This month we start a two-part article on retention of title clauses. This is brought about by a file that we are handling where there is a dispute over how far a retention of title clause will extend to allow a supplier to recover their goods, money from the sale of those goods, and monies from other sources.
Arguments involving these clauses generally center upon whether they are valid (these clauses are generally drawn fairly well these days) or whether certain items of stock or other items held by the company fall under the clause or not. These have to be dealt with on a case-by-case basis.
But arguments sometimes arise over:
(i) what rights Voluntary Administrators have to use items that are caught under valid Retention of Title clauses; and
(ii) how far these clauses can be used to collect monies generated from the sale or use of these items.
This month we look at a Voluntary Administrator’s rights.
In general terms, retention of title clauses leave ownership of the item with the supplier, meaning that insolvency practitioners must tread carefully when dealing with these items. The Corporations Act clarifies the position with voluntary administrators, giving the same rights to these items as they have over other owned or leased equipment.
Section 440C generally stops owners of property taking possession of their items without agreement – “During the administration of a company, the owner or lessor of property that is used or occupied by, or is in the possession of, the company cannot take possession of the property or otherwise recover it, except (a) with the administrator’s written consent; or (b) with the leave of the Court.”
Section 442C(1) states that voluntary administrators must not sell items that are the subject to liens etc or belong to someone else (albeit they have the right to retain and use these items under section 440C). But a voluntary administrator does have the right to sell items that are subject to ROT clauses without anyone’s agreement, as long as the sale is done in the ordinary course of business.
442C(2) Subsection (1) does not prevent a disposal:
(a) in the ordinary course of the company’s business; or
Sales in the ordinary course of business can even occur after the supplier has demanded the return of their items. This power allows administrators to keep using items necessary for trading on the business of the company under administration in an attempt to either save the business (the main purpose of Part 5.3A of the Corporations Act), or maximize the return to creditors from a controlled closure of the business.
442C(8) For the purposes of paragraph (2)(a), if:
(c) the property is subject to a retention of title clause under a contract; and
(d) the owner demands the return of the property;
a disposal of the property that occurs after the demand is made does not mean that the disposal is not in the ordinary course of the company’s business.
If the sale of the items produces sufficient money to pay the cost price of the item in full, the administrator will have to (and should) pay that supplier for those goods. Generally there will be no argument between the parties. However, arguments may arise if that item was in a package of items sold or required other work to prepare it for sale, and these costs are not fully recovered. Breaking down the proceeds over the individual parts may be difficult.
But what if the item is sold for less than the amount owed to the supplier?
Section 442CC(2) says that if the property subject to a retention of title clause is sold by an administrator by a sale in the ordinary course of business and the net proceeds are less than the amount that remains unpaid for the item – the administrator must apply the amount in paying those debts in order of priority and, if any of those debts is not fully paid “so much of the debt as remains unpaid may be recovered from the company as an unsecured debt”.
Essentially the shortfall owed to the supplier after the sale of the item (usually they would have priority over any secured creditor holding security over items of this class due to their continued ownership), is claimable against the company, but is not a debt due by the voluntary administrator personally. This allows voluntary administrators to trade on with some confidence to attempt to save the business.
Next month .. How far ROT clauses can be used to collect money