When is a credit application a security agreement?

The Victorian Court of Appeal has clarified when terms and conditions contained on invoices may be incorporated into a credit application and when a security agreement comes into existence.

Central Cleaning Supplies (Aust) Pty Ltd v Elkerton [2015] VSCA 92 (12 May 2015)

The Victorian Court of Appeal has overturned an earlier decision of Her Honour Justice Ferguson who found that Central’s terms and conditions (including a retention of title clause) contained on its invoices were not incorporated into an earlier credit application which Central relied upon as its security agreement.

Facts

Central Cleaning Supplies (Aust) Pty Ltd (Central) is a supplier of cleaning equipment.  Between September 2009 and May 2013, Central supplied cleaning equipment to Swan Services Pty Ltd (Swan).

On 3 September 2009 Swan applied to Central for a 30 day commercial credit facility (Credit Application). Swan signed the Credit Application which provided that among other things:

• Central’s standard terms and conditions would apply to the supply of equipment; and
• Swan would have 30 days to pay for any equipment.

Subsequently, Central supplied cleaning equipment to Swan as ordered, with each order being covered by a specific invoice. Relevantly, the first delivery was made on 4 September 2009. Each invoice rendered by Central included a ‘retention of title’ clause (ROT Clause) which stated that the equipment to which that invoice related remained the property of Central until it was paid for in full.

On 30 January 2012 the PPSA came into force.

In May 2013 Swan went into voluntary administration and in June 2013 Swan went into liquidation. Mr Elkerton and Mr Young were appointed liquidators. As at the date of their appointment as administrators there were unpaid invoices for cleaning equipment supplied between November 2012 and May 2013.

Central sought to enforce the ROT Clause in each outstanding invoice and claim the equipment. The liquidators resisted the claim, arguing that Central had not registered its security interest(s) on the PPSR and so the security interest(s) vested with Swan pursuant to section 267 of the PPSA when it went into administration in May 2013. Accordingly, the liquidators were entitled to treat the equipment as Swan’s property.

At first instance

Central claimed that the Credit Application was a transitional security agreement which gave rise to a transitional security interest which had temporary perfection by force of section 322 of the PPSA. Accordingly, Central’s interest did not vest when Swan went into administration.

However, the Court found in favour of the liquidators and dismissed Central’s application.

The Court held that the ROT Clause did not form part of Central’s standard terms and conditions because the terms on the invoices, including the ROT, did not exist at the time of the Credit Application and so did not form part of the security agreement. Rather, there was a series of agreements reached which were constituted by the purchase orders and corresponding invoices.

The Issue

Central appealed the decision.

The issue on appeal was whether Central’s security interest in the equipment supplied after 30 January 2012 (when the PPSA came into force) was ‘provided for’ by the Credit Application between Central and Swan made in September 2009.

Court of Appeal decision

The Court overturned the original decision.

The Court held that the Credit Application gave rise to a ‘transitional security agreement’ which provided for the granting of a security interest in equipment supplied in the future.

In reaching this decision the Court found that:

• the Credit Application included an undertaking by Swan to be bound by Central’s standard terms and conditions;
• in the absence of any communication from Central of its acceptance of the Credit Application, the terms of the Credit Application only became binding on the parties when Central supplied equipment to Swan on 4 September 2009 and also extended the 30 day credit which Swan had requested;
• the ROT Clause was in existence as a standard term of supply, at the date on which the agreement became binding on Swan; and
• under the Credit Application, Swan accepted that all future supplies of equipment would be governed by the standard tern.
  Accordingly, Central had the benefit of temporary perfection of its security interest(s) and so was able to enforce the ROT Clause with respect to all equipment.

Key messages

Since the transitional period under the PPSA has now expired, this aspect of the case has limited value. However, the decision serves as a useful illustration of when a security agreement comes into existence and how terms and conditions may be incorporated into a trading agreement.