Southbank Traders Pty Ltd v General Motors Acceptance Corporation Australia

SUPREME COURT OF VICTORIA
COURT OF APPEAL

No. 3726 of 2004

SOUTHBANK TRADERS PTY LTD
	Appellant
v.
GENERAL MOTORS ACCEPTANCE CORPORATION AUSTRALIA and AUTO GROUP LIMITED	First Respondent
	Second Respondent

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JUDGES:	MAXWELL, P., EAMES and ASHLEY, JJ.A.
WHERE HELD:	MELBOURNE
DATE OF HEARING:	13 September 2005
DATE OF JUDGMENT:	5 May 2006
MEDIUM NEUTRAL CITATION:	[2006] VSCA 102

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SECURITIES – Chattel securities – Sale of motor vehicles – Retention of title (Romalpa) clause – Whether reservation of title by vendor constituted security at common law - Whether reservation of title by vendor constituted “security interest” for purposes of Chattel Securities Act 1987 (Vic).
STATUTES – Interpretation – Extrinsic materials – Legislation drawn from reports of Law Reform Committees – Whether statutory provisions gave effect to a Committee’s recommendation – Whether purposive approach to construction available.
CHATTEL SECURITIES – Whether, if the unpaid vendor did have a “security interest” in the motor vehicles, the third party purchaser had been put on notice of that interest when the purchase price was paid – Onus of proof.
CHATTEL SECURITIES – Operation of s.7(1), Chattel Securities Act, in circumstances where it was to be assumed that the vendor of the vehicles had an unregistered “security interest” therein, and that the third party purchaser had an “inventory security interest” therein.
PRACTICE AND PROCEDURE – Refusal of leave to amend to enable unpaid vendor to raise a claim under s.7(7), Chattel Securities Act – Sale of vehicles by debtor to financier – Purchase price less “retention amount” paid to debtor – Subsequent bailment of vehicles to debtor – Evidence available to support proposed claim – Amendment wrongly refused.

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APPEARANCES:	Counsel	Solicitors
For the Appellant	Mr W.T. Houghton, Q.C. with Mr I.W. Upjohn	Brown & Co.
For the First and Second Respondents	Mr M.L. Sifris, S.C. with Mr A.P. Trichardt	Corrs Chambers Westgarth

MAXWELL, P.,
EAMES, J.A.,
ASHLEY, J.A.:

The appellant, Southbank Traders Pty Ltd (“Southbank”), is a motor vehicle wholesaler which brought an action in the County Court against the first respondent, General Motors Acceptance Corporation Australia (“GMAC”), a financier, and the second respondent, Autogroup Ltd (“Autogroup”). The claim – for damages for conversion and detinue – related to ten motor vehicles which Southbank contended were its property (“the vehicles”).

Between October and December 2002, Southbank sold the vehicles to Kingstrate Pty Ltd (“Kingstrate”), a motor vehicle retailer then trading as “Dandenong Suzuki”. The contract of sale contained a retention of title clause – commonly known as a “Romalpa clause”[1] – which provided as follows:
[1]After Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676.

“’(1)Property in the vehicle(s) to which this invoice relates shall not pass to the purchaser until such time as the vehicle(s) to which this invoice relates, and all other vehicles supplied by the vendor to the purchaser, have been paid in full.
(2)Until property in the vehicle(s) to which this invoice relates passes to the purchaser, or until the vehicle(s) is or are sold by the purchaser as agent for the vendor as hereinafter provided:
(a)the purchaser shall store or mark the vehicle(s) to which this invoice relates in such fashion that they are clearly identified as the property of the vendor;
(b)the vehicle(s) to which this invoice relates shall nevertheless be at the risk of the purchaser;
(c)the purchaser shall keep the vehicle(s) to which this invoice relates insured for their full insurable value and shall ensure that the vendors (sic) interest in the vehicle(s) is noted on the policy;
(d)the vendor may at any time recover or resell the vehicle(s) to which this invoice relates and may at any time enter upon the purchaser’s premises by its servants or agents for that purpose.

(3)Until property in the vehicle(s) to which this invoice relates passes to the purchaser, the purchaser shall not sell, encumber or dispose of the vehicle(s) except as hereinafter provided:
(a)the purchaser may sell the vehicle(s) in the ordinary course of its business to a bona fide purchaser for value, but only as agent for the vendor;
(b)the purchaser shall hold the proceeds of any sale on trust for the vendor and shall keep the proceeds separately and apart from the purchaser’s own moneys; and
(c)the purchaser shall account to the vendor for the proceeds on demand.

(4)The Purchaser and the Vendor agree that the provisions of this Clause apply notwithstanding any arrangement, indulgence or further extension of credit provided by the Vendor to the Purchaser.’”

As contemplated by the contract of sale, Kingstrate took possession of the vehicles. With the purchase price still unpaid, Kingstrate purported to sell the vehicles to GMAC. (GMAC was a provider of finance to Kingstrate in its business as a retail motor dealer, the finance enabling Kingstrate to purchase stock for resale to the public.) GMAC in turn bailed the vehicles to Kingstrate under what is known as a floor plan agreement, which enabled Kingstrate to display the vehicles in its yard.

Upon learning subsequently that Kingstrate was insolvent, GMAC on 10 December 2002 took possession of nine of the ten vehicles and registered a security interest in those vehicles pursuant to the Chattel Securities Act 1987 (“the 1987 Act”). The tenth vehicle had already been sold by Kingstrate and hence could not be seized. In January 2003, GMAC sold the remaining nine vehicles to Autogroup.

In the action Southbank claimed that GMAC had converted the vehicles when it took possession of them on 10 December 2002, registered a security interest over them and then sold them to Autogroup. As against Autogroup, Southbank claimed that it had converted the vehicles by purchasing them from GMAC; further, in failing to deliver up the vehicles to Southbank, Autogroup had wrongfully detained them.

All of Southbank’s claims failed. The critical finding of the learned trial Judge was that Southbank had acquired a “security interest” in the vehicles by virtue of its agreement with Kingstrate. Southbank having failed to register that security interest, the registration by GMAC of a security interest in the same vehicles had the effect of extinguishing Southbank’s interest in those vehicles, by operation of s.7(1) of the 1987 Act. That is, the operation of the 1987 Act was held to have extinguished Southbank’s proprietary interest in the vehicles. Accordingly, Southbank’s claims in conversion and detinue could not succeed.

On appeal, Southbank contended that the retention of title clause did not create a security interest in the vehicles as defined in the 1987 Act. Rather, argued Southbank, the sale subject to the retention of title clause was a conditional sale. Until the condition was fulfilled, Southbank retained its full rights as owner. Since Southbank had not granted any interest in the vehicles to Kingstrate, Southbank as continuing owner was entitled to enforce its rights against GMAC and Autogroup respectively, for their wrongful conversion and detinue of its property.

In the alternative, Southbank argued that if its interest in the vehicles was a security interest, that interest was not extinguished by s.7(1). It was said that GMAC took possession of the vehicles (pursuant to its floor-plan agreement with Kingstrate) at a time when GMAC either had actual notice of Southbank’s interest in the vehicles, or else had been “put upon inquiry” within the meaning of s.3(5)(b) of the 1987 Act. GMAC had therefore failed to discharge the onus imposed on it by s.7(3) to establish that it acquired the goods free of the security interest held by Southbank.

Southbank also contends that it has, pursuant to s.7(7) of the 1987 Act, a claim against GMAC for payment of the balance of the purchase price owing on each of the vehicles. Fourthly, Southbank contends – in answer to a notice of contention by GMAC – that GMAC did not in any event have a security interest in the vehicles.

Finally, Southbank contends that s.67 of the Goods Act did not apply to ensure that GMAC acquired good title from Kingstrate. That provision applied only if Kingstrate was authorised to on-sell the vehicles to GMAC, and did so in the ordinary course of and with respect to the business of a mercantile agent. Neither prerequisite was met and GMAC was on notice as to the limitations of Kingstrate’s authority, so it was contended.

The threshold issue – and the one to which the parties to the appeal devoted most attention – was whether Southbank’s interest in the vehicles was a “security interest” within the meaning of the 1987 Act. We were informed that this was a question of general importance relating to dealings in motor vehicles.

First issue: did Southbank have a security interest in the vehicles?

Central to the question whether Southbank’s interest in the vehicles is subject to the operation of the 1987 Act is the definition of “security interest” in s.3:

“‘security interest’ means an interest in or a power over goods (whether arising by or pursuant to an instrument or transaction or arising on the execution of a warrant issued under the Magistrates’ Court Act 1989) which secures payment of a debt or other pecuniary obligation or the performance of any other obligation and includes any interest in or power over goods of a lessor, owner or other supplier of goods.”

Section 7 of the 1987 Act is the operative provision. It provides as follows:

“Extinguishing of security interest
7(1) Subject to section 8, if a secured party has –
(a)an unregistered security interest (whether or not over registrable goods or interstate registrable goods); or
(b)a registered inventory security interest –

in goods but is not in possession of the goods and a purchaser purchases or purports to purchase an interest in the goods (otherwise than at a sale in pursuance of a process of execution issued by or on behalf of a judgment creditor) for value in good faith and without notice when the purchase price is paid (or, if the price is not paid at one time, when the first part of the purchase price is paid) of the security interest from a supplier being –
(c) the debtor; or
(d)another person who is in possession of the goods in circumstances where the debtor has lost the right to possession of the goods or is estopped from asserting an interest in the goods against the purchaser –
the security interest of the secured party is extinguished.

…
(3)The onus of proving that a person has purchased an interest in goods free from a security interest is on the person asserting that the interest was so purchased.
…”

If s.7(1) applies to the present case, as the Judge found it did, it has the effect of extinguishing Southbank’s interest in the vehicles, by operation of law. In order to establish that the subsection applied, GMAC had to establish each of the following matters:

14.1 Southbank had a security interest in the vehicles and hence was a “secured party”.[2]
[2]The definition of “secured party” is in s.3(1) of the Act.

14.2 Southbank’s security interest was unregistered.

14.3 Southbank was not in possession of the vehicles.

14.4 GMAC had purchased an interest in the vehicles for value in good faith.

14.5 When GMAC paid the purchase price (to Kingstrate), GMAC did not have notice of Southbank’s security interest.

14.6 Kingstrate, as the party from which GMAC purchased, was “the debtor” in relation to Southbank’s security interest.

The elements set out in 14.2, 14.3 and 14.4 were not in issue. We defer for later consideration proposition 14.5, concerning GMAC not having been on notice. That leaves the first and last elements (14.1 and 14.6), both of which turned on the “security interest” question. That is, a conclusion that Southbank did have a security interest within the meaning of the 1987 Act (14.1) would necessarily involve reaching the conclusion that Kingstrate was “the debtor” in relation to that security interest (14.6).

Southbank’s contentions: Southbank did not have a “security interest”

Mr Houghton for Southbank submitted that the critical words in the definition of “security interest” were those in parenthesis. Since under the contract of sale Southbank retained its ownership of the vehicles, its “interest in or power over the goods” was constituted by or derived from that ownership and did not “arise by or pursuant to [the] instrument or transaction” being the contract of sale. The scheme of the 1987 Act, he submitted, was to provide for priority of security interests and, by s.7(1), to extinguish an unregistered security interest. The 1987 Act did not seek to extinguish legal title retained by an owner of goods.

Mr Houghton submitted that the 1987 Act recognised the long-established operation of retention of title clauses and did not interfere with, or purport to defeat, them. The 1987 Act applied the common law understanding of a “security”, being an interest in goods owned by another (the debtor), which interest was vested in a creditor by the debtor, whereby the creditor was granted certain rights over the property in order to satisfy an obligation owed to the creditor by the debtor.[3] At common law, a retention of title clause could, if carefully framed, ensure that no interest in goods was passed to the purchaser under a conditional sale agreement, and the purchaser could not then grant security to the vendor over the goods. The right of parties to enter such agreements and thereby take themselves outside the 1987 Act was undisturbed, Mr Houghton submitted.
[3]E Sykes and S Walker, The Law of Securities, (5th Ed, 1993) at 12.

As Professor Palmer has observed,[4] a retention of title clause, which constitutes the agreement a conditional sale, is employed so as to provide protection for a seller of goods in the event that the buyer becomes insolvent. As the Court of Appeal (UK) explained in Clough Mill Ltd v Martin[5] (discussed in more detail below), in that event the seller can seek to retrieve the goods from the buyer or liquidator by relying on its property in the goods, and can defeat any floating charge over the buyer’s assets which has arisen since delivery of the goods under the contract of conditional sale. Without the clause, property would pass to the buyer and the seller’s only recourse would be to sue for its debt, a right of limited value if the debtor was insolvent. Under a conditional sale, the relationship between buyer and seller is, according to Professor Palmer, that of bailor and bailee.
[4]N E Palmer, Bailment (2^nd Ed, 1991) at 148-150,
[5][1985] 1 WLR 111; [1984] 3 All ER 982.

Southbank accepted that the employment of a retention of title clause did in a practical sense provide security in goods, might prejudice innocent third party purchasers and could defeat the interests of other creditors. Nevertheless, it was submitted, the 1987 Act was intended to apply only to the creation of security interests in the strict common law sense. Properly construed, the 1987 Act had no application to conditional sales.

The respondents’ contentions: Southbank did have a security interest

Mr Sifris for GMAC and Autogroup submitted that the 1987 Act was intended to cover all methods employed for the creation of security in consumer goods. The intention of Parliament was to eliminate the artificiality of legal forms employed by financiers, so that substance should prevail over form. The Court ought not permit Southbank to escape the clear intention of Parliament, which was to ensure that as between competing parties the priorities upon insolvency in such circumstances should be governed by the 1987 Act.

It was submitted that the definition of “security interest” ought be given a purposive construction, one which would capture the reality of the retention of title agreement between the wholesaler, Southbank, and the retailer, Kingstrate. In reality, so it was said, the transaction between them was designed to give Southbank security over the vehicles. Southbank submitted that the intention of Parliament to achieve that objective could be seen from the legislative history, supported by reference to extrinsic materials,[6] including the reports of expert committees which preceded the legislation, and the Parliamentary debates. Although there has been no decision by a superior court interpreting the relevant provisions of the 1987 Act, Mr Sifris called in aid a number of academic writings to support the interpretation of the 1987 Act for which he contends.

Conditional sales and the Goods Act 1958

[6]Section 35, Interpretation of Legislation Act 1984.

Conditional contracts were an established part of the law of sale of goods long before chattel securities legislation was ever contemplated. Thus, s.6(2) of the Goods Act 1958 distinguishes between an absolute and a conditional contract of sale.

At common law, the passing of property in goods was not conditional on the payment or tender of the price. This is the rule which is codified as Rule 1 in s.23 of the Goods Act 1958, namely:

"Where there is an unconditional contract for the sale of specific goods in a deliverable state the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment or the time of delivery or both be postponed.”

It is precisely because property in the goods passes under the contract of sale that the unpaid vendor will ordinarily wish to have some form of security over the goods. From the date of the contract, the goods belong – unconditionally – to the purchaser. In the event that the purchaser is unable to pay the purchase price, the vendor is without remedy unless the purchaser has given the vendor some security interest in the goods.

In a conditional sale, the contract of sale is made subject to a condition upon the fulfilment of which the transfer of property depends. Property in the goods does not pass to the buyer when the contract is made, but only when the condition is fulfilled. The effect of a contractual reservation of title is stated unambiguously in s.24(1) of the Goods Act, which provides:

"Where there is a contract for the sale of specific goods... the seller may by the terms of the contract... reserve the right of the disposal of the goods until certain conditions are fulfilled. In such a case notwithstanding the delivery of the goods to the buyer... the property in the goods does not pass to the buyer until the conditions imposed by the seller are fulfilled.”

It will be recalled that, in the contract of sale of the vehicles in the present case, the reservation of title clause was in these terms:

“Property in the vehicle(s) to which this invoice relates shall not pass to the purchaser until such time as the vehicle(s) to which this invoice relates, and all other vehicles supplied by the vendor to the purchaser, have been paid in full.”

This was an unambiguous reservation of title. As a matter of contract, its intent and effect were clear viz Kingstrate would acquire no interest in the vehicles unless and until payment in full had been made.

In the meantime, Kingstrate had nothing to sell. So much is confirmed by s.27 of the Goods Act, which provides:

"... Where goods are sold by a person who is not the owner thereof and who does not sell them under the authority or with the consent of the owner, the buyer acquires no better title to the goods than the seller had unless the owner of the goods is by his conduct precluded from denying the seller’s authority to sell.”

Importantly, however, the Goods Act establishes a measure of protection for an innocent third party purchaser of goods sold under a conditional sale agreement. Section 31 provides as follows:

“Buyer in possession after sale
Where a person having bought or agreed to buy goods obtains with the consent of the seller possession of the goods or the documents of title to the goods, the delivery or transfer by that person or by a mercantile agent acting for him of the goods or documents of title under any sale pledge or other disposition thereof to any person receiving the same in good faith and without notice of any lien or other right of the original seller in respect of the goods shall have the same effect as if the person making the delivery or transfer were a mercantile agent entrusted as such with the possession of the goods or documents of title.”

The relevant effect of s.31 is as follows. If the purchaser (P) of goods under a conditional sale, having possession of the goods with the consent of the vendor (V), delivers the goods under a sale to any person (T) “receiving the same in good faith and without notice of any right of the original seller in respect of the goods”, P is deemed to have had V’s actual authority to sell.[7]
[7]See Gamer’s Motor Centre (Newcastle) Pty Ltd v Natwest Wholesale Australia Pty Ltd (1987) 163 CLR 236 at 253-4.

This provision protects T, the third party purchaser[8]. But it does not affect the fundamental proposition that P, the purchaser under the conditional sale, has nothing which it can dispose of in its own right. As noted, s.31 deems P to be acting as agent for V, conveying V’s title to T.
[8]Ibid at 249 and 251.

The protection afforded by s.31 has no application to “registrable goods” within the meaning of the 1987 Act. That is the effect of s.7(6) of the latter Act, as the respondents pointed out. This means that, if Southbank is right and its reservation of title did not give rise to a “security interest” as defined, the innocent purchaser is nevertheless denied the protection of s.31. This is so because motor vehicles are registrable goods.[9]
[9]Chattel Securities Act 1987 s.13(1)(a).

Does a conditional sale create a security?

At common law, a conditional sale is not regarded as giving rise to a “security” over the goods sold. For example, in Clough Mill Ltd v Martin[10] a supplier of yarn reserved to itself the ownership of the material until the purchaser had paid in full. Upon the purchaser being placed in the hands of a receiver, the supplier sued in detinue and conversion. On behalf of the receiver it was contended that the effect of the retention of title clause was to confer on the supplier an interest in the buyer’s property, thereby creating a charge in favour of the supplier. Since the charge had not been registered pursuant to the requirements of s.95 of the Companies Act 1948, so it was argued, the charge was void and unenforceable.
[10][1985] 1 WLR 111; [1984] 3 All ER 982.

The Court of Appeal (UK) rejected this argument. Robert Goff, L.J. said of the retention of title clause that –

“the buyer does not, by way of security, confer on the seller an interest in property defeasible on the payment of the debts so secured. On the contrary, the seller retains the legal property in the material.”[11]

His Lordship went on:

“I recognise that, on the view which I have formed of the retention of title in the first sentence of condition 12 in this case, its effect is very similar to that of a charge on goods created by the buyer in favour of the seller. But the simple fact is that under the first sentence of the condition the buyer does not in fact confer a charge on his goods in favour of the seller; on the contrary, the seller retains his title in the goods for the purpose of providing himself with security. I can see no reason in law why a seller of goods should not adopt this course, and, if the relevant contractual term is effective to achieve that result, I can see no reason why the law should not give effect to it in accordance with its terms.” [12]

[11]At 989 (emphasis in original).

[12]At 990 (emphasis added).

Oliver, L.J. agreed, observing that “a company can create a charge only on its own property and if it never acquires property in the goods the subject of an agreement for sale it cannot charge them”[13]. His Lordship continued:

“The question, therefore, is this: it being open to an unpaid seller to protect his position by reserving to himself the property in the goods agreed to be sold in a way which involves no charge by the buyer, is there something in the contract, in the nature of the transaction or in the circumstances of the case which compels the Court to construe the contractor as doing something which, on its face, it does not purport to do, namely to transfer the property which is expressed not to be transferred and to create on it a charge by the buyer in the seller’s favour, in order then to hold that charge void for want of registration?”

[13]At 991.

His Lordship held that there was no implied transfer of the property, and no creation of a charge on the property. The liquidator had contended that, when the whole of the circumstances were considered, it could be seen that the entire purpose of the condition was to give security to the vendor for the payment of the purchase price. Oliver, L.J. accepted that this was “a part, and an important part” of the purpose of the condition, but concluded that its purpose went “well beyond a mere security for the price.” In “more general terms”, its purpose was to protect the seller from the insolvency of the buyer in circumstances where the price remained unpaid. The retention of title condition meant that, in those circumstances, the vendor could repossess the goods not as mortgagee but in exercise of its right as owner to recover the goods.

In Armour v Thyssen Edelstahlwerke AG,[14] the House of Lords came to the same conclusion. The relevant condition in the contract of sale reserved to the vendors property in the goods until all debts owing by the purchaser were settled. The question was whether this clause was designed to create security over the goods. Their Lordships unanimously held that it was not. According to Lord Keith[15] -

“There was no question of the [vendors] creating a right of security. They were not in the position of debtors seeking to give a right of security to a creditor. They were themselves creditors of [the purchaser] for the price of the [goods] and it may be for other debts also.
...
Can it be said that [the purchaser] somehow attempted to create a security over the goods in favour of the [vendors]? In order that it might do so it would require to have both the ownership and the possession, actual or constructive, of the goods. The essence of a right in security is that the debtor retains at least what Gloag and Irvine[16] call the ultimate right to the goods. Can it be said that [the purchaser] obtained anything which gave it the capacity to retain an ultimate right to the goods? That could be so only if the contract of sale gave it the property in the goods, but the contract of sale said that the property in the goods was not to pass until all debts due to the [vendors] had been paid.”[17]

[14][1991] 2 AC 339.

[15]With whom Lord Griffiths, Lord Oliver, Lord Goff and Lord Jauncey agreed.

[16]The reference is to a Scottish text, Gloag and Irvine, Law of Rights in Security (1897).

[17]At 351-2 (emphasis added).

His Lordship later added:[18]

“I am... unable to regard a provision reserving title to the seller until payment of all debts due to him by the buyer as amounting to the creation by the buyer of a right of security in favour of the seller. Such a provision does in a sense give the seller security for the unpaid debts of the buyer. But it does so by way of a legitimate retention of title, not by virtue of any right over his own property conferred by the buyer.”

[18]At 353.

In concurring, Lord Jauncey of Tullichettle said:[19]

“I consider that the courts below were in error in failing to appreciate the true nature of the transaction between the parties. A right in security is a right over property given by a debtor to a creditor whereby the latter in the event of the debtor’s failure, acquires priority over the property against the general body of creditors of the debtor. It is of the essence of a right in security that the debtor possesses in relation to the property a right which he can transfer to the creditor, which right must be retransferred to him upon payment of the debt.“ (emphasis added)

[19]At 354-5.

The proposition that a reservation of title clause does not create, or enable the buyer to create, a charge over the goods sold was affirmed by the New South Wales Court of Appeal in Associated Alloys Pty Ltd v Metropolitan Engineering and Fabrication Pty Ltd.[20] The relevant clause provided as follows:
[20](1998) 16 ACLC 1,633.

“It is expressly agreed and declared that the title of the subject goods/product shall not pass to the purchaser until payment in full of the purchase price. The purchaser shall in the meantime take custody of the goods/product and retain them as the fiduciary agent and bailee of the vendor.”

Citing the decision in Clough Mill, Sheller JA said:

“In the present case, [the buyer] did not acquire title to the goods before payment and could not, accordingly, charge the goods in favour of [the vendor]... There could be no question of any charge over the goods, the title to which [the vendor] retained at least until they are sold or used in a manufacturing or construction process.”[21]

[21]At 1639.

On appeal to the High Court, the decision of the Court of Appeal was affirmed on different grounds, relating to a point which does not arise in the present case.[22] Nothing was said to cast doubt on the proposition that “there could be no question of any charge on the goods.”
[22]Associated Alloys Pty Limited v ACN 001 452 106 Pty Ltd (In Liq.) (2000) 202 CLR 588.

It is, in short, a settled rule at common law that a provision reserving title to the seller until payment of the price (or even of all debts due) does not amount to the creation by the buyer of a right of security in favour of the seller. While it is generally accepted that the reservation of title does “in a sense” give the seller security for the unpaid purchase price (or the debts of the buyer), it does so –

“by way of a legitimate retention of title, not by virtue of any right over his own property conferred by the buyer.”[23]

[23]Armour (supra) at 353.

Put another way, it is a defining characteristic of a right of security at common law that rights over property owned by the debtor be conferred on the creditor. This is reflected in the definition of “security” given by Sykes and Walker:

“For the practical purposes of the ordinary security given to secure the repayment of money lent or the payment of money owed, it is probable that a security can be defined as an interest vested in a person called ‘the creditor’ in certain property owned by another called ‘the debtor’, whereby certain rights are made available to the creditor over such property in order to satisfy an obligation personally owed... to the creditor by the debtor or some other person.”[24]

[24]Sykes and Walker, The Law of Securities (5^th Ed., 1993) p.12 (emphasis added).

Under a conditional sale agreement, the unpaid vendor continues to be the owner and does not have any rights over the goods “made available” to it by the purchaser. Moreover, the rights of ownership which the vendor has in a conditional sale are not rights which can be used “to satisfy an obligation owed” by the purchaser. If the condition is unsatisfied, the purchaser’s obligation to pay is, and remains, unsatisfied. The pre-condition to the passing of property is never satisfied.

Sykes and Walker point out, however, that their general definition –

“... will not cover all cases. ... In the cases of conditional sale and hire purchase the debtor will not initially have full proprietary rights but will have the right of possession with the potentiality of acquiring full ownership.”[25]

This qualification reflects the fact, as acknowledged in the cases referred to above, that a retention of title clause “does in a sense give the seller security”. It was precisely this issue – that in substance, though not in form, retention of title constituted a security interest – which was highlighted in the law reform processes to which we now refer.

[25]Ibid.

The case for law reform: the Molomby Committee Report

The Molomby Committee was first established by the Law Council of Australia in 1967, to reply to a questionnaire from the Adelaide Law School on The Law Relating to Consumer Credit and Money Lending. In January 1972, the Committee provided a report to the then Victorian Attorney-General, entitled “Fair Consumer Credit Laws”.[26]
[26]For details of the Committee’s work, and of the work of earlier law reform committees, see Sykes, The Law of Securities (4^th Ed., 1986) pp. 825-836.

In its 1972 report the Committee recommended legislative reforms designed to deal with the substance, rather than the form, of transactions involving chattel securities and to eliminate the “excessive technicality” of existing laws.[27] The centrepiece of the chattel securities legislation which Molomby proposed was a system of goods mortgages. The goods mortgage, which would be created by a statement “I hereby mortgage”, would create an interest in the mortgagee by way of security but would not operate as a transfer of title.[28]
[27]Molomby Report at 1.1.4.
[28]Ibid at 5.10.1.

The Molomby Report dealt specifically with conditional sale agreements. The Committee noted the use of such agreements as a means of avoiding the bills of sale legislation then in force in each Australian State. That legislation sought to secure the registration of securities over goods for debts which contained a power to seize. The legislation did not require registration of a conditional sale agreement. In the view of the Committee, however –

“The means used to avoid registration do not change the fact that functionally the retention of title by the vendor or owner under a non-registrable agreement is a security.”[29]

[29]Ibid at 5.9.3.

The Committee concluded that there was a need for reform in both commercial and consumer transactions. The bills of sale legislation ought be repealed and “there should be a complete reform of the law relating to security interests in chattels”[30]. In the Committee’s view, it was –

“plain that transactions which have the same commercial substance should be regulated in like manner. There ought to be no distinction between the manner of regulation of the security aspects, on the one hand, of hire-purchase and conditional sale agreements, and on the other of bills of sale and chattel mortgage securities”[31].

The proposed legislation should provide that all transactions purporting to give security over goods would have the same legal operation as between the mortgagor and mortgagee, and as regards third parties, as the statutory goods mortgage itself.

[30]Ibid at 5.9.10.

[31]Ibid at 5.9.5.

The Committee considered, but decided against, recommending a system for the registration of title to goods. In the absence of such a system, the Committee said –

“...[T]he common law rules which govern the transfer of title would apply, and the buyer would acquire no better title to the goods than the seller had, unless the owner is, by his conduct, precluded from denying the seller’s authority to sell.[32]
... Accordingly the [proposed] Chattel Securities Act would not provide for the registration of an owner’s title to goods nor would it affect the rights of an owner based upon legal title under the common law”[33].

[32]The report here referred to s.27 of the Goods Act 1958.

[33]Ibid at 112, 5.10.2 (emphasis added).

Priority disputes between existing competing mortgages, and between mortgages and the rights of unsecured creditors, would be resolved by means of a registration system. This conclusion depended on two basic principles identified by the Committee, as follows:

“First, that a secured party should have the means available to give notice of his mortgage interest to all persons who may later acquire interests in the goods and secondly that persons who later acquire interests in the goods should not take subject to the prior mortgage interest unless they know of it or would have known of it if they had made proper inquiry.”[34]
[34]Ibid at 5.10.03.

Legislative change: the 1978 Bills

It was not until May 1978 that legislation based on the Molomby Report was introduced to Parliament. Three cognate Bills were introduced, the relevant one being the Chattel Securities Bill.[35] In his Second Reading Speech,[36] the Attorney-General said that the introduction of the Bills was –

“an important step in what may well be one of the most fundamental and far-reaching reforms of the law that has been undertaken in Australia. The Bills present an advanced and comprehensive law to take the place of the complex but inadequate and incomplete laws that at present regulate the granting and obtaining of credit, the giving and taking of security over goods and the rights and liabilities of the buyer and the seller.”

[35]The others were the Credit Bill and the Goods (Sales and Leases) Bill.

[36]Hansard, Legislative Council, 11 May 1978, p.2787ff.

Although the 1972 Molomby Report was described as “the particular basis” of the Bills, the Minister said the Standing Committee of Attorneys-General had been –

“closely involved in the development of the three Bills since 1975 and has from time to time given directions for the alteration and in some cases the omission of particular recommendations of the Molomby report.”

The 1978 Chattel Securities Bill did not introduce a registration system.[37] Instead, the “broad principle” adopted was –

“to abolish the concept of a legal interest being created in goods as a security and to substitute for bills of sale a system that will enable equitable charges to be created in goods to secure debts and other obligations which will not require registration but which may be defeated by a bona fide purchase of the goods for value by a person without notice of the secured intent”.

Specifically it was proposed that –
“... security interests in goods – goods mortgages – take effect as equitable charges, and confer and impose the rights, powers, duties and obligations that mortgagees and mortgagors have under the Property Law Act.”

[37]As the Minister pointed out (Hansard pp.2794-5), the Molomby Committee’s original recommendation for a system of registration and search had been superseded by its December 1973 supplementary report, proposing the arrangement which became the subject of the 1978 Bill.

There was no mention of conditional sales, either in the second reading speech or in the Chattel Securities Bill itself. Following introduction, the 1978 Bills were allowed to stand over for submissions from the public. They were not re-introduced until the autumn session of 1981 and then allowed to stand over again, until the spring session of that year.

The 1981 Act

According to the second reading speech[38], the 1981 Bills were redrafts of the 1978 Bills, taking into account the numerous submissions which had been received. This time the Chattel Securities Bill did provide for a system of registration of proprietary interests in goods. There was again no mention of conditional sales, either in the second reading speech or in the Bill.
[38]Hansard, Legislative Assembly, 30 April 1981, p.7997; 28 October 1981, p.2234.

In accordance with the Molomby Committee’s recommendation, the Chattel Securities Act 1981 (“the 1981 Act”) introduced the concept of a goods mortgage. This term was defined to mean –

“an instrument or transaction by or under which a security in or over an interest in goods is reserved or created or otherwise arises.”

The term “security interest” was defined to mean –

“an interest or a power –
(a) reserved in or over an interest in goods; or
(b)created or otherwise arising in or over an interest in goods under a mortgage, charge, lien, pledge, trust or power –

by way of security for the payment of a debt or other pecuniary obligation or the performance of any other obligation but does not include an interest or a power reserved, created or otherwise arising under a lease of goods or under a hire purchase agreement within the meaning of the Hire Purchase Act 1959.”[39]

[39]Section 2(1).

The 1981 Act contained a provision (which has no equivalent in the 1987 Act) declaring the effect of a security interest. Subsection 5(1) provided that –

“where an instrument or transaction reserves or creates... a security interest... in or over an interest in goods –
(a)the security interest has effect under and subject to this Act as a statutory charge in or over the interest in the goods;

(b) ...
(c)the mortgagee under the goods mortgage by or under which the security interest is reserved or created or otherwise arises has an interest in the goods.”

Of particular note in the present context is that, under the 1981 Act’s definition of “security interest”, such an interest could come into existence in two distinct ways. That is, a security interest could –

· be reserved (para (a) of the definition); or

· be created “or otherwise arise” under a mortgage, charge, lien, pledge, trust or power (para (b) of the definition).

Hence, the phrase “to mortgage” was defined by the 1981 Act to mean –

“to reserve or create or otherwise give rise to a security interest.”

In striking contrast, the definition of “security interest” in the 1987 Act speaks only of such an interest being created. The word “reserved” is not used. We consider below the significance of this difference between the two Acts.

On closer examination, it appears that the 1981 Act itself failed to capture conditional sales, contrary to the Molomby Committee’s express recommendation. As we have seen, the relevant part of the definition of “security interest” spoke of “an instrument or transaction [which] reserves or creates … a security interest … in or over an interest in goods”. This definition assumes that there is a clear distinction between the security interest which is reserved, and the interest in goods in or over which that security interest is reserved. They are recognised as separate interests.

In short, the definition of “security interest” in the 1981 Act was premised on there already being an interest in goods. The (separate) security interest was reserved or created “in or over” that pre-existing interest. That is precisely what occurs when a buyer under an unconditional sale mortgages the goods as security for payment of the purchase price. The buyer creates a security interest “in or over” its own proprietary interest in the goods. But it is not what occurs in a conditional sale. In a conditional sale, there is no reservation of a security interest “in or over” an interest in goods. There is simply a reservation (by the seller) of an interest in goods. That is, as we have seen, the basis for the common law’s conclusion that, whatever its function, a reservation of title is not, and does not create, a security properly so-called.

This is not a point which arose in the course of argument on the appeal, and it is not necessary, in any event, to express a concluded view on the question. Nevertheless, what appears to have happened is that the 1981 Act used a definition of “security interest” which made the form, rather than the substance, of the transaction determinative. That is, unless the transaction involved the reservation (or creation) of a security interest “in or over” an interest in goods, then there was no security interest for the purposes of the 1981 Act. Of course, what the Molomby Committee had expressly recommended was that it should be enough to constitute a security interest (in the case of a conditional sale) that the vendor had “reserved an interest in goods”, the intent and effect of which was to give the vendor security. For unexplained reasons, the definition in the 1981 Act did not adopt that approach.

The Viney Committee

In March 1984[40], the then Premier of Victoria requested the establishment of a committee to review certain aspects of the 1981 Act in the light of criticism of the Act on technical legal grounds.[41] The new committee was chaired by Mr R T Viney, then chairman of the Credit Licensing Authority. Amongst its members were two former members of the Molomby Committee. The Committee reported in April 1985. As explained in its Report, the Committee –

“was not asked to review in any way the major changes to the law of Victoria effected by the [1981 Act]. Thus the Committee’s examination proceeded on the assumption that the principal provisions of that Act which can operate to extinguish a prior security interest in favour of an innocent purchaser for value and without notice of goods would remain; so also would the provisions enabling security interests over certain goods (principally motor vehicles) to be registered under a simple registration scheme maintained solely for that purpose.
Rather the Committee’s task was to examine and report on a number of other matters of a less fundamental nature from a policy viewpoint which either had been the subject of submissions to the Government prior to the time of proclamation, or had been the subject of published commentaries on the [1981] Act.”

[40]As amended by the Chattel Securities Act 1983, the 1981 Act was proclaimed to take effect fully on 1 April 1984.

[41]Hansard, Legislative Council, 28 April 1987, p.1113.

The recommendation of the Viney Committee of most relevance for present purposes is its recommendation to remove the distinction, made by the 1981 Act, between –

· mortgages and charges;

· the interests of lessors; and

· the interests of owners under hire purchase agreements.

The 1981 Act had separate sections providing for the extinguishment of interests of each of those three types. The Viney Committee’s draft definition of “security interest,” which was attached to its Report, encompassed all three classes of interest. The Committee’s draft definition was subsequently adopted, almost verbatim, in the 1987 Act.

The Committee noted that there was “debate and uncertainty” as to the ultimate effect of s.5(1)(a) of the 1981 Act, which (as we have seen) declared that a security interest had effect as a statutory charge. In the view of the Committee, clarification was required as to whether a security interest was legal or equitable in nature. Accordingly, the Committee recommended the repeal of s.5 and the enactment of what became s.5 of the 1987 Act, under which parties to a security interest might agree that the security interest should be a legal interest.

There is nothing in the report of the Committee to suggest that the Committee had any intention of altering the scope of the chattel securities legislation. Rather, the scope was intended to remain the same, the new definition of “security interest” being intended merely to achieve the simplification referred to above.

Interpreting the 1987 Act

It is both necessary and appropriate to examine the history of the legislation, as we have done.[42] First and last, however, it is to the language of the 1987 Act that we must look, rather than to secondary sources, in deciding how the Act is to be interpreted.[43]
[42]cf. Palgo Holdings Pty Ltd v Gowans (2005) 221 CLR 249 at 254-259.
[43]Palgo at 254-5[9]; Weiss v The Queen [2005] HCA 81 at [31] and the cases there cited.

An examination of the statutory language leads, in our view, to the clear conclusion that the interest of a vendor under a conditional sale is not a “security interest” within the meaning of the 1987 Act. This conclusion is, as we shall explain, reinforced by important differences between the language of the 1987 Act and the language of its predecessor, the 1981 Act.

The 1987 Act treats a security interest as something “created”, that is, as something which comes into existence by virtue of an act of creation. Thus, the term “debtor” is defined in s.3 to mean “the person who created the security interest”. For example, where in a conventional sale the purchaser gives the vendor security (by way of mortgage or charge) over the goods (or some other property) to secure the payment of the purchase price, the act of charging, or mortgaging, the goods is the act of creating the security interest. The purchaser, who creates the security interest, is the “debtor” for the purposes of the 1987 Act.

The notion that a security interest is created also informs ss.4(1) and 4(2) of the 1987 Act, each of which uses the phrase “whether created within or outside Victoria”. A different, but cognate, concept is to be found in ss.4(2), (3) and (4) and in s.6(1), namely, that a security interest must “attach” to the relevant goods. The concept of “attachment” (drawn from the United States Uniform Commercial Code[44]) is itself defined in part by reference to the earlier notion of creation. Thus, s.3(4) of the 1987 Act provides as follows:

“For the purposes of this Act –
(a)a security interest attaches at the time at which value is given by the secured party and the debtor has rights in the goods or at such later time as the secured party and the debtor intend; and
(b)an agreement to which a debtor is party which contains a provision to the effect that the debtor takes the goods on lease or hire-purchase or creates a security interest over the goods shall be deemed to give value to the debtor.” (emphasis added)

[44]Sykes and Walker op cit at 551-2.

It cannot, in our view, be said of the interest which the vendor reserves under a conditional sale that it is an interest in the goods which is “created” (or “attached”) in this sense. There simply is no act of creation of the vendor’s interest – at least not in the transaction between vendor and purchaser. The only act of “creation” of the vendor’s interest in the goods is the vendor’s original acquisition of title, either by purchase from another person or by its own manufacture of the goods. Even if it could be said that the vendor’s interest was the subject of an act of creation, it is perfectly clear that the vendor’s interest is not created by the purchaser. Yet to satisfy the Act’s definition of “debtor” in relation to the putative security interest, the purchaser would have to be the creator of the interest.

The purchaser in a conditional sale creates no interest in the goods. The purchaser simply agrees to pay the purchase price. As we shall see in the consideration of s.3(3) of the 1987 Act (below), one academic writer has sought to interpret that subsection as supplying this omission, by deeming the purchaser in a conditional sale to have created a security interest over the goods. As we shall explain, we are unpersuaded by this argument.

It is at this point that a comparison with the 1981 Act is instructive. It will be recalled that the definition of “security interest” in the 1981 Act included both:

· an interest or power reserved in or over an interest in goods; and

· an interest or power created (or otherwise arising) in or over an interest in goods.

The 1981 Act thus recognised that there was a conceptual difference between the reservation of an interest in goods – being (at least in the case of a conditional sale) a pre-existing interest – and the creation of an interest in goods – an interest which, by definition, did not exist before the act of creation. We have already seen that the Goods Act recognises, and deploys, the concept of reserving an interest.[45] That concept was an established part of the law of Victoria when the 1981 Act was enacted, and likewise when the 1987 Act was enacted.[46]
[45]See s.23, r.5(2); s.24(1); s.54(4).
[46]As noted in para [31] above, the 1987 Act makes express reference to the Goods Act.

Given that “reservation” and “creation” are distinct concepts, and given that reservation is the hallmark of a conditional sale, it would have been reasonable to expect that chattel securities legislation which was intended to embrace conditional sales would include the concept of “reservation” explicitly. As we have seen, the 1981 Act did include that concept though, as already suggested,[47] it seems doubtful whether even the use of that word achieved the objective of bringing conditional sales within the framework of the 1981 Act.
[47]See paras [61]-[63] above.

How, then, to explain the disappearance of the concept of “reservation” altogether when the 1987 Act replaced the 1981 Act? There is nothing in the Viney Report to suggest that that Committee was aware – let alone intended – that its proposed new definition of “security interest” would repeal, and not replace, paragraph (a) of the 1981 Act’s definition of “security interest”, which used the word “reserved”. As we have said, the Committee’s sole objective in this regard appears to have been to combine within the single term “security interest” the three classes of interest which had been dealt with separately in the 1981 Act. The Committee did not see itself as altering the substantive scope of the legislation at all.

The inescapable fact is, however, that the definition of “security interest” in the 1987 Act contains no reference to the reservation of an interest in goods. The Act defines “security interest” by reference solely to the concept of “creation”. The 1987 Act thus omitted the very concept – reservation – which was a key requirement if conditional sales were to be captured.

The Viney Report makes no mention of conditional sales. This is a little surprising given that one of the clauses which the Committee proposed be added – the clause which eventually became s.3(3) of the 1987 Act, which we discuss in detail below – would introduce into the legislation for the first time an express reference to conditional sales. (The proposed clause was identified in Appendix 3 to the Report as a new provision, but without any explanation of its purpose. The Report itself did not mention the proposed new provision.)

There are other significant omissions from the 1987 Act. While the term “debtor” is expressly defined to include a lessee under a lease and a hirer under a hire purchase agreement, there is no mention of a purchaser under a conditional sale. In order to ensure that conditional sales were treated as giving rise to a security interest in the vendor, the definition of “debtor” should have expressly included a purchaser under a conditional sale agreement. The clear common law position to the contrary rendered a provision of that kind essential.

Likewise with the definition of “secured party”, which expressly includes the lessor under a lease and the owner under a hire purchase agreement. In order to ensure that the vendor under a conditional sale agreement would be treated as a secured party for the purposes of the 1987 Act, an express inclusion should have been made. The need for such an express inclusion is reinforced by the very point which s.3(3) of the 1987 Act itself makes, namely, that no interest is in fact transferred to the purchaser under a conditional sale agreement.

To satisfy the definition of “security interest” in the 1987 Act, the relevant interest in goods must have two characteristics, that is, the interest –

(a) must arise by or pursuant to an instrument or transaction; and

(b) must secure payment of a debt.

In our view, the title reserved by the vendor under a conditional sale agreement lacks at least the first of these characteristics. It is a defining characteristic of the conditional sale agreement that the owner’s interest in the goods does not arise “by or pursuant to” the contract or the transaction. Quite the opposite. The vendor’s interest predates the transaction and – until the condition is satisfied - is unaltered by it. As we have said, the vendor’s interest arises from a prior transaction, being the manufacture or acquisition of the goods.

The applicability of the second limb of the definition is also far from clear. Can it be said that the vendor’s reservation of title under a conditional sale “secures payment” of the debt? The ambiguity flows from the use of the word “secures”. If the word was intended to be given a functional meaning – such that “secures” means “has the function or purpose of securing” – then it would apply to a reservation of title. If, however, Parliament were taken to have used the word “secures” according to its legal meaning, then it would not. For, as we have seen, such a reservation of title is not a “security” at law. In view of our conclusion that the first limb is in any event inapplicable, it is unnecessary to resolve this point. Suffice it to say that this may well be another instance where legislation which the Molomby Committee said should focus on substance rather than form was enacted in language which inevitably directed attention to form rather than substance.

How to deal with s.3(3) of the 1987 Act?

Subsection 3(3) of the 1987 Act provides as follows –

“For the purposes of this Act, a hirer or lessee of goods or a buyer of goods under a conditional sale is deemed to have an interest in the goods notwithstanding that title or general property in the goods has not passed to the hirer, lessee or buyer.” (emphasis added)

The purpose of this provision remains a mystery. As noted above, a provision in these terms was amongst the changes recommended by the Viney Committee, but the Report of the Committee contains no discussion of the proposed clause. It is the only reference to conditional sales in the entire Act.

It is obvious from the concluding words of the subsection that it was not intended to alter the fundamental rule of sale of goods law that property does not pass to the buyer under a conditional sale. The subsection expressly acknowledges that neither title nor property passes in the transaction itself. (The Viney Report contained the same acknowledgment[48].)
[48]Appendix 3 p.2.

Equally clearly, s.3(3) creates in the purchaser a deemed interest in the goods – for the purposes only of the 1987 Act. What purpose was that deemed interest intended to serve? Take s.7(1) for example, which contemplates a purchase – or purported purchase – of an interest in goods by a bona fide purchaser for value without notice of the security interest. As is pointed out by Duggan, Begg and Lanyon,[49] for s.7(1) to apply (and operate as an extinguishing provision) the innocent purchaser must have purchased the interest in the goods from a “supplier”, being either the debtor (in relation to the relevant security interest) or another person –

“who is in possession of the goods in circumstances where the debtor has lost the right to possession or is estopped from asserting an interest in the goods against the purchaser”.

[49]Regulated Credit: The Credit and Security Aspects (1989).

The word “supplier” is not defined in the 1987 Act. But the verb “supply”, in relation to goods, is defined to mean –

“dispose of an interest in the goods by way of sale, exchange, lease or hire purchase”.

This means that the buyer under a conditional sale cannot be a supplier for the purposes of s.7(1), since the buyer has no interest in the goods to dispose of. Duggan, Begg and Lanyon recognise this “problem” but argue that s.3(3) is the solution:

“In the absence of any provision dealing with the point, it might have been argued that a debtor being a hirer pursuant to a hire purchase agreement, a lessee pursuant to a lease or a buyer pursuant to a conditional sale is not a supplier for the purposes of s.7(1). The reason is that, in cases of this kind, ownership of the goods remains with the secured party during the currency of the transaction and it is open to doubt whether the customer has any interest in the goods which can be disposed of. However, the problem has been anticipated by s.3(3) which provides that, for the purposes of the 1987 Act, a hirer or lessee of goods or a buyer of goods under a conditional sale is deemed to have an interest in the goods notwithstanding that title or general property in the goods has not passed.”[50]

[50]At 411-12.

With respect to the learned authors, we do not accept this analysis. As we read s.7(1), and the definition of “supplier”, both provisions are applicable only where – as a matter of sale of goods law – the person purporting to sell to the bona fide purchaser has an interest of its own – an actual interest, not a fictional interest – to dispose of.

In the present case, the purchase to which s.7(1) is said to be applicable is the purchase by GMAC from Kingstrate (the latter being the purchaser under the conditional sale). On established sale of goods principles, as we have seen, Kingstrate had nothing to sell. We cannot accept that s.3(3) should be taken to have changed that position in any way. If s.3(3) had changed that position - by vesting in the buyer a proprietary interest in the goods which the buyer would not otherwise have, and of which the buyer could therefore dispose by sale – this would have constituted a substantive change in the law of sale of goods. There is no sign in the 1987 Act that any such change was even contemplated, let alone intended. On the contrary, as we have said, s.3(3) expressly recognises the general law position that in a conditional sale property does not pass.

A quite different rationale for s.3(3) is suggested by Dr Chin in his 1988 article on the corresponding West Australian legislation, [51] on which the respondents placed considerable reliance. Acknowledging that it is “unclear what [s.3(3)] is intended to achieve”, Dr Chin suggests that the “unlikely clue” lies in the definition of “debtor”. As we have seen, for the purposes of the 1987 Act the debtor is “the person who creates the security interest”. As Dr Chin acknowledges –

“Ordinarily, a lessee, a buyer under a conditional contract of sale or a hirer under a hire-purchase agreement does not have the requisite title to confer or create in the other party any [security] interest and could not be called a debtor within s.3.”

[51]N Y Chin, “The Chattel Securities Act 1987 (WA)” (1988) 18 University of Western Australia Law Review 282.

Accordingly, Dr Chin suggests, subsection 3(3) –

“may be intended to confer on the stipulated parties a notional interest so as to enable each of them to create in the lessor, seller or owner, a security interest and thereby constitute himself a debtor as defined. ... This awkward piece of fiction in s.3(3) may be the link which was considered necessary to “tie” the broad notion of security interests to an entity called the debtor who features in s.7...”[52]

[52]At 286.

Again with respect to the learned author, we are not persuaded that this “awkward piece of fiction” is what Parliament had in mind. Not only does s.3(3) expressly affirm the common law position that the purchaser under a conditional sale has no property in the goods, but the provision says nothing about the nature or extent of the interest which the provision deems the buyer under the conditional sale to have. There is no suggestion, for example, that the buyer is deemed to have the general property in the goods. Even if this were expressly provided for, it would be another thing again – and would require further express provision – for the entry into the conditional sale agreement to constitute the creation of a security interest for the purposes of the 1987 Act, so as to constitute the purchaser a “debtor” for the purposes of the 1987 Act.

It seems most improbable that the draftsperson would have adopted such a convoluted and artificial way of bringing within the scope of the 1987 Act something which – as the 1981 Act implicitly recognised – was not an act of creation by the buyer but an act of reservation by the seller.

In our view, whatever s.3(3) was intended to achieve, the subsection does not operate to achieve what the express definitions fail to achieve, that is, the bringing of the vendor’s title under a conditional sale within the scope of the 1987 Act. The argument might have been a little stronger had s.3(3) addressed itself to the interest of the vendor under a conditional sale – that being the putative “security interest” – but of course s.3(3) deals only with the interest of the purchaser.

A purposive construction?

In the 1988 article to which we have already referred, Dr Chin’s central contention was that the vendor’s interest under a conditional contract of sale was within the scope of the 1987 Act. The reasons he gave were as follows:

“Section 3 departs significantly from existing law. Traditionally, consensual securities are by way of grant and secure a current obligation of the debtor. Thus in a purchase-money chattel mortgage, for example, the security is granted by the debtor/mortgagor to secure his obligation to repay the equivalent of the purchase-money advanced by the mortgagee. In contrast, where a party reserves title in a conditional contract of sale, the common law regards the reservation as no more than the mere continuance of his title in the asset. This view of the common law ignores the point of the conditional contract of sale which is to protect the owner/seller’s interest or stake in the transaction by maintaining in him a real right in the asset. It does not accept that ‘security devices’ which do not secure in the usual way any current obligation of a debtor, do serve a security purpose. A security interest in section 3 is not dependent on grant or on it securing a current obligation in the usual way. Thus a conditional contract of sale comes within it by virtue of it being in substance a security transaction.”[53]

[53]loc.cit. at 283-4 (emphasis added).

It may be accepted – as Dr Chin and others have said[54] – that a conditional contract of sale is in substance a security transaction. As we have seen, that was the view taken by the Molomby Committee. What does not, however, follow is that the 1987 Act therefore applies to it. As we have seen already, Dr Chin recognised the difficulty presented by the definition of “debtor” in the 1987 Act, namely, that a buyer under a conditional contract of sale has no title which would enable it to confer on, or create in, the vendor any security interest. Hence Dr Chin had to postulate what he properly described as an “awkward piece of fiction”.
[54]See also Sykes and Walker op cit at 5; Berna Collier, “Romalpa Clauses: Reservation of Title in Sale of Goods Transactions” (1989) pp.60-61; D Everett, “Romalpa Clauses: The Fundamental Flaw” (1994) 68 ALJ 404 at 405.

For the reasons we have given, the reservation of title by the vendor under a conditional sale does not fit, and cannot be made to fit, within the language of the 1987 Act. It is at this point that the argument advanced by the respondents - that this Court should adopt a purposive construction of the 1987 Act, so as to ensure coverage of conditional sales – must inevitably fail.

It is clear, as we noted earlier, that the Molomby Committee envisaged chattel securities legislation which would extend to conditional sales. Though different in form, the conditional sale was seen to be in substance no different from other forms of chattel securities. Were the language of the relevant provisions of the 1987 Act open to alternative interpretations, we would – as Parliament has directed – adopt the interpretation which better advanced that purpose.[55] But it is not. There is no interpretation of the provisions of the 1987 Act which could render them applicable to the relationship between buyer and seller under a conditional sale. In short, that part of what the Molomby Committee recommended has not been effectuated.
[55]cf. Interpretation of Legislation Act 1984 s.35(a).

As we have suggested, it appears that this unfortunate result has occurred because the language in fact adopted for both the 1981 and the 1987 Acts made the applicability of the legislation depend on the legal form of the transaction, rather than on its substance or purpose. Once this approach was adopted, it was essential that there be express deeming provisions so as to ensure that, whatever differences in form there might be, a conditional sale was treated for all purposes as a transaction giving rise to a security interest in the vendor. Regrettably, this was not done in either Act.

For these reasons, the appeal must succeed. The extinguishing force of s.7(1) of the 1987 Act had no application to the ownership of the vehicles which, in accordance with the reservation of title clause, remained at all times in Southbank. Accordingly, Southbank must succeed in its claims in conversion and detinue.

For completeness, however – and since the other matters were fully argued – we proceed to deal with those other questions which arise only if, contrary to our conclusion, the 1987 Act is applicable.

Second issue: extinguishment of security interest

Assuming (contrary to our conclusion) that Southbank’s interest in each of the vehicles was a security interest for the purposes of the 1987 Act, that interest was certainly unregistered when GMAC purchased the vehicles from Kingstrate; and, when the purchases were made, the vehicles were not in Southbank’s possession.[56] Accordingly, the effect of s.7(1) of the Act was that the assumed security interest was in each instance extinguished, provided that GMAC had purchased the vehicles “for value in good faith and without notice” of such interest when the purchase price was paid. Grounds of appeal 2(a)(i), 2(b)(i)(ii), 3(a) and 3(b)(i) address the issue of extinguishment from a number of standpoints. Grounds 2(a)(ii), 2(b)(iii)(iv) and 3(b)(ii) focus upon the ultimate consequences of allegedly faulty consideration of that issue by the trial judge.
[56]The dates of sale, according to paragraph 7A(b) and (c) of GMAC’s defence, were 29 October 2002 (2), 6 November 2002 (2), 7 November 2002 (1), 25 November 2002 (2), 26 November 2002 (1) and 27 November 2002 (1).

Section 3(5) addresses the question of notice:

“For the purposes of this Act, a person has notice of a security interest in goods –
(a)if the person has actual notice of the security interest; or
(b)if the person has been put upon inquiry as to the existence of the security interest and has deliberately abstained from inquiry or further inquiry when the person might reasonably have expected the inquiry or further inquiry to reveal the security interest.”

Section 7(3) addresses the question of onus:

“The onus of proving that a person has purchased an interest in goods free from a security interest is on the person asserting that the interest was so purchased.”

It was common ground that the effect of s.7(3) was that GMAC carried the ultimate onus of establishing that it purchased the vehicles for value in good faith and without notice of Southbank’s (assumed) security interest.[57] In support of a submission that the trial judge ought to have found that GMAC did have notice of Southbank’s assumed security interest, counsel for Southbank –

· did not argue that GMAC had actual notice of the assumed security interest in any instance; but
· did argue that, in the case of each purchase, GMAC had been put upon inquiry as to the existence of such interest.

[57]It was not in dispute that Southbank referred to and relied upon the sub-section at trial.

As to the latter, counsel for Southbank submitted that –

·     remarks made by GMAC representatives in late 2002 showed that GMAC knew that Kingstrate owed money to wholesalers;
·     GMAC’s conduct in registering a security interest in the vehicles on 10 December 2002 – rather than simply relying upon its rights under the bailment agreements or under a fixed and floating charge given by Kingstrate in favour of GMAC – constituted, in effect, an admission that it knew that a wholesaler had an interest as owner in the vehicles;
·     the judge should have found that GMAC had received letters from the Victorian Motor Wholesale and Auction Association (“the Association”) which put it on notice that members of that Association (including Southbank) always, or almost always, included a retention of title clause in their terms and conditions of sale.

As to the last of these points, the learned trial judge said:

“Neither Mr Molloy[58] nor anyone else including GMAC was able to produce either the original or a copy of any such letter. Mr Molloy never saw an acknowledgment from GMAC in response to any of the letters he sent. The last time that Mr Molloy is able to say that he sent such a letter to GMAC was in August 1998. No witness who gave evidence on behalf of Southbank was able to say that a copy of any of the ROT clauses had been sent to GMAC.”

[58]The author of the letters.

His Honour next referred to a submission for Southbank that –

“… GMAC could have become aware of the ROT clauses because it had had access to Kingstrate’s business records, including the invoices for the disputed vehicles, on a number of occasions prior to 10 December 2002..”

His Honour said that there was, however -
“…no evidence that any of GMAC’s employees or agents who were present at Kingstrate’s premises on those occasions actually saw the relevant invoices or were told of them. It follows that there is no evidence of actual knowledge in GMAC – see s.3(5)(a) of the [1987]Act.”

In the passages set out in the preceding two paragraphs, his Honour was addressing the question of actual notice. His subsequent consideration of what might be called constructive notice consisted of one paragraph, as follows:

“Was GMAC ‘put (on) inquiry’ and ‘deliberately abstained’ from making inquiries which would have revealed the relevant security interests? In my view, the answer is no primarily because it was not shown that GMAC had any interest in inquiring about the antecedents of any of the disputed vehicles sold to it under the bailment agreement. GMAC’s position was secured or protected by the bailment agreement, the floating charge and the general law. Insofar as it could, GMAC took a ‘belt and braces’ approach to its association with Kingstrate and there was no suggestion that GMAC was not entitled to do so. Included in the general law is s.48 of the Motor Car Traders Act which prohibits a motor car trader, except in certain circumstances not here relevant, from selling, exchanging or disposing of a motor car without first procuring the cancellation of any security interest registered under the [1987] Act, a corresponding interstate law or created by the motor car trader or of which the motor car trader had notice. By s.3(1) of the Motor Car Traders Act, ‘security interest’ is defined in terms which, for all intents and purposes, are the same as those in the [1987] Act.”

The essence of his Honour’s reasoning was that GMAC had relied – as in his opinion it was entitled to do – upon provisions in the bailment agreement and in the fixed and floating charge given by Kingstrate. His Honour understood it to be the case that by one or both of those documents Kingstrate had, in effect, warranted good title to the vehicles. His Honour further reasoned that GMAC’s position was protected by “the general law,” in particular a provision of the Motor Car Traders Act 1986 which prohibited sale of a motor vehicle without the trader first procuring the cancellation of any security interest registered under the 1987 Act. The substance of his Honour’s conclusion was that GMAC could never be put on inquiry as to the existence of a security interest in the circumstances described, nor be held to have deliberately abstained from inquiry.

That approach, with respect, was flawed. Let it be assumed that a witness called for GMAC had given evidence that the company had relied upon provisions in the bailment agreement and in the charge, and upon the relevant provision of the Motor Car TradersAct, as the bases for making no inquiry as to the existence of a security interest when any of the particular vehicles was purchased. (As will be seen, the evidence adduced for GMAC only partly fitted this template[59]). Such evidence would have been pertinent to the question whether GMAC purchased in good faith and without notice. But it is another thing altogether to say that the evidence would have been conclusive of that question.
[59]See para [129] below and footnote 67.

Having regard to the onus imposed by s.7(3), it was necessary for GMAC to satisfy his Honour, upon consideration of all of the circumstances revealed by the evidence, that it had not been put on inquiry in respect of any of the vehicles as to the existence of Southbank’s assumed security interest; and, if it could not satisfy his Honour of that matter, that it had not deliberately abstained from inquiry when it might reasonably have expected the same to reveal such interest.

His Honour did not, in connection with either actual or constructive notice, explicitly analyse the situation by reference to where the onus of proof lay. There is no complaint on this appeal that the judge’s reasons were inadequate. It might more easily be concluded, therefore, that his Honour’s failure to mention the matter in the reasons did not justify a conclusion that he did not consider it. His Honour’s choice of language, however, suggests that he in fact treated Southbank as bearing the onus of proof. So, concerning constructive knowledge, his Honour posed this question and gave this answer:

“Was GMAC ‘put (on) inquiry’ and ‘deliberately abstained’ from making inquiries which would have revealed the relevant security interests? In my view, the answer is no primarily because it was not shown that GMAC had any interest in inquiring about the antecedents of any of the disputed vehicles sold to it under the bailment agreement.”

It might be said that the following paragraph in his Honour’s reasons tells to the contrary:

“On the evidence, I am satisfied that GMAC did not have any notice of the [retention of title] clauses under either s.35(a) or (b) of the [1987] Act when it bought the disputed vehicles and that there is no evidence to establish lack of good faith on GMAC’s part.”

But we think that this paragraph did not address onus at all. It was essentially a summary of conclusions earlier expressed, where his Honour’s analysis had treated the onus as resting on Southbank.

The next matter which should be noted is that his Honour’s approach to the constructive notice issue meant that he did not analyse in that connection all the evidence which was before him, let alone consider the evidence in the context that GMAC carried the ultimate burden of proof on the issue. Thus, his Honour did not consider:

· such evidence as there was of letters allegedly written to GMAC advising it of the widespread use by motor vehicle wholesalers of retention of title clauses in their sales documents;[60]
[60]He considered that evidence only in the context of actual notice.

· the significance, if any, of evidence that GMAC representatives knew in late 2002 that Kingstrate owed money to wholesalers; or

· the circumstance that GMAC registered a security interest over each vehicle on the day that it seized the same from Kingstrate, when it was not GMAC’s practice, as a matter of course, to effect such registration.[61]

[61]It was not suggested on the appeal that any of those matters (together with the circumstance that GMAC employees had been frequenting Kingstrate’s office for a period pre-dating 10 December 2002, and so – it was claimed – had had an opportunity of seeing relevant documents) had not been raised at trial.

His Honour’s consideration, then, of the question whether Southbank’s (assumed) security interest in each of the vehicles was extinguished by GMAC’s purchase was defective for more than one reason. We reach this conclusion without touching upon his Honour’s analysis of the significance of the definition of “purchaser” in s.3(1) of the 1987 Act in the context of the use of that word in s.7(1).

What, then, should be done? His Honour’s faulty analysis does not mean that GMAC must necessarily have failed to discharge the onus which it bore. Again, this Court does not lack power to find facts and draw inferences; and there is good reason in principle why, if it could be avoided, a proceeding or an issue in a proceeding should not be remitted for retrial.[62] Nevertheless, we consider that in the present case there would need to be a retrial on this issue, for the following reasons.
[62]See CSR Ltd v Della Maddalena [2006] HCA 1.

First, and to set the scene, it is to be remembered that s.7(1) of the Act focuses upon goods the subject of a particular sale; and upon whether, when the purchase price was paid, the purchaser acted in good faith and without notice (actual or constructive) of the unregistered security interest. In this case, there were[63] nine separate sales on six days in the period from late October to late November 2002.
[63]Not less than.

Secondly, quite apart from a concession made (at least) on the appeal, there was no evidence that GMAC had actual notice of Southbank’s interest in the case of any of those sales. That interest was revealed in tax invoices provided by Southbank to Kingstrate. But those invoices were not part of the documentation provided to GMAC when vehicles were “floor-planned”. Further, although there was evidence that GMAC employees had attended at the Kingstrate dealerships for “audit” purposes, and had done so very frequently in the month or so preceding the date of seizure of the vehicles, there was no evidence that such staff ever examined tax invoices provided to Kingstrate by Southbank. It is unlikely that they would have done so. The purpose of the “audits” was to account for floor-planned vehicles – that is, by ascertaining that they were on the lot or had been sold, or that their whereabouts could otherwise be explained.

Thirdly, there was evidence that GMAC staff knew in December 2002 that Kingstrate made purchases from wholesalers. Mr Rimanic, director of Kingstrate, gave evidence of things said by a Mr Schofield of GMAC which revealed such an understanding. No attempt was made to controvert that evidence.

The evidence to which we have just referred said nothing directly about GMAC’s state of knowledge before December 2002 as to whether Kingstrate dealt with wholesalers. But it could not seriously be supposed that GMAC did not know that Kingstrate had such dealings. The evidence showed that wholesalers are a key element in the supply of used vehicles for retail sale. It showed also that Kingstrate was turning over a large number of used cars each month, a number that could not sensibly be explained simply by trade-ins on new vehicles or by purchases direct from owners. Observations made by GMAC staff at the time of recurrent audits over the years, and in the relevant period, must have revealed – even if GMAC’s knowledge as a participant in the motor vehicle industry did not – the high probability that some of the vehicles being floor-planned by Kingstrate in the relevant period had been purchased from wholesalers.

We turn to the evidence about communications between the Association and GMAC. There was uncontradicted evidence that the Association – its membership comprising representatives of the eight or so major motor vehicle wholesalers in Victoria – had existed at least since 1991. There was also plain evidence that its members had used retention of title clauses in transactions with retailers such as Kingstrate at least from 1991; and that some finance companies had specifically been put on notice of the use of such clauses as early as December 1991.

Again, Mr Denicole, director of Southbank, gave evidence that the particular retention of title clause used in this case had been discussed at a meeting of the Association in 1994; and that the clause, drawn by Nettle, Q.C. (as his Honour then was), had been generally adopted by members of the Association.[64] The then Secretary of the Association had been asked, he said, to “send it to all the finance companies, the Conference and the individual ones that were not members of the Conference.”
[64]Mr Denicole said that he had seen the documentation used by most of the other wholesalers. With one exception, in the documentation that he had seen the retention of title clause had been in the terms used by Southbank. He thought that the wholesaler which was the exception had now “complied”.

Further again, Mr Denicole gave evidence that retailers had failed in the past. On such occasions, he said, Southbank had received its vehicles back, in conformity with the retention of title clause. On one other occasion there had been a dispute with a finance company. It had been satisfactorily resolved out of court.[65]
[65]That body of evidence bore upon the likelihood that financiers generally would be aware of the probability that a retention of title clause was included in wholesalers’ documentation.

Southbank adduced evidence from Mr Molloy, Secretary of the Association at least from 1991 until 2002, that he implemented resolutions[66] which called for notification to financiers of the retention of title clause. He had a firm recollection of sending copies to GMAC by registered post. He said that he sent letters to financiers approximately six-monthly. He was unsure whether he had sent letters after December 1998. Cross-examined, Mr Molloy conceded that he could not produce copies of letters sent to GMAC, that he had not received acknowledgment of receipt of same by GMAC, and that he could not recall GMAC requesting a meeting with the Association about the subject matter of the letters.
[66]Disclosed by the Minutes of Meeting held between 18 December 1991-20 December 1998, which minutes went into evidence.

Then there was the evidence of Roger Steele, who was business development manager of GMAC. He had held that position for three years. Before that he had been employed by GMAC for 12 years “in various capacities”. Those capacities were unstated. Cross-examined, he denied that “retention of title is notorious” throughout the industry. He did not know of the Association. He had not enquired about it. He was aware of what was meant by a retention of title clause. He said:

“… I’m saying there are many and varied practices. Your statement regarding a retention of title perhaps on an invoice or some other means is one of them. From my knowledge most – and I’m saying from my personal knowledge, in most cases that is not the case”.

But that evidence was followed immediately by him saying that he was not involved in buying from wholesalers.

Mr Steele was not squarely asked, in examination-in-chief or cross-examination, whether he had seen any of the letters allegedly sent by Mr Molloy to GMAC; whether his position at relevant times made it likely that he would have seen them; or whether he had made any enquiries as to whether or not GMAC had received the letters.

Unless the judge did not regard Mr Molloy as a witness of truth, there seems no reason why his evidence – that he had communicated the existence and content of the retention of title clause to GMAC on a series of occasions between 1991 and 1998 - would not have been accepted. He was Secretary of the Association. The Minutes record that he was directed to act; and that he had acted. He knew, as he said, that GMAC was a financier that stood outside the Finance Conference, and so must be contacted individually. Why would he not have acted as he said he did? The failure by GMAC to respond was equivocal. In particular, its position, as explained by Mr Steele, was that when an offer to sell a motor vehicle was received from a retailer, that being the initiating step in floor-planning the vehicle, GMAC made no further enquiries. That was so –

“… for a number of reasons. (1) We have been operating in this manner for many years, going back probably 40, 50 years. The other is that under the terms of our bailment agreement it states that all the vehicles must be free of any charge or encumbrance”.[67]

It would not have been inconsistent with that stated approach for GMAC to have ignored communications suggesting that some vehicles offered to it for sale would be subject to a retention of title clause.

[67]The witness did not refer either to the charge or to the Motor Car Traders Act provision mentioned by the judge. Apropos the bailment agreements, he was referring to clause 5(f). it is unnecessary to consider whether his description of its meaning was in all respects accurate.

Relevant to the question of notice – and potentially standing against the viva voce evidence of Mr Molloy, which itself relevantly built upon the evidence of Mr Denicole – there was the lapse of time between late 1998 and late 2002; the non-production of copies of letters allegedly sent to GMAC; the admission that GMAC had not responded to the letters allegedly sent to it; and the evidence of Mr Steele. The last-mentioned, for reasons explained, was for the most part non-contributory.

If Mr Molloy was accepted as a credible witness, there was evidence of circumstances which arguably should have suggested to GMAC that any vehicle floor-planned by Kingstrate in the latter months of 2002, and which had been acquired by it from a wholesaler, was virtually certain to have been sold subject to a retention of title clause in the particular form here applicable. For reasons already explained, GMAC must have known that a significant proportion of the used vehicles which Kingstrate was then floor-planning had been acquired from wholesalers. That being so, GMAC may then have been unable to show, despite the lapse of time since 1998, that it was not put upon inquiry in respect of the particular vehicles.[68] If – contrary to our analysis – Mr Steele’s evidence could stand as some evidence of non-receipt of correspondence from the Association, then the acceptance or otherwise of that evidence involved, inter alia, a question as to his credibility. In that connection, the transcript suggests that he was an enthusiastic witness in GMAC’s cause.
[68]Certainly, if put on (constructive) notice, it had made no enquiries.

The difficulty about this Court resolving the area of dispute is that, on the judge’s approach, a finding that letters had been sent and received would not have mattered. Notwithstanding such approach, it may be the case that his Honour rejected critical aspects of Mr Molloy’s evidence. If he did, then the basis upon which he did so is not apparent. Logic suggests the probability that letters were sent to GMAC. If they were sent, the conclusion was open that GMAC had constructive knowledge of Southbank’s interest in the particular vehicles. One possibility is that the judge rejected critical aspects of Mr Molloy’s evidence because he did not consider him to have been a credible witness. It might also be the case that the judge, to the contrary, regarded Mr Steele as a credible witness who had given evidence pertinent to the issue of constructive knowledge.

In the event, although much of the evidence given for Southbank upon the question of notice was uncontroversial, and impregnable, the area of dispute which was of considerable potential importance may have involved consideration of the credibility of witnesses; and in that connection this Court has no guidance from the trial judge. It is for this reason that we consider that the issues of both notice and good faith would – had Southbank failed on the threshold issue – have needed to be remitted for retrial.

We mentioned earlier Southbank’s submission that it should be inferred – from the fact that GMAC registered a security interest in respect of each of the disputed vehicles very soon after their seizure – that at the time of purchase GMAC had at least constructive notice of Southbank’s interest; and that its purchases had not been in good faith. That submission had obvious force. But, as we read the transcript, this matter was not put to Mr Steele. It should have been, even if it had proved to be the case that the witness was not qualified to explain why GMAC had taken the particular step, which was not in accordance with its usual practice. We would not have been prepared to draw an inference unfavourable to GMAC if we were now resolving issues of fact and inference.

Third issue: a new argument about extinguishment

According to an argument which Southbank sought to raise for the first time on the appeal, the interest which GMAC was able to register in respect of the vehicles was “a registered inventory security interest”. That was insufficient to defeat, under s.7(1) of the Act, the (assumed) unregistered security interest of Southbank.

Counsel for GMAC did not resist consideration of the argument. No question arose, he said, of prejudice to his client by reason of evidence not adduced at trial. He accepted that GMAC’s interest in each of the vehicles under the bailment agreements fell within the meaning of “inventory security interest”, as defined by s.3(1) of the Act. But he submitted that s.7(1) did not work in the manner contended for by Southbank.

In our opinion, the argument advanced for GMAC was correct. The question for determination in relation to s.7(1) was whether Southbank’s assumed unregistered security interest in the vehicles had been extinguished by the sale of the vehicles by Kingstrate to GMAC. That question arose under s.7(1)(a), not s.7(1)(b). The relevant security interest said to have been extinguished was Southbank’s “unregistered security interest”.

The position would have been different if Kingstrate had sold vehicles subject to bailment agreements in circumstances where GMAC had an inventory security interest therein. Even if such interest had been registered, it would have been extinguished by a sale in the event that GMAC was not then in possession of the goods. That would have told against GMAC, but arising out of a transaction quite different from the one which was here in point.

Claim under s.7(7) of the Act. Refusal of grant of leave to amend.

Very late in the piece[69] Southbank applied to amend so as to raise a claim under s.7(7) of the Act. The application was not opposed by counsel for the respondents. No question of further evidence arose. The issue had been raised in cross-examination of Mr Steele. Nonetheless, the judge refused the application.
[69]Apparently after reasons for decision had been published.

Despite the lateness of the application, leave to amend should not have been refused if Southbank was shown to have had an argument of substance in reliance on s.7(7).

The notice of appeal[70] suggests that the judge refused the application on a particular basis. Apparently his Honour gave oral reasons, and what the notice of appeal reveals is said to be all there is which shows the substantive reason for refusal.[71] No party submitted to this Court that the reason allegedly given was sound; and, if the reason assigned was the reason in fact, then we do not consider that it was sound.
[70]Paragraph 4(a)(ii).
[71]According to the notice of appeal, his Honour found that Southbank “as a person whose interest in the vehicles was extinguished by operation of s.7... was not entitled to receive the unpaid purchase price of the vehicles.”

The question remains: Did Southbank have an argument based on s.7(7) which in justice ought to have been entertained? Section 7(7) says this:

“If a security interest is extinguished under sub-section (1), (1A) or (2), the secured party shall be subrogated to the rights (if any) of the supplier and any predecessor in title of the supplier in and in respect of the goods, including the right to receive any part of the purchase price for the goods which has not been paid.”

For present purposes Southbank was prepared to assume, contrary to its primary position, that –

·its interest in each of the vehicles was a security interest; and
·in each instance the security interest had been extinguished by operation of s.7(1).

It was also a necessary part of its argument that “the supplier” for the purposes of s.7(7) was Kingstrate.

Southbank’s argument ran this way: in the case of each vehicle GMAC had not paid Kingstrate some part of the purchase price. Southbank itself was statutorily subrogated to Kingstrate’s right to receive the unpaid balance from GMAC.

Assumptions and any construction issue aside, the question which arises is whether there was any evidence which would support the foreshadowed claim. In our opinion, there was some such evidence.

It appears that Southbank sold the disputed vehicles to Kingstrate for a total invoiced amount of $202,150. When Kingstrate offered to sell the vehicles to GMAC in the floor-planning transactions, the latter valued them by reference to a dealers’ guide. The total “suggested purchase price” of the vehicles, derived from one column in GMAC’s “offer to sell” pro forma document, was $205,100. In fact, however, GMAC did not pay amounts totalling $205,100; but only amounts totalling $172,200 - which were characterised in the pro forma document as “amount[s] immediately payable”. The balance in the case of each vehicle, arbitrarily determined by GMAC, was described by the same document as a “retention amount”. According to Mr Steele’s evidence, the retention amount was not payable by GMAC to Kingstrate. What GMAC paid was the amount which it was prepared to advance. Moreover, all that Kingstrate had to pay GMAC, when it sold any of the vehicles, was the amount which GMAC had paid for such vehicle.[72]
[72]Together with interest and holding charges.

The legal construct of the relationship between Kingstrate and GMAC was that GMAC purchased motor vehicles and bailed them to Kingstrate, which sold them on behalf of GMAC and then accounted to the latter. It is natural that, in a practical sense, Kingstrate would account to GMAC for what had been paid to it, plus interest and holding charges. But it may be that the true legal analysis was that, when Kingstrate sold a vehicle, GMAC became liable to pay any retention amount; and that Kingstrate must then have accounted for the entirety of what had been paid, plus interest and holding costs. The overall money outcome would be the same.[73] But the two methodologies would reveal a different basis in legal theory.
[73]Take this example:
·     Suggested purchase price $30,000
·     Amount immediately payable $25,000
·     Retention amount $5,000
·     Holding charges $2,500
·     Sale price $37,500
Accounting methodology (1)
Amounts received by Kingstrate
·     $25,000 from GMAC
·     $37,500 from purchaser
Less
·     $25,000 paid to GMAC
·     $2,500 interest plus holding charges paid to GMAC
Net amount held by Kingstrate $35,000 (enabling payment to Southbank)
Accounting methodology (2)
Amounts received by Kingstrate
·     $25,000 from GMAC as “amount immediately payable”
·     $5,000 from GMAC as “retention amount”
·     $37,500 from purchaser
Less
·     $30,000 paid to GMAC ($25,000 plus $5,000)
·     $2,500 interest plus holding charges paid to GMAC
Net amount held by Kingstrate $35,000
In each instance the “net income” of GMAC would be identical.

GMAC’s pro forma offer to sell suggests that the latter analysis is the correct one. Against a background of columns headed –

·“Suggested Purchase Price”,
·“Amount Immediately Payable”, and
·“Retention Amount”

the document noted that –
“GMAC may retain a part of any purchase price paid to the dealer until the vehicle is sold by GMAC.”

There was, we think, an explanation as to why that should have been the true position. It was put to Mr Steele in cross-examination that it was GMAC’s practice to claim a tax credit for the full unit price of each vehicle – that is, including the retention amount. The witness did not assent. His answer might be thought to have been evasive. That is not the point. It is, rather, that the cross-examiner suggested a reason why the purchase price payable, according to GMAC’s document, was the “suggested purchase price’.

In our opinion, in the circumstances described, Southbank should have been granted leave to amend. Had it been necessary to do so, we would have granted such leave. We are further of the opinion that the proper course would have been to remit the issue thus opened-up to the further trial which would have been necessary upon the issues of notice and good faith. It seems likely that the evidence relevant to the s.7(7) claim could have been further developed. It would not be surprising, for instance, if one party or the other had sought to put in evidence relevant accounting records of GMAC. In the circumstances, we need not explore this question further.

Conclusion

As we said earlier,[74] the appeal succeeds on the first issue. The judgment below must be set aside, and there should be judgment for Southbank in the proceeding.
[74]Para [101] above.

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[2006] VSCA 102

5 May 2006