An overseas manufacturer sends valuable stock to an Australian distributor. The distributor does not buy the goods immediately: it holds them, sells them to customers and remits the agreed amount to the supplier after each sale. The contract says that ownership remains with the overseas supplier until the goods are sold.
The distributor then runs into financial trouble. A bank already has a registered security interest over the distributor’s assets.
Who has the stronger claim to the unsold stock?
The answer cannot be determined by title alone.
Under Australia’s Personal Property Securities Act 2009 (Cth) (PPSA), some consignment arrangements are treated as security interests even where the consignor remains the legal owner and the transaction does not function like an ordinary secured loan. Whether the supplier has protected its position therefore depends first on the legal character of the consignment and then on perfection and priority.
Not every consignment is a commercial consignment
The starting point is the statutory definition.
Under section 10 of the PPSA, a consignment is a commercial consignment where the consignor retains an interest in goods delivered to the consignee, the goods are delivered for sale, lease or another form of disposal, and both parties deal in goods of that kind in the ordinary course of their businesses.
Two important exclusions narrow that definition. A consignment to an auctioneer for sale is excluded. So is an arrangement where the consignee is generally known to its creditors to be selling or leasing goods belonging to other people.
This distinction matters because section 12(3)(b) goes further than the ordinary definition of a security interest. The consignor’s interest under a commercial consignment is treated as a security interest whether or not the transaction actually secures payment or performance of an obligation.
A supplier should therefore not start with the question, “Do we still own the goods?”
The better first questions are:
- Does the arrangement legally amount to a consignment?
- Do both parties ordinarily deal in goods of that kind?
- Is the Australian consignee generally known to creditors as a seller of other people’s goods?
- Is the transaction a commercial consignment under section 10, or does some other PPSA category apply?
The answers determine whether the statutory PPSA regime applies at all.
Re Arcabi shows why classification can decide the dispute
The Supreme Court of Western Australia considered this problem in Re Arcabi Pty Ltd (Receivers & Managers Appointed) (in liq) [2014] WASC 310.
Arcabi dealt in rare coins and banknotes. Property belonging to customers was stored with it, and some goods were held for sale on consignment. After receivers and liquidators were appointed, the question arose whether the PPSA gave Arcabi’s secured creditor rights over goods that were still owned by those customers.
The Court found that the relevant consignments were not commercial consignments within the statutory definition.
One important reason was that many of the consignors were collectors or hobbyists rather than businesses dealing in rare coins or banknotes in the ordinary course of business. The requirement that both consignor and consignee deal in goods of that kind therefore was not satisfied for those arrangements.
There was also evidence that Arcabi was generally known to its creditors to sell goods belonging to others. That brought the arrangements within another exclusion from the definition of commercial consignment.
Because the relevant arrangements also did not secure payment or performance of an obligation, they did not become security interests merely through the ordinary section 12 analysis. The owners therefore retained their proprietary position in the goods.
For an international supplier, the case has a practical consequence: two contracts both labelled “consignment” may produce very different PPSA results.
A manufacturer regularly supplying stock to an Australian dealer may fall squarely within the commercial-consignment regime, while a private owner placing a one-off asset with a specialist dealer may not.
Why PPSR registration matters even when title stays with the supplier
Once an arrangement qualifies as a commercial consignment, the PPSA deliberately looks beyond conventional ownership.
Section 14(1)(d) expressly treats the consignor’s interest under a commercial consignment as a purchase money security interest (PMSI). That status can be particularly valuable where the consignee already has a bank or financier with an earlier security interest over its inventory or other assets.
Under the ordinary PPSA priority rules, a perfected security interest generally defeats an unperfected one. Between competing perfected interests, timing is normally important. A qualifying and properly perfected PMSI can obtain priority over an earlier non-PMSI interest in the same collateral.
For inventory, however, the timing rule is demanding.
Where the property is inventory, the PMSI generally needs to be perfected by registration before the grantor obtains possession, or before the security interest attaches where that occurs first. Registration after the consigned stock has already reached the Australian dealer may therefore preserve a different security position but fail to deliver the special PMSI priority the supplier expected.
This makes the shipping process legally significant. PPSR analysis should occur before the goods leave the supplier’s control, not after the Australian customer misses a payment.
The separate risk of selecting PMSI status incorrectly is examined in our article on PMSI checkbox errors and invalid PPSR registrations in Australia. For a consignment, the important point is to establish first that the arrangement genuinely qualifies before relying on PMSI priority.
One registration may protect a continuing consignment relationship
A supplier that regularly places stock with the same Australian dealer does not necessarily need a completely new registration for every shipment.
A properly structured registration may cover future consignments with a particular consignee where the collateral description is sufficiently broad to encompass the relevant goods.
That can materially simplify an ongoing distribution relationship, but only if the original registration was structured correctly.
A foreign consignor should therefore check whether the registration accurately identifies:
- the relevant Australian grantor;
- the appropriate collateral class;
- the goods covered by present and future consignments;
- PMSI status where it is legitimately claimed; and
- the period for which the registration needs to remain effective.
This is more useful than simply counting registrations. A broad registration that correctly covers repeated consignments may provide better operational protection than a series of inconsistent shipment-by-shipment filings.
Insolvency does not create the same result for every consignment
This is where a common explanation of PPSR law becomes misleading.
It is often said that if a consignor fails to register, its goods automatically become property available to the insolvent consignee’s creditors. That statement is too broad.
Section 267 of the PPSA contains vesting rules for certain unperfected security interests when specified insolvency events occur. However, section 268 creates an important exception: the vesting rule does not apply to a security interest arising from a commercial consignment if that interest does not secure payment or performance of an obligation.
A corresponding distinction exists under the corporate insolvency regime.
Section 588FL of the Corporations Act 2001 (Cth) can cause certain PPSA security interests registered outside the statutory timing requirements to vest in an insolvent company. But section 588FN excludes a commercial consignment from that vesting rule where the interest does not secure payment or performance of an obligation.
The result is important.
For a genuine commercial consignment of this kind, failure to register does not necessarily mean that ownership simply disappears on insolvency. The more immediate PPSA danger may instead be priority: an unperfected consignor can face a competing perfected secured creditor with superior rights in the same goods.
The precise contractual structure therefore matters. A consignment that also operates in substance to secure another payment or performance obligation may require a different analysis, and the statutory exceptions should not be assumed to apply merely because the agreement uses the word “consignment”.
The PPSA enforcement regime has another unusual limitation
There is a further reason not to treat commercial consignment as an ordinary secured loan.
Section 109(1)(d) provides that Chapter 4 of the PPSA — which contains the general statutory enforcement regime for security interests — does not apply to a commercial consignment that does not secure payment or performance of an obligation.
For a foreign consignor, this makes the underlying contract particularly important.
The agreement should clearly address practical matters such as:
- when the consignee obtains possession and when title can pass;
- who may sell the goods and on what terms;
- when payment becomes due after a sale;
- whether unsold stock must be returned on termination or default;
- how the stock must be identified in the consignee’s records;
- whether stock must be physically segregated where commercially practical;
- what inventory and sales reports must be provided;
- who bears insurance, storage and damage risk; and
- what rights arise when insolvency, administration or another default event occurs.
A PPSR registration protects a priority position. It does not replace a properly drafted consignment agreement.
Evidence can become as important as the registration
A priority dispute normally begins after the commercial relationship has already deteriorated. At that point, the supplier may need to establish exactly which goods were delivered, which remain unsold and which transactions fall within the registered collateral.
Foreign suppliers should therefore retain shipment and inventory evidence capable of connecting physical stock to the consignment arrangement.
Useful records may include consignment schedules, serial numbers, model numbers, warehouse records, delivery confirmations, consignee stock reports, photographs where appropriate, sales reports and invoices identifying goods sold to end customers.
This becomes especially important where the consignee holds a mixture of:
- its own stock;
- goods purchased on ordinary credit;
- retention-of-title goods;
- consigned goods from several suppliers; and
- inventory subject to a financier’s general security interest.
A contractual statement that “all goods remain ours” may have limited practical value if the supplier cannot identify what goods remain at the consignee’s premises when administrators or receivers arrive.
What an overseas supplier should check before the first shipment
For a substantial Australian consignment arrangement, the legal work is best done before inventory is delivered.
The supplier should first determine whether the transaction is a true commercial consignment for PPSA purposes rather than relying on the commercial label used by the parties.
It should then search the PPSR against the Australian counterparty to identify existing registrations that may affect inventory and understand which financiers could compete for priority.
If PMSI protection is available and the stock is inventory, the registration timetable should be coordinated with shipment and possession so that the supplier does not discover after delivery that the section 62 priority window has already been lost.
The consignment agreement and the registration should also be reviewed together. A contract describing one category of goods while the PPSR registration covers another creates unnecessary uncertainty precisely when the supplier most needs the registration to work.
Finally, the supplier should establish a practical stock-reporting process. Legal rights are considerably easier to enforce when the consignor can show what was delivered, what was sold, what remains and where the remaining goods are located.
When the Australian consignee stops paying
Once payment problems appear, the supplier should avoid treating the matter as an ordinary unpaid-invoice case.
The first review should separate three categories: unsold consigned goods still held by the consignee, goods that have already been disposed of, and ordinary monetary debt owed by the consignee.
Those categories can lead to different legal questions.
Where unsold stock remains, the immediate issues are classification of the consignment, the contractual return rights, PPSR perfection and competing security interests.
Where the goods have already been sold, the analysis moves into the separate PPSA rules dealing with proceeds and transferred collateral. That should not be confused with the question of recovering identifiable consigned stock still in the consignee’s possession.
If the Australian company is entering administration, restructuring or liquidation, the supplier should promptly provide the insolvency practitioner with the consignment agreement, PPSR registration details, delivery records and an itemised list of stock claimed.
Delay can make a factual dispute over ownership and identification considerably harder even where the supplier has a strong legal position.
For the broader options available when an Australian counterparty defaults — including pre-litigation recovery, court proceedings, enforcement and insolvency measures — see our guide to debt collection in Australia.
For an international consignor, the key issue is therefore not simply whether the contract says that the supplier owns the goods. The transaction must first be classified correctly, the priority position should be protected before inventory reaches the consignee, and the supplier must retain evidence capable of identifying the stock if the commercial relationship fails.
Australian PPSA law can preserve ownership in situations where an oversimplified insolvency analysis might suggest otherwise. But ownership and priority are different questions — and it is usually the priority question that must be solved before the goods are shipped.
