Is it time to take stock? Who owns what in the David Jones administration

When a retailer enters voluntary administration, the administrators take control of its property and business, and the directors’ powers are suspended. 

Where receivers have been appointed under a security over all of a retailer's property, they will generally control that property and its business ahead of the administrators. 

Stock that the brand owns is not the retailer’s property, but that does not end the inquiry. If the stock is in the retailer's possession and the arrangement creates a security interest, the brand may still lose the stock or its priority if it does not comply with certain legislative requirements. 

Whether this occurs depends on whether the arrangement falls within the PPSA at all and, if so, whether the brand’s interest is properly protected.

Where an agreement provides that ownership remains with the brand until sale, unsold stock is likely to remain the brand’s property. 

Once an item is sold, ownership passes to the customer and the brand’s claim is to the proceeds. 

Whether that claim is held on trust, secured or unsecured depends on the agreement. Where the PPSA applies, it also depends on whether the brand’s interest was properly protected (‘perfected’), along with questions of priorities and tracing. 

Goods in transit, returned or held for customers may need to be tracked separately.

Once a retailer enters an insolvency process, legal ownership alone is not enough. A crucial question is whether the brand’s rights are properly protected under the PPSA.

The PPSA looks at the substance of the agreement, rather than its form. 

If a brand’s interest is a ‘security interest’ and was unperfected when the administrators were appointed, the stock may vest in the retailer under section 267, despite any clause providing that the brand retains ownership, unless an exception applies. 

Vesting means that the brand’s rights are lost in the asset and its proceeds.  

An interest can be perfected through registration on the Personal Property Securities Register (PPSR) or, for goods, the brand having possession of them. 

If the stock vests in the retailer, the brand would become an unsecured creditor for its value.

Consignment is when a company, such as a retailer, sells assets on behalf of another, such as a brand. 

Importantly, the PPSA distinguishes between ‘commercial consignments’ which sit within the scope of the PPSA, and other consignments, which fall outside the PPSA unless, in substance, they secure payment or performance of an obligation.

If the arrangement falls outside of the PPSA, the brand may retain its asset and, depending on the agreement, the proceeds of sale may be held on trust for the brand.  

If it falls within the PPSA, the brand must protect its rights, such as by a valid registration.

Brands should seek advice on whether any of the following scenarios apply to them:

• No consignment: some arrangements, such as a brand selling its own goods through its own staff, may not involve a 'delivery' to the retailer at all, although delivery may be found even where goods remain at the retailer's premises. The position is more complex where the retailer stores or processes sales of the goods, or the agreement does not clearly allocate possession.

• Retailers generally known to be selling goods belonging to others: the definition of ‘commercial consignment’ excludes a consignee generally known to sell goods belonging to others. A department store business model may support this, although it is a question of evidence on a case-by-case basis.

• No vesting: section 268 of the PPSA excludes from vesting a commercial consignment that does not secure payment or performance of an obligation. That said, under the priority rules, the inventory and proceeds may rank behind other secured parties.  It is therefore important to ensure proper protection and not just rely on this exclusion.

For wholesale suppliers, a retention of title clause secures payment of the price. 

This creates a security interest that must be perfected, usually through registration on the PPSR. 

There are timeframes for when registration must be in place which can impact the brand’s rights. 

Registered suppliers can be secured creditors in respect of their unpaid stock, although enforcement is restricted during the administration. Unregistered suppliers are exposed.

When people talk about the PPSA, they tend to focus on registration. There is another method of protection (‘perfection’), being possession. 

This requires actual or constructive possession of the assets by the brand.

In practice, perfection by possession can be complex in retail. There can be factual matters which will determine whether the criteria are met. 

Goods under the supplier's day‑to‑day control may be the strongest case for possession by the supplier, although this depends on the agreement and how the stock is managed in practice. Goods held in the retailer's own storage or fulfilment areas can be less clear.

Registering an interest on the PPSR after the retailer enters an insolvency process will not help. Rights are determined as at the date of appointment. 

If brands have registered just before an appointment, advice should be sought as they may also be at risk.

Not without permission.

Under section 440B of the Corporations Act 2001 (Cth), an owner cannot recover property used or occupied by, or in the possession of, the retailer without the administrators’ written consent or the court’s leave. 

Removing stock without permission carries significant risk. 

Where the stock is in the retailer’s possession or used by it, administrators may generally sell it in the ordinary course of business under section 442C of the Corporations Act. 

If a brand maintains that its stock is in its own possession, it may argue that the power of sale does not extend to it. 

Either way, brands may wish to raise any objection to continued sale, and the treatment of proceeds, early.

Where the retailer continues to use or possess third-party property under an agreement entered into before the appointment, administrators become personally liable for amounts payable under that agreement for the period after five business days from their appointment. 

This does not apply if, within that five-business-day period, they give notice that they do not propose to exercise rights in relation to the property under section 443B. 

A notice, or its absence, can clarify how the administrators intend to treat a brand’s stock. If stock is to be dealt with outside the ordinary course despite a brand’s claim, the brand may need to seek urgent relief from the court.

Brands may also face costs when recovering their stock. In Wine National Pty Ltd, James Estate Wines Pty Ltd and Liquor National Pty Ltd [2014] NSWSC 1516, the court allowed insolvency practitioners an equitable lien for their costs of identifying and returning third-party stock.

Brands should seek advice before terminating an agreement following a retailer’s administration.

The ipso facto stays under sections 451E and 434J of the Corporations Act prevent parties from enforcing termination rights because of the administration, receivership or the retailer’s financial position. 

The stay applies to contracts entered into on or after 1 July 2018. Brands with older agreements, or agreements varied since, should check how these rules apply.

Courts consider the substance of the reason for termination. 

For example, if a brand has never pursued an existing breach, such as overdue payments, but relies on it only after the appointment, there is a risk the termination will be treated as being, in substance, because of the administration. 

Termination should rest only on a genuine, separate breach, or proceed with the administrators’ consent or the court’s leave. In either case, it should not proceed without advice.

Brands are not obliged to extend new credit, but a blanket suspension of supply may breach the agreement. 

Brands should review their existing supply obligations and whether further supply should be conditional on written orders from the administrators or receivers.  

Administrators or receivers are generally personally liable for goods they order under sections 443A and 419 of the Corporations Act.