given to making further registrations against parties who suppliers know are in possession of their goods.
However, it should be understood that these were unusual circumstances and the "proceeds" of the solar panels were paid to a third party, not to the original purchaser from Metal Manufactures, SES. In these circumstances, it is arguable that WesTrac's payment did not constitute "proceeds" of the solar panels because SES does not have any interest in those proceeds. What SES might have instead is a right to prove for a debt owed to it in Verdia's winding up. If that argument is correct, then Metal Manufactures' claim would succeed in light of the Court's other findings because there are no proceeds from the solar panels for the security interest to continue in.
While the current position is that this payment from WesTrac to Verdia constitutes "proceeds" of the solar panels, we would not be surprised if there is a further chapter in this story to play out in the NSW Court of Appeal.
We will provide a further update in our PPSA series if an appeal arises.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.