Insolvency Insights: Can an unpaid seller stop goods in transit to obtain payment?16 June 2017 Topics: Insolvency and restructuring, Litigation and dispute resolution
All Australian states have sale of goods legislation that, in certain circumstances, allows an unpaid seller to retain possession of goods in transit where the buyer becomes insolvent. The statutory right, called stoppage in transitu, is a useful remedy to obtain payment.
A registered security interest on the PPSR is not required to exercise the statutory right. Administrators and liquidators may be trumped by a notice under the stoppage in transitu provisions.
However, the sale of goods legislation is not identical in each state.
Stoppage in transit
Under state legislation, an unpaid seller whose buyer has become insolvent may retain possession of goods that are in transit by giving a notice of stoppage before the goods are delivered to the buyer.
The exercise of the right of stoppage in transitu does not rescind the sale contract or restore property in the goods to the seller. It gives the seller the right to retain possession until payment. The seller, having obtained possession of the goods by stopping them in transit to the buyer, is then in a position to exercise an unpaid vendor’s lien for the unpaid price.
Goods are considered ‘in transit’ from the time they are delivered to the transport provider until the customer (or the customer’s agent) takes delivery. Once the goods are delivered, the seller no longer has a right to ‘reclaim’ possession under the sale of goods legislation.
Case of Toll Holdings
The case of Toll Holdings Ltd v Stewart  FCA 256, illustrates that giving a stoppage in transitu notice can improve the prospects of an unpaid seller getting paid even if it does not have a registered security interest on the PPSR.
In Toll Holdings it did not matter the notice was given after the buyer went into administration.
The case also demonstrates that a transport provider can be liable for conversion if it fails to comply with a notice under the stoppage in transitu provisions.
An overseas supplier supplied televisions to a buyer on 90 day credit terms. The goods were in transit with Toll Holdings on their way to the buyer when administrators were appointed to the buyer.
On the day after the appointment of the administrators, the supplier emailed Toll advising that goods being transported under 12 bills of lading were the property of the supplier and directed Toll to ‘hold’ the goods and help ‘recall’ those goods.
However, Toll did not follow the supplier’s instructions in relation to seven of the bills of lading.
Toll was concerned that it would incur significant storage costs if the goods remained at the container terminals. To avoid the additional storage costs, Toll lodged requests with Customs for the underbond movement of the containers and issued delivery orders to the buyer’s unpacking contractor to enable it to collect the containers under the seven bills of lading. The goods were then placed into Australian Customs’ bonded warehouses.
Both the supplier and the buyer asserted a right to possession to the stored goods.
The Federal Court was asked to decide:
- whether the supplier or the administrator was entitled to the goods in the bonded warehouses; and
- if the administrator was entitled to the goods, whether Toll were liable for damages in conversion to the supplier, because it released the goods despite receiving a notice under the stoppage in transitu provisions.
The Court decided as follows:
- The supplier’s email to Toll was an effective notice of stoppage in transitu.
- The administrator was entitled to possession of the goods held in bonded storage because the release of the goods to the buyer’s contractor meant that the goods were no longer in transit and, as a result, the supplier had lost its rights of stoppage in transitu.
- By failing to comply with the notice and by instead releasing the goods to the buyer’s contractor, Toll had acted inconsistently with the supplier’s right to possession of the goods and was liable to the supplier for conversion.
- The supplier was entitled to claim damages from Toll for the loss of the goods, with the value of that loss to be assessed. The supplier’s invoiced price for those goods was approximately $1.76 million.
This case is subject to an appeal.
Irrespective of the outcome of the appeal, where goods have not been delivered an unpaid seller should immediately issue a notice of stoppage complying with the relevant legislation.
If you receive a notice of stoppage you should urgently obtain legal advice to minimise the risks of becoming involved in legal proceedings and potentially being held liable for conversion.
Administrators and liquidators may be trumped by a notice under the stoppage in transitu provisions.
If you would like further information about these issues, please contact Graham Roberts on 07 3231 2404.