Jurisdiction - Australia
Australia – Supreme Court Highlights Transitional Security Interest Controversy.
21 July, 2013
Legal News & Analysis – Asia Pacific – Australia – Dispute Resolution

There is a recognised ambiguity in the transitional provisions of the Personal Property Securities Act 2009 (Cth) (PPSA), relating to the issue of whether an ‘umbrella agreement’, governing the supply of goods on retention of title (RoT) terms entered into prior to 30 January 2012, will be an effective transitional security interest.


This issue is regularly encountered by insolvency practitioners acting as liquidators, administrators or receivers, who must determine whether suppliers claiming under a pre-PPSA retention of title clause, have an effective transitional security interest, even though the security interest is not registered on the Personal Property Security Register (PPSR). We have previously noted the controversy in relation to the issue and the competing arguments.


A recent decision of the Supreme Court of Western Australia has drawn attention to the issue and provided some useful (although not definitive) guidance for practitioners.


Under the PPSA, pre-30 January 2012 agreements will act as effective security for the first two years of the PPSA’s operation, even though the interest arising under those agreements are not registered on the PPSR. However, an uncertainty in relation to these ‘transitional security interests’ arises because it could be argued that, although the security interest is anticipated by the pre-PPSA security agreement (eg agreed terms and conditions of supply containing an RoT clause), no security agreement in relation to the particular supply arises until there is a request for supply under those pre-existing terms and conditions. Therefore, it could be argued, the security agreement does not come into operation until the request, which is after 30 January 2012.


In Industrial Progress v Wilson & Ors,([2013] WASC 225) the Supreme Court held that it is at least seriously arguable that security interests governed by the terms of pre-PPSA ‘umbrella agreements’ can be transitional security interests.


The ambiguity


Understanding the ambiguity requires a fairly close look at the transitional provisions, and the relevant definitions within the PPSA.


A transitional security interest is defined as a security interest ‘provided for’ by a transitional security agreement. It is clear that a transitional security interest can arise after the PPSA registration regime came into force (ie after 30 January 2012) because the PPSA contains specific provision for such interests. Section 308(b) provides that security interests arising at or after the registration commencement time are transitional security interests if ‘a transitional security agreement as in force immediately before the registration commencement time provides for the granting of the security interest’”.


The issue arises from the words ‘provides for’. Is it sufficient that:


  • a pre-PPSA security agreement contains the terms governing the post-PPSA agreement? This would be the case if a credit application or other umbrella agreement provides that all future supplies will be on the basis of the RoT clause, or
  • is it necessary for all of the contractual steps (ie including the request for supply) to have taken place prior to the PPSA coming into force?


Some guidance is available from the definition of the term ‘security agreement’, which includes ‘an agreement or act by which a security interest is createdarises or is provided for’ (emphasis added) (PPSA section 9). It could be argued that:


  • as a matter of statutory interpretation, the phrase ‘is provided for’ must be given a different meaning to the other two limbs of this definition, namely agreements by which a security interest ‘is created’, or ‘arises’,
  • the idea of an agreement ‘providing for’ a security interest is a broader concept than the other two limbs, and can, as a matter of ordinary usage, include taking measures ‘in view of a possible event’ (Oxford English Dictionary: http://www.oed.com), and
  • accordingly, an ‘umbrella agreement’ contemplating future supplies is a document which  ‘provides for’ security interests coming into existence by later agreement and, therefore, can constitute a transitional security agreement.


This argument is made difficult by the fact that the PPSA equates the concepts of ‘providing for’ and ‘arising under’. Section 10 states that ‘a security agreement provides for a security interest if the interest arises under the agreement’. The ordinary meaning of the phrase ‘arising under’ seems to require a more direct relationship between the security agreement and the interest. (For example the Oxford English Dictionary relevantly defines arising in the following terms ‘Of matters generally: To spring up, come into existence or notice, ‘come up,’ present itself. arising out of: used, with loose construction, to introduce a circumstance, action, proposal, etc., arising out of an event, statement, etc.’ Oxford English Dictionary: http://www.oed.com).


That said, it is not a stretch of the language to say that a post-PPSA security interest can ‘arise under’ a pre-PPSA agreement containing the terms of the security arrangement (eg an RoT clause), even though the security interest also owes its existence to a post-PPSA request for supply.


Perhaps more importantly, the drafters of the PPSA could have made clear that only interests created by a pre-PPSA security agreement attract the protection as a transitional security interest. Their failure to do so suggests that it is possible for a transitional security interest to be created after the commencement of the PPSA registration regime, so long as it also arises under a pre-PPSA agreement.


The decision in Industrial Progress v Wilson & Ors


In the recent decision of Industrial Progress v Wilson & Ors, Beech J was not required to finally resolve this question.


This case concerned an argument by a guarantor that its liability to the secured party should be reduced by the extent to which the secured party had failed to perfect its security (Secured parties have a general duty to guarantors to perfect any securities provided by the beneficiary of the guarantee) in respect of goods purchased after the PPSA came into effect, but governed by the terms of a 1998 agreement containing an RoT clause. The key question was whether the secured party was excused from registering its security on the PPSR because the 1998 agreement was a transitional security agreement that ‘provided for’ the future deliveries.


Having noted the provisions of section 308, and the relevant definitions, Beech J concluded that ‘it is at least seriously arguable’ that the plaintiff’s rights under the retention of title clause are temporarily perfected by operation of the transitional provisions of the PPSA. The court did not have to finally resolve the issue because the case related to an application to maintain a caveat, lodged by the secured party over real property owned by the guarantor, and the court merely had to decide whether the secured party had a ‘seriously arguable’ case (ie to maintain the caveat).


His Honour considered that the plaintiff had demonstrated a seriously arguable case in relation to the following propositions:


  • the October 1998 dealings gave rise to an agreement that would govern future deliveries
  • a right to repossess arises under that agreement in respect of each delivery
  • accordingly, the October 1998 agreement is a security agreement as defined in the PPSA
  • because the agreement was in force, and continuing as at 1 February 2012, the October 1998 agreement is a transitional security agreement, and
  • the October 1998 agreement provides for the granting of the security interests, so the security interest provided for is a transitional security interest.


Although not offering definitive guidance, we consider that this judgment provides a useful endorsement for the view that ‘umbrella agreements’ can satisfy the requirements for a transitional security agreement.


Certainly, we consider that the better view is that a pre-PPSA ‘umbrella agreement’ governing the terms of future supplies can constitute a transitional security agreement. Of course, it will be necessary to have close regard to the relevant facts in each case, because the correct analysis will depend on the particular terms of the arrangement in question. For example:


  • a concluded pre-PPSA agreement that is expressed to contain the terms of all future deliveries is likely to constitute a transitional security agreement, but
  • terms and conditions that are merely stated to be incorporated into subsequent contracts are unlikely to give rise to a transitional security interest, where those contracts are then entered into after the PPSA came into effect. 




For further information, please contact:

David John, Partner, Herbert Smith Freehills

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