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“Timing” is everything in insolvency law, because it determines the classification of a debt which is critical to whether a liquidator can make a claim for assets once a company has appointed a liquidator.
In the recent case of Hussain vs CSR Building Products Limited, in the matter of FPJ Group Pty Ltd (in liquidation)  FCA 392, the Federal Court has determined that a retention of title clause (“ROT clause”) – incurred before the introduction of the Personal Property Securities Act – contained in a credit agreement resulted in a supplier, CSR Building Products Limited (“CSR Building”) becoming a “secured party”, which has prevented the liquidators of FPJ Group Pty Ltd (in liquidation) (“FPJ Group”) from making a successful unfair preference claim under section 588FA of the Corporations Act 2001 (Cth) (“the Act”).
FPJ Group were previously in the business of purchasing and resupplying building supplies to builders. On 26 September 2010, FPJ Group entered into a credit agreement with CSR Building, which included the following clause: “You agree that any goods you receive remain the property of CSR Building until CSR Building receives payment for them.” This was the ROT clause. Between January and June 2014, FPJ Group made payments to CSR Building under the agreement (“Payments”), and on 18 July 2014 FPJ Group was placed into liquidation.
The liquidators of FPJ Group contended that because FPJ Group were insolvent as at 21 November 2013, they were unable to pay their debts under the credit agreement. As a result, the liquidators sought to recover the Payments, claiming that they constituted unfair preferences under s.588FA of the Act, insolvent transactions under s.588FC of the Act, and voidable transactions under s.588FE of the Act.
Section 588FA(1)(b) of the Act states that an unfair preference is a transaction which results in the creditor receiving more from a company more than what is owed for a debt, if the transaction were set aside and the creditor were to prove the debt in a winding up of the company. A transaction is an “insolvent transaction” under section 588FC of the Act if it is an unfair preference given by the company and the company is insolvent at the time of the transaction.
When making its decision the Court considered the broad meaning of “security interest” in s51A of the Act, which references the Personal Property Securities Act 2009 (Cth). The Court rejected the liquidator’s claims in this case on the basis that there was not sufficient evidence to substantiate that FPJ Group became insolvent in November 2013, and so at the time that the Payments were made to CSR Building in 2014, FPJ Group were not insolvent. The Court also determined that there was no unfair preference relating to the Payments, and so the Payments did not relate to “unsecured debts” under s.588FA(1)(b) of the Act. The Court also found that an ROT Clause had the effect of rendering the debt to which the ROT Clause relates a secured debt, which avoided the operation of s588FA(1)(b) of the Act.
Since the introduction of the Personal Property Securities Act in January 2012, retention of title claims must be the subject of a security agreement (such as a clause in the terms of trade) and the security interest must be registered on the Personal Property Securities Register. Failure to take these steps may have the unintended consequence of a liquidator being able to take goods which have not been paid for by the insolvent company (the subject of an "unsecured debt") and this can have severe unintended consequences for suppliers of goods who have not been paid for those goods.