Security agreements and the PPSA

Introductory comments

A recent decision by the Queensland District Court in Trenfield v HAG Import Corporation (Australia) Pty Ltd [2018] (“HAG Imports”) has surprised many commentators and left some credit managers wondering just how protected their perfected security interests are from liquidator’s clawback provisions.

Prior to the decision in this case, it had been widely viewed that the Victorian Supreme Court of Appeals decision in Elkerton (that was followed in Amerind) established a default legal position that a credit application constituted an offer that was capable of acceptance through the first supply of goods.  Furthermore, an agreement which imposed ROT terms in respect of future supplies was seen to be an agreement by which a security interest was provided for irrespective of individual dealings with orders and invoices.

On the surface, HAG Imports appeared to raise many of the same issues previously settled in Elkerton and Amerind regarding credit applications and the PPSA.  There were ongoing arrangements in place between the creditor (HAG) to supply the debtor (Lineville) with goods on credit under its standard terms and conditions.  However, in this case the court elected to distinguish (rather than follow) Elkerton and found that primacy must be given to the specific contractual terms of each arrangement to determine if the underlying requirements for a contract had been met.


The issue

Following on from this case, it would seem that the issue facing credit managers today is how to ensure that credit applications satisfy fundamental contract law principles such that the credit application can be characterised as an offer that expressly provides for ongoing supplies of goods (and thereby constitutes an overarching security agreement).


The cases

Central Cleaning Supplies (Australia) Pty Ltd v Elkerton (“Elkerton”)

In Elkerton, the parties had executed a credit application prior to the commencement of the PPSA that provided for the future supply of goods on 30 day credit terms subject the creditors standard terms and conditions.

The Court of Appeal rightly noted that the credit application was simply an application for credit on 30 day terms.  The mere signing of the credit application did not create a contract because this act did not impose an obligation on the debtor to do anything.  It was an offer by the debtor to be bound by the credit terms of the creditor.

For the arrangement to constitute a contract the debtors offer had to be accepted by the creditor, which the court determined occurred by way of conduct when the first delivery of equipment was made and the sending of the invoice confirmed that credit was being provided.

On this analysis, the first supply of equipment operated to establish a security agreement between the creditor and debtor whereby all future security interests came under the same overarching security agreement capable of perfection once registered on the PPSR.


Amerind Pty Ltd (“Amerind”)

In similar circumstances, Amerind followed Elkerton and found that the relevant contractual arrangement was that of an overarching security agreement created at the time of the first supply of goods.   

Despite the fact the creditor sought to argue (contrary to the Elkteron finding) that there was no overarching security agreement providing for a security interest in future deliveries, but rather each supply of goods represented a new security interest requiring ongoing and consecutive registrations on the PPSR, the court disagreed and cited Elkerton with approval.


Transfield v HAG Imports (“HAG Imports”)

The recent 2018 decision in HAG Imports did not follow the cases of Elkerton or Amerind and is a stark reminder that each contractual arrangement must be considered in relation to the principles of contract law and the PPSA.

In HAG Imports a credit arrangement was entered into between the creditor (HAG Imports and debtor (Lineville) prior to the introduction of the PPSA for the supply of goods on credit.  The application was expressed as a request for credit and one of the agreed facts was that the defendant would supply goods to the company pursuant to the standard terms and conditions.

After the commencement of the PPSA, HAG Imports terms and conditions were amended to include a ROT clause and a purchase money security interest (PMSI) was registered which stated that the registration was transitional.  In doing so, HAG Imports was asserting that the post PPSA terms were an amendment to the pre-PPSA security agreement, thereby creating a security interest in all future goods.

Following the liquidation of Lineville and during the relation back period, the liquidators sought to recover sizeable payments made to HAG Imports on the basis that they were unfair preferential payments of an unsecured debt.

In response HAG Imports sought to rely on Elkterton by arguing that the credit application constituted an offer by Lineville to acquire goods on credit that was accepted by HAG Imports after the first supply (pre-PSSA) and constituted an overarching supply agreement.

HAG Imports then went on to argue that the security agreement provided for future security interests and since it was created prior to the introduction of the PPSA, the benefit of the transitional provisions applied.

Curiously, the Queensland District Court chose to distinguish rather than follow Elkterton and declined to accept that the credit application constituted a security agreement on two grounds.  Firstly, his Honour found that the credit application didn’t constitute an offer capable of acceptance and secondly, that there was no evidence of consideration provided by the debtor.

McGill SC DCJ stated:

“In my opinion, the credit application in the present case was not an offer…it was a request for credit…It is simply an evidentiary document, an admission that the applicant knows of those terms and knows that those are the only terms on which the defendant will supply goods to the applicant.

I find it impossible to characterise a mere supply of goods after receipt of this document as amounting to an agreement on the part of the defendant to provide any particular credit to the applicant in the future.” 

Furthermore, his Honour found that there was no formal agreement providing for ongoing supplies and declined to find that there was any evidence of consideration by the defendant HAG Imports.  McGill SC DCJ stated:

“Overall it appears to me that the arrangements put in place by the defendant (HAG Imports) have so carefully excluded any commitment at all by it to a person in the position of the company that I am unable to identify any consideration given for an implied promise in the credit agreement application by the company that goods to be supplied to it will be on the standard terms and conditions in force from time to time…

On that basis the situation here was factually distinct from that in Elkerton.”

On this analysis his Honour held that each supply would be considered a separate contract rather than a transitional security agreement and therefore the security interests made after the registration commencement time would not benefit from the protection provided in the transitional provisions.  This meant that each supply of goods required separate registration of a security interest following each delivery of stock.

According to his Honour HAG Imports had registered a purchase money security interest in all future goods supplied and their proceeds, the effect was that the purported registration was defective and of no effect. 

As a result of this finding HAG Imports was ordered to pay the liquidators $473,291 together with interest under the unfair preference provisions of the Corporations Act 2001 because following the liquidation of Lineville the unsecured security interests vested in the insolvent estate of Lineville pursuant to s 267 of the PPSA.


In Conclusion

HAG Imports is an important and curious decision because it is a reminder that not all credit arrangements meet the underlying requirements of a contract.  Whether a security agreement creates a security interest will depend on the specific contractual terms of each arrangement.  Every credit arrangement must have an offer, acceptance and consideration for the courts to recognise a credit application as a contract as opposed to merely an announcement.

Drafters of commercial ROT arrangements will need to carefully ensure that arrangements with customers meet these requirements so that terms of credit can operate as an overarching security agreement for all future goods requiring only one registration at or before the time of the first delivery.

The one distinct commonality between all the major decisions concerning the PPSA thus far, is that it can only be decided if a credit application creates a continuing security agreement by considering the precise nature of the documents in the context of the principals of contract law and the PPSA.


  • Frank Gambera
  • Director
  • McMahon Fearnley Lawyers
  • T: 03 9670 0966
  • M: 0413 052 529


May 2019 - FNSCRD505 - Respond to corporate insolvency situations - FNS51520 Diploma of credit management and FNSCRD401 - Assess credit applications and BSBRSK501 - Managing Risk

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DISCLAIMER:  All material contained in this paper is written by way of general comment.  No material should be accepted as authoritative advice and any reader wishing to act upon material contained in this paper should first consult McMahon Fearnley Lawyers Pty Ltd for properly considered professional advice, which takes into account specific solutions.