Clarifying consignment confusion in Australia
/Consignment agreements often afford both parties the opportunity to market and sell goods without the usual risks associated with the outright purchase of products. But what constitutes a valid consignment under Australian law?
Whether an agreement can be considered a consignment essentially requires consideration of two questions:
Is the agreement considered a consignment under common law?
If so, is the agreement also considered a consignment under the Personal Property Securities Act 2009 (Cth) (PPSA)?
If an agreement can be considered a consignment under the PPSA, that agreement will be afforded the additional protection under that regime. Conversely, it can also mean that where an agreement is considered a consignment under the PPSA and the consignor to that agreement has not registered their interest on the Personal Property Securities Register (PPSR), the consignor may be at risk where an external administrator is appointed to the consignee.
Definition of ‘consignment’ under Australian common law
In Australia, there is currently no legal definition (either under common law or statute) of a consignment agreement. The PPSA , similarly, does not define the term ‘consignment’. However, there are various Canadian cases (noting that the Canadian Provinces versions of the PPSA are similar) which have advanced several positions as to the definition of consignment, which have since been followed in Australia. Saunders J in Re Stephanian’s Persian Carpets Ltd (1980) 34 CBR (NS) 35 defined a consignment as follows:
“In its simplest terms, a consignment is the sending of goods to another. An arrangement whereby an owner sends goods to another on the understanding that such other will sell the goods to a third party and remit the proceeds to the owner after deducting his compensation for effecting the sale is an example of a consignment agreement.”
In Access Cash International v Elliot Lake Inc & North Shore Corp for Business Development (2000) Carswell Ont 2824, Molloy J listed 15 indicia to characterise a consignment, namely:
(a) where the merchant is the agent of the supplier;
(b) title to the goods remains in the supplier;
(c) title passes directly from the supplier to the ultimate purchaser and does not pass through the merchant;
(d) the merchant has no obligation to pay for the goods until they are sold to a third party;
(e) the supplier has the right to demand the return of the goods at any time;
(f) the merchant has the right to return unsold goods to the supplier;
(g) the merchant is required to segregate the supplier’s goods from his own;
(h) the merchant is required to maintain separate records;
(i) the merchant is required to hold sale proceeds on trust for the supplier;
(j) the goods are shown as an asset in the books and records of the supplier and are not shown in the books and records of the merchant as an asset; and
(k) the supplier has the right to stipulate a fixed or floor price.
While the above matters are helpful in determining the existence of a consignment, no one single factor is determinative of a consignment agreement. To that end, whether or not a consignment exists under common law is to be determined objectively upon the facts available in each case.
‘Consignment’ under the PPSA
If a consignment agreement exists under common law (based on a consideration of the matters set out above), we turn to the question of whether that consignment is a consignment pursuant to the PPSA.
A consignment which falls under the ambit of the PPSA can afford additional protection to those consignors who have registered their security interest on the PPSR, and conversely, have devastating effects for those who fail to register their security interest and that interests then falls under the vesting provisions where an external administrator is appointed to the consignee.
There are two types of consignment under the PPSA, a ‘consignment’ pursuant to section 12(2)(h), and a ‘commercial consignment’ pursuant to section 12(3)(b).
‘Consignment’ pursuant to section 12(2)(h) of the PPSA
Section 12(1) of the PPSA defines a ‘security interest’ as an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation.
As section 12 of the PPSA demonstrates, not all consignments are subject to the PPSA. However, section 12(2)(h) of the PPSA provides that a consignment will be a security interest if it, in substance, secures payment or performance of an obligation.
In Re Arcabi Pty Ltd (Receivers and Managers Appointed) (In Liq) [2014] WASC 310, Master Sanderson held that a particular consignment agreement did not constitute a consignment pursuant to section 12(2)(h) of the PPSA, as:
(a) the consignment did not appear to be intended to secure a debt due by the consignee to the consignor, given that
I. if the relevant stock was sold on consignment, the consignee would have an obligation to pay the consignor but title in the stock would pass straight from the consignor to the third party consumer; and
II. if the relevant stock was not sold, title would remain with the consignor and there would be no obligation on the consignee to pay for same; and
(b) there was a mutual benefit of the consignment arrangement that suggest that the arrangement was intended for a purpose other than to secure the performance of any obligation of payment by the consignee, as:
I. the consignee has the advantage of having additional stock to sell, without the need to purchase that stock outright or to purchase additional stock on its own accord; and
II. the consignor had the advantage of marketing its products through the consignor while retaining title to those products, without the risk of the consignee’s creditors (once in receivership) having access to same.
Put simply, a consignment agreement under common law would not be considered a consignment pursuant to section 12(2)(h) of the PPSA if it does not secure payment or performance of an obligation by the consignee to the consignor.
‘Commercial consignment’ pursuant to section 12(3)(b) of the PPSA
Sections 10 and 12(3)(b) of the PPSA provides that a consignment for the purposes of the PPSA will be considered a security interest, whether or not the transaction, in substance, secures payment or performance of an obligation, if:
(a) the consigner retains an interest in the goods that are delivered to the consignee;
(b) the consignor delivers those goods to the consignee for the purposes of sale, lease or other disposal; and
(c) the consignor and the consignee both deal in goods of that kind in the ordinary course of business;
but does not include agreements under which the goods are delivered to:
(d) a consignee for sale, lease or other disposal if the consignee is generally known to the creditors of the consignee to be selling or leasing goods of others.
In Re Arcabi, it was held that a ‘commercial consignment’ for the purposes of the PPSA did not exist, as:
(a) the majority of the consignors the subject of the consignment agreements did not regularly deal with the relevant goods in their ordinary course of business, and in fact only dealt with the goods as a hobby rather than a business venture; and
(b) it was generally known to the consignee company’s creditors that it was selling the goods of other parties, as:
I. the company openly advertised that fact; and
II. a questionnaire issued to the company’s consignment creditors revealed that approximately 85% of those creditors were aware that the company sold goods on behalf of other consignees.
Conclusion
Prior to providing or accepting stock on a consignment basis, it is imperative that both parties are in agreement that the relevant stock is being provided on that basis. Aconsignor ought to protect their property from any potential issues (including being considered the rightful assets of a consignee company or subject to the vesting provisions of section 267 of the PPSA in the event of a consignee’s external administration), by entering into a written consignment agreement and registering their security interest (if that consignment falls under the PPSA) on the PPSR.
If you would like more specific advice in relation to a current or potential consignment arrangement, please contact Edwards Mac Scovell.