Retention of title: why the clause in your terms isn't enough by itself

Picture a timber merchant who supplies framing to a builder on 30-day terms. The builder falls behind, then appoints a liquidator. The merchant’s invoices say, in small print at the bottom, “goods remain the property of the supplier until paid for in full”. There is $48,000 of framing stacked on three half-built sites. The merchant assumes it can drive out and collect it.

Whether it can depends on three questions that have little to do with the wording of that sentence: did the builder agree to the term, did the merchant register on the PPSR, and was the registration made in time? This guide explains how retention of title works now, and what suppliers can do to make it count.

What does retention of title actually do?

At common law, ownership of goods normally passes to the buyer on delivery, or when the parties intend it to. A retention of title (ROT) clause moves that moment: the supplier stays the owner until the price has been paid. If the customer fails, the supplier says, “those goods are mine, not part of your insolvent estate”.

The idea dates back to a famous English case involving a company called Romalpa, which is why you’ll sometimes hear these called Romalpa clauses. Before 2012, Australian suppliers relied on the contract alone, and arguments focused on interpretation.

The Personal Property Securities Act changed the game. It looks at substance over form. A clause that lets a supplier keep ownership as security for payment is, in substance, a security interest, and it follows the rules of the PPSA like any other. See our glossary entries on retention of title and the PPSR for short definitions.

Why isn’t the clause enough on its own?

Because the PPSA separates having a security interest from being protected by it. Two steps matter:

1. Attachment. The interest has to arise: there must be an agreement, the customer must have rights in the goods, and you must have given value. In practice, that means the customer has accepted terms that contain the retention clause.
2. Perfection. In most cases, perfection means registering on the PPSR (or, less commonly, holding possession of the goods). An interest that has attached but is not perfected is exposed.

When a company goes into liquidation, an unperfected security interest generally vests in the company. For the merchant above, an unregistered ROT clause could mean the framing is treated as the builder’s property, available to every creditor. The merchant becomes unsecured for the full $48,000, with the same chance of a few cents in the dollar as everyone else.

An unperfected interest is also weak against other secured creditors. Imagine the builder’s bank holds a general security agreement over all assets, registered years ago. Without a timely registration, the bank’s interest in the framing may rank first. With one, and a proper purchase money security interest, the supplier can leapfrog the bank.

How do you set up a clause that holds up?

A sound system has four parts, and the order matters.

1. A signed credit application with terms attached

Get the customer’s agreement before the first delivery. A credit application that the customer signs, with your standard terms either printed on it or incorporated by reference, is the strongest foundation. It should:

• State clearly that ownership of goods stays with you until all amounts owing are paid in full.
• Say that you hold a security interest in the goods, and in their proceeds, to secure payment.
• Allow you to register that interest on the PPSR and require the customer to cooperate.
• Allow you to enter the premises and retake possession if the customer defaults. This permission matters; without it, taking back goods could be trespass.
• Require the customer to store goods separately and identifiably, keep them insured and not remove labelling.

Terms that only appear on invoices after delivery are weaker, because the customer never agreed to them before the contract formed. For larger accounts, have a solicitor draft your terms once. The cost is small compared with a single lost account.

2. Register on the PPSR before you deliver

Register against the correct legal entity of your customer: the ACN for a company, the ABN or the individual’s details for a sole trader, and the trustee for a trust. Check the name on ASIC or ABN Lookup first. A wrong entity is the most common reason registrations fail.

The key timing rule for a purchase money security interest:

• Inventory (goods the customer buys to resell): register before the customer takes possession.
• Other goods (equipment, fittings, vehicles the customer will use): register within 15 business days after the customer takes possession.

The PPSR’s official guidance on PMSIs is explicit that the right selection of boxes matters. Ticking “PMSI” when it doesn’t apply can render the registration ineffective, and it can’t be changed after the event. Where in doubt, take advice.

3. Describe the goods sensibly

For a customer who will order repeatedly, you generally register once, describing the collateral by class (for example, “timber products and building materials supplied by [your business] to the grantor”). That covers future deliveries without needing a new registration each time.

For a single, high-value item with a serial number, such as a machine or a vehicle, include the serial number as required for that class of goods.

4. Keep a paper trail

Hold copies of the signed application, the verification statement from the PPSR, delivery dockets, and invoices that identify the goods. If you ever need to retake stock, the record shows which items were yours.

If you’re unsure whether to register for every account, a simple policy works: register on every customer over a set limit, or any account on credit terms of 30 days or more.

What can’t retention of title protect?

Realism helps here. ROT is strongest when the goods are physically present, identifiable and unchanged. It weakens quickly when any of those fail.

• Goods that have been sold on. A buyer in the ordinary course of business generally takes free of your interest. You may have a claim over the proceeds, but you’ll need to trace the money, and a customer in trouble has often spent it.
• Goods incorporated into something else. Framing nailed into a house, paint used on a wall, or fertiliser spread on a paddock is usually gone. Under the PPSA, some commingled goods can still be traced, but it’s difficult.
• Goods that can’t be identified. Bulk commodities mixed into a customer’s stockpile, or stock without batch numbers, make it hard to say which items you supplied.
• Services and labour. ROT only attaches to goods. If you supply a service, a clause won’t help.
• Customers with a bigger secured creditor and no PMSI from you. Without a timely registration, you rank behind them.

Retention of title is best seen as one tool among several. A well-run supplier also uses credit limits, sensible terms, a prompt follow-up routine and sometimes security over other assets. Our guide on how to collect debts from customers covers the chasing side, and managing slow-paying customers looks at spotting trouble sooner.

What should you do when a customer fails?

Act quickly, and in this order.

1. Check your registration. Search the PPSR for your interest, and confirm the details on the verification statement are right.
2. Find your goods. Compare delivery dockets with what’s on site or in the warehouse.
3. Contact the insolvency practitioner. If a liquidator, administrator or receiver has been appointed, their details are on the ASIC notices. Send a written claim, with copies of your terms, registration and dockets.
4. Don’t collect goods yourself without authority. Entering premises uninvited can create new problems. Follow the contract terms and the practitioner’s process.
5. Lodge a proof of debt for any amount not covered by retaken goods.
6. Get advice early. If the claim is large, an insolvency lawyer pays for itself.

Administrators can also stop secured parties enforcing for a period, which is why speed in lodging a claim matters.

How does supplying on credit affect your own cash flow?

Selling on terms is a loan to your customer, and you’re funding it from your own cash. A supplier carrying $150,000 of unpaid invoices at any time needs working capital somewhere. If customer credit is stretching you thin, a short conversation with us can show what’s available. Some owners use invoice finance so they don’t wait the full 30 to 60 days. Others tighten terms, take deposits on big orders or ask customers for a progress payment.

If you’re on the receiving end of a supplier insisting on cash, the mirror-image problem is covered in supplier demanding payment now, and our guide on negotiating better supplier terms helps buyers and sellers understand each other’s position.

A short checklist before your next credit account

• Signed credit application with ROT and security-interest wording, collected before delivery
• Customer’s legal entity checked against ASIC and ABN Lookup
• PMSI registered on the PPSR, with the right inventory or non-inventory box ticked
• Verification statement saved and checked against the terms
• Credit limit set and reviewed, with someone responsible for the aged debtors list
• Delivery dockets that describe goods precisely
• Calendar reminder before the registration end date

When unpaid stock is squeezing your own cash

Even the best-drafted clause doesn’t pay your wages this fortnight. If customers owing you money are stretching your cash flow, or you’ve lost goods to a failed customer and need to keep trading, it’s worth looking at funding that doesn’t hinge on a single account paying up.

Our enquiry is a one-minute form. Sending it won’t trigger a credit check, and your details aren’t distributed to a stack of lenders. A person on our team reads it, then rings you. Put in your actual turnover and the amount of debtors you’re carrying and the match will be better first time.

Find funding that fits your cash flow →