PPSA & Real Estate

There seems to have been a flurry of activity over the last month with a number of our clients being pestered to discharge PPSR registrations on the basis that they are impeding the sale of real estate property.

While this is an obvious nonsense it is, unfortunately, being propagated by a number of legal professionals and is becoming such a nuisance that I was asked to draft up a letter on behalf of a client which they could then send to their customers.  

Our client sells building materials which go to form an integral part of the structure of a building and their immediate customers are usually builders who will then be selling the resulting building.

The draft went as follows:

The Personal Property Securities Act 2009 (PPSA) was passed by Government in an attempt to simplify and clarify how security interests are treated across the whole of Australia. 

One of its key elements has been the creation of a national register (the PPSR) where the holders of security interests are encouraged to register the existence of those interests.  As a matter of company policy, we have decided that we will register all our security interests on the PPSR.

Our registration is strictly in relation to a security interest we maintain over the goods we supply in the form of a Retention of Title clause enshrined in our standard Terms & Conditions of Sale.

Our registration on the PPSR is purely a means to safeguard our position against any competing claims from other creditors and should not, as a matter of practicality, change our normal trading relationship with you nor indicate any concerns regarding your value to us as a trading partner.

However, the PPSA is still relatively new to everyone and misunderstandings abound – particularly with organisations which you might think would know better such as banks and solicitors. 

One such misunderstanding may arise when you are attempting to sell real estate property. 

During the sale process, someone (usually a conveyancer) will discover that [Client Name] holds a PPSA security interest against your business and will decide that the real estate sale cannot be concluded until [Client Name] has released and/or discharged its security interest.

If this occurs you should point out to whoever draws this to your attention that the PPSA does not apply to the sale of real estate or to any fixtures attached to such property.

For further confirmation you may direct interested parties to the PPSR’s web site at www.ppsr.gov.au where it clearly states that:

Under the Personal Property Securities Act 2009 (Cth), personal property is defined as any form of property other than land, buildings or fixtures that form part of it or a right (such as water rights), entitlement or authority.

You may also make reference to Section 8(1)(j) of the PPSA which specifically identifies fixtures as an item of property to which the Act does not apply and Section 10 of the same Act which defines the Act’s use of the term fixtures.

Our registered security interest applies to rights we hold to recover unpaid goods that we have supplied up until the point those goods are incorporated into a building and become fixtures. 

After that point our security interest transfers to a portion of any proceeds that may arise from the sale of that property but no longer applies to the property itself.

Please feel free to send a copy of this letter to anyone requiring the release of our PPSA registered security interests as a pre-condition to allowing the sale of real estate to go ahead.  When presented with a request based upon a misunderstanding our inclination is to dispel the misunderstanding rather than perpetuate it by humouring the request.

I have a particular fondness for the last line although I don't doubt that this would be one of the more likely elements to be edited out by anyone choosing to base their own letter on this draft.

Feel free to use the draft as you see fit (although if you want to publish a version on your own website I'd appreciate the credit).

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PPSR Facts n Figures

The PPSR’s Registrar, David Bergman provided the following statistics for the PPSR’s first 9 months of operation:

Security Interests currently registered on the PPSR = 7.5 million

Migrated or pre-loaded security interests = 6.3 million

Registrations lodged since 30^th January 2012 = 1.2 million

As far as Collateral Class is concerned, the vast majority of registrations are in respect of Motor Vehicles accounting for a massive 4.1 million registrations.  Next up are AllPAP (All Present and After Acquired Property) registrations at 2.3 million with ROT and Leasing registrations combining in third place at 864,000.

2.3 million searches have been undertaken so far on the PPSR – just over 60% searching for specific serial numbered goods, a little under 10% searching by registration number and the remaining third searching by grantor name.

Interestingly, in the July to September quarter, there were nearly twice as many amendments and discharges undertaken on the PPSR than new registrations!

New Registrations            579,424

Amendments                    730,885

Discharges                       358,489

Statistics for the July to September 2012 quarter can be found at http://www.ppsr.gov.au/NewsRoom/News/Pages/StatisticsJulytoSeptember2012.aspx

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Making Amendments on the PPSR

It is obviously very important to get the details of your PPSR registration correct at the time of registration but every now and then an error will be made or information omitted that might be more helpful to others if it were to be included.  And thus, the prudent security holder will need to lodge an amendment.

The PPSR accepts that amendments might be necessary and breaks amendments down into three categories:  minor, major and benign.

Minor amendments will involve such things as:

• adding or changing a collateral description text (for most collateral classes this is an optional free-text field of up to 500 characters);
• adding or changing a Giving of Notice Identifier (effectively, a customer reference field);
• or re-describing a proceeds description (this is automatically defaulted by the PPSR to ‘all present & after acquired property’).

Minor amendments will be charged at $3.40 by the PPSR.

Major amendments involve, as the label suggests, more substantive changes to the registration.  The most obvious examples of these will be the extension of a registration’s expiry period and the addition of a grantor.

Major amendments are charged as if they were a fresh registration, that is, equivalent to the length of the expiry period ie, $6.80 for a 7 year registration period, $34.00 for a period of between 7 and 25 years and $119.00 for an indefinite period.

Benign amendments (my term, not the PPSR’s) are what would otherwise be major amendments that have the effect of lessening or reducing the nature of the registration.  Examples will include:

• Reducing the length of a registration period;
• Removing a grantor where the registration identifies more than one grantor; and
• Discharging a registration (this is effectively the same as the first ‘benign’ example as the mechanism for discharge is to bring the expiry date forwards to the current date).

Benign amendments although major in nature do not attract a charge from the PPSR.

Other potentially amendable registration elements such as:

• toggling the Purchase Money Security Interest (PMSI) flag;
• changing the collateral class; or
• re-designating collateral as inventory

are not permissible amendments. 

Quite why this should be the case is not clear. Why should it be allowable to change the identity of who is granting the security interest but it not be possible to change the collateral of that security interest?

But by far the biggest inconsistency with the PPSR’s approach to amendments rests with its pricing structure.

I’ve got no problem with the PPSR attempting to recover a contribution towards its development and maintenance costs by charging for amendments and, once we get past the ‘minor’ amendments, the idea of aligning charging with the price of an equivalent registration has some merit; however, why is this approach not applied consistently where Transitional registrations are involved?

If I lodge a transitional security interest with no stated end date the PPSR will not charge me.  If I then realise that I failed to include an additional grantor on my registration and try to correct that error via an amendment the PPSR will charge me $119.00 for the privilege!

*While the work around will be to discharge the incorrect registration (no PPSR fee) and register a fresh Transitional security interest (again no PPSR fee) it seems a nonsense that two separate free PPSR transactions should need to be used as a more reasonable alternative to a single transaction amendment charged at $119.00.

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Re * above, while my workaround was appropriate at the time of writing, the PPSR's decision to start charging for transitional registrations from 1st July 2015 onwards pretty much invalidates this as a practical solution.

Note: Edited to reflect new PPSR charges introduced on 1st July 2013.
         Further edited to (belatedly) keep up with current PPSR pricing (12/2016) 

PPSA & The 'All Monies' Clause

Earlier today I was asked the following question by one of my colleagues:

If a client [a supplier] has a customer that has goods on their floor that HAVE been paid for, but owes them for goods that have not been paid for, but since used / on-sold  can they go in and get the paid for goods?

Our client’s rights in this begin with the terms of their Retention of Title clause [ROT].  

While a basic ROT would only allow for the client to recover unpaid for goods, an ‘All Monies’ extension to the ROT would allow the client’s recovery rights to also attach to goods that had been paid for provided that other goods they had supplied had not.

However, while the ROT will describe what security interest is present, it is the PPSA that will determine the relative priority of that security interest over other competing interests.

Under PPSA an interest in collateral that secures its own purchase price is designated as a Purchase Money Security Interest [PMSI] and a PMSI will have, effectively, the highest priority around.  Thus recovering unpaid for property should be relatively straightforward and uncontentious (we obviously know better but this is the theory at least!).

However, under an All Monies clause we are not referring to goods that are securing their own purchase price, we are instead referring to goods that have already been paid for but secure the purchase price of other goods that have not yet been paid for.

The paid for collateral that enters the scenario by virtue of the All Monies clause cannot, therefore, be designated as a PMSI security interest.

The upshot being that the unpaid for collateral can be treated as a PMSI and recovered without the need to worry about higher priority competing claims while the paid for collateral is treated as a general non-PMSI security interest and may only be recovered once higher priority competing claims have been considered.  

In this instance, a higher priority competing claim may be an earlier all present and after acquired property security interest put in place many years ago by the customer’s bankers.

If this is a question regarding an actual situation a client is finding themselves in then I would suggest they have a go at recovering all they can as soon as they can.  This is still very new territory to many and our client may get lucky!

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Reading a PPSR Registration

The manner in which the PPSR has been designed does not require suppliers to provide any description of the collateral representing their security interest beyond identifying the Collateral Class (eg, 'Other Goods').  

There is an opportunity for registrants to provide a description of their goods but this is not a mandatory field and, as with most Government forms, if you are given an opportunity not to have to enter something then it is not unnatural to give a quick murmured thanks to your deity of choice and move on, leaving the optional field pristine and untouched.

However, there are clearly a large number of organisations out there (most of which should definitely know better) who seem to view the absence of a collateral description as some sort of indication that the registration could therefore apply to anything.  As a result we have clients who supply paper products, for example, being asked to sign Deeds of Release or amend their registrations for anything from cars and trucks to hose-pipes and buildings.

The big problem, however, is not that the supplier has failed to enter a collateral description but that the third party (usually a bank or financier) has failed to understand the information that is contained in the basis registration.

At the moment one of our client's ‘typical’ registrations without a collateral description tells the following story (I'll simply refer to our client as ABC):

Commercial Property

ABC have a security interest over certain property owned by the Grantor.  This does not include any interest over property owned by the Grantor in any capacity they may hold as a private consumer.

Other Goods

That security interest is not over land, buildings or serial numbered collateral such as motor vehicles, watercraft, aircraft etc.

ABC's security interest is over tangible goods and is not a general security interest over all the Grantor’s property.

PMSI

The security interest only applies in relation to goods that ABC have supplied to the Grantor.

Inventory

The security interest applies to goods ABC have supplied that form part of the inventory of the Grantor and therefore does not apply to any of their other assets and equipment.

Proceeds

ABC's security interest extends to any return the Grantor may have received from on-selling or otherwise disposing of the goods ABC supplied.

ABC's security interests only apply while there is an outstanding account between the Grantor and ABC.

The above is all evident from a quick glance at one of ABC's Verification Statements or from the results of a search that any third party might conduct on the PPSR.

While adding a collateral description of, say, “Materials and raw materials” will certainly do no harm, I am sure you will agree that it adds little if anything to the basic story being told by ABC's registration without that description.

I appreciate that it must be getting more than a little frustrating to be pestered by third parties who, for whatever reason, have failed to take the trouble to understand a supplier's registrations to that end the following ‘standard’ response we drafted recently for another of our clients in a similar predicament may be of interest:

Our registration relates to a security interest held, by virtue of a Retention of Title clause, over goods supplied by us as well as over the proceeds of any sale of those goods. 

Reference in our registration to “All present and after acquired property” relates solely to any proceeds that might arise from the use, disposal or sale of collateral supplied by us and does not represent a security interest over any other assets of the Grantor. 

In light of this it would appear neither necessary nor appropriate for us to complete the Deed of Release you have provided.

Registering Transitional Security Interests

The introduction of the PPSR required that personal property security interests be ‘perfected’ in order to achieve full effectiveness under the PPSA.  

While this perfection is commonly interpreted to mean registration on the PPSR, the Government has made it clear that security interests arising from security terms in credit agreements already in place at the time of the introduction of the PPSR are deemed to have achieved that perfection via legislation. It is this provision that is referred to as the PPSR’s Transitional arrangements.

In the PPSR’s Fact Sheet on Retention of Title interests the Registrar describes the effect of the Transitional arrangements as follows:

In order to give businesses an opportunity to adjust to PPS reform and the need for registration on the PPS Register in particular, a 24 month transitional period exists from registration commencement time (RCT).

The effect of this transitional period is that ROT suppliers or lessors who have entered into agreements that create security interests in the property supplied or leased before RCT will have two years to register those interests.

It is important to note that it is the agreements that must pre-date RCT, the security interests (for example, by way of supply the goods) may arise after this time. Agreements entered into after RCT are not subject to the transitional arrangements.

It is important to note that the PPS Act does not require a registration to be made in respect of all supplies or leases to the same buyer or lessee. A single registration may cover subsequent security interests in property that is supplied under later agreements

(The full document can be obtained here: http://www.ppsr.gov.au/AsktheRegistrar/FactSheets/Documents/Retention-of-title-and-leasing.pdf)

In effect, registration on the PPSR is not necessary for perfection of the security interests held over a supplier's pre-PPSR client base until 29^th January 2014.

Where Transitional security interests are registered on the PPSR the specific date of that registration is held to be irrelevant in determining any matters of priority.  

When any issues of competing security interests arise in respect of Transitional security interests the relevant date is taken to be the date of the agreement which contained the terms that gave rise to the security interest in question – eg, the date of the signed credit agreement with between supplier and customer.

Where credit agreements are signed after the commencement of the PPSR; however, the situation is completely different.  

When a supplier needs to assert their security interest in respect of a new account (established post-PPSR commencement) their priority against competing security interests will be determined by reference to the date of their registration and the date the credit agreement was formed will be held to be irrelevant.

The PPSR does not charge for registering Transitional security interests and while there is no specific hurry to do so it would be unwise to leave it to the last minute rush as the two year grace period draws to a close.

There have been a few challenges to the interpretation of the PPSA's Transitional rules which I have discussed here but nothing conclusive has been determined as yet.

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PPSA Pitfalls

I've been asked to compile some speaking notes for a colleague who wants to talk about some of the PPSA pitfalls we have become aware of since the PPSR opened for business at the end of January this year.  

While this is far from an exhaustive list (this is for a speaking engagement after all and it doesn't take long for eyes to glaze over once the subject of PPSR is raised) I nevertheless thought it might be helpful to reproduce it here.

• Don’t rely on an independent body such as a judge, court or the PPSR itself to determine the validity of your security interest under the PPSA – more often than not such issues will be decided by a receiver acting on behalf of a bank who will have a vested interest in defeating any competing rights you hold.
  
• Where the PPSA requires goods to be registered by serial number you must not make any mistakes in recording that serial number on the PPSR as any error is likely to invalidate the registration without it having to be demonstrated that anyone was misled by that error.
  
• Banks are frequently (wilfully?) misunderstanding PPSR registrations and asking suppliers to discharge registrations to enable the bank to put their own registration in place – they are then ‘generously allowing’ the supplier to re-register their own interest!  Do not fall for this!
  
• If your debtor/grantor is a company with an ACN and you do not specifically register against that ACN then your registration will almost certainly be deemed to be invalid.
  
• Timeliness is very important. Do not allow your new credit agreements to pile up with the intention of registering  them all at the end of the month.
• Where your goods are destined to form part of your buyer’s inventory (WIP, end product etc.) you need to register before you make delivery.
• Where you are selling equipment that will not be on-sold you need to register not later than 15 days from delivery.
  
• Do not confuse ARBNs with ABNs – an ARBN (Australian Registered Body Number) is a 9 digit number issued by ASIC, most commonly to overseas companies whereas an ABN is an 11 digit number issued by the Australian Business Register.  We have seen a lot of invalid registrations arise from this confusion.
  
• While the PPSA does not require you to obtain prior permission from your buyer to register your security interest against them it does require you to notify them once you have lodged your registration. (With the right wording in your agreed Terms & Conditions, however, you can have your buyers waive their rights to receive such notification).
  
• PPSR registration is not enough to justify your claim against an administrator; you will still need to be able to provide the documents that demonstrate you have the valid security interest you are claiming with your registration.
  
• Most know that Retention of Title clauses justify PPSR registration but don’t overlook the need to also register consignment stock and long-term leasing arrangements.
  
• Make sure that your staff who are actually lodging your registrations understand what they are doing – we see many instances where they seem confused by terms such as ‘inventory’ and ‘Retention of Title’ let alone ‘Purchase Money Security Interest’.
  
• It is better to have a PPSR registration you don’t need than to need a registration you don’t have.
  
• Do I need to register all my security interests – No, only the ones you want to be effective.

Section 64 of the PPSA

OUR CLIENT has a properly registered security interest lodged on the PPSR in respect of a Retention of Title clause included in their terms & conditions with THEIR BUYER.

Because OUR CLIENT’S security interest is in the form of a Retention of Title clause it entitles OUR CLIENT to have designated their security interest as a Purchase Money Security Interest (PMSI) thus giving OUR CLIENT a higher level of priority for their security than might otherwise be the case.

OUR CLIENT’S security interest also extends to any proceeds that might arise from THEIR BUYER on-selling or otherwise using/disposing of the goods subject to the retention of title.

However, as far as those proceeds are concerned (just the proceeds, not the actual goods OUR CLIENT has supplied) THE BUYER’S BANKERS are advising OUR CLIENT that they have a competing claim to the proceeds by virtue of a debtor financing facility they have put in place with THEIR BUYER.  THE BUYER’S BANKERS are suggesting that, in the event of THEIR BUYER entering into receivership or liquidation, their claim on the proceeds will rank higher than OUR CLIENT’S claim.  While this position may be subject to challenge, Section 64 of the PPSA certainly gives them grounds for this view.  In return for being pushed down the priority pecking order for proceeds, OUR CLIENT will automatically have their PMSI rights expanded to include a share in the money being advanced by THE BUYER’S BANKERS in so much as it relates to the sale of product originating from OUR CLIENT.

While I’ve yet to see any examples of this being challenged/upheld in practice, OUR CLIENT should proceed on the basis that, while they have the highest priority security interest over the goods they are specifically supplying, they probably now only have a second level priority over any proceeds that may arise from the subsequent sale of those goods by THEIR BUYER.

No action is required on OUR CLIENT’S part. 

On the one hand, the presence of THE BUYER’S BANKERS’ debtor financing may give OUR CLIENT some additional comfort that finance is being made available to THEIR BUYER to make payments to its suppliers but on the other, if THEIR BUYER does fail, the extent to which their security interest can be stretched to include income from goods OUR CLIENT supplied but which have subsequently been sold by THEIR BUYER has been weakened.

We have seen banks and other financiers try to ‘encourage’ suppliers who have registered PMSI interests to discharge their registrations or otherwise grant releases where the bank is looking to securitise its book debt financing facilities but issuing such notices under Section 64 of the PPSA is the correct way for banks to go about this and better achieve their ends.

As per usual, I have reproduced below the actual text from Section 64 of the Act:

64  Non‑purchase money security interests in accounts

Non‑purchase money security interest in account as original collateral has priority over purchase money security interest in account as proceeds of inventory

             (1)  Despite subsection 62(2), a non‑purchase money security interest (the priority interest) granted for new value in an account as original collateral and perfected by registration has priority over a perfected purchase money security interest that is granted by the same grantor in the account as proceeds of inventory, if:

                     (a)  the registration time in respect of the priority interest occurs before the earlier of the following times:

                              (i)  the time at which the purchase money security interest is perfected;

                             (ii)  the registration time in respect of the purchase money security interest; or

                     (b)  both of the following conditions are met:

                              (i)  the secured party holding the priority interest gives a notice in accordance with subsection (2) to the secured party holding the purchase money security interest;

                             (ii)  the notice is given at least 15 business days before the earlier of the day on which the registration time for the account occurs and the day the priority interest attaches to the account.

Note 1:       This section is subject to sections 57 (perfection by control) and 71 (chattel paper).

Note 2:       The period mentioned in paragraph (b) may be extended by a court under section 293.

             (2)  A notice is given in accordance with this subsection if:

                     (a)  the notice is in the approved form; or

                     (b)  the notice:

                              (i)  contains a description of the inventory to which the notice relates; and

                             (ii)  sets out the effect of subsection (1).

Perfected purchase money security interest in both proceeds and new value

             (3)  If a person has a purchase money security interest in an account as proceeds of inventory that is subordinate to a non‑purchase money security interest under subsection (1):

                     (a)  the person is taken to have a purchase money security interest in both the proceeds of the inventory and in the new value mentioned in subsection (1); and

                     (b)  the purchase money security interest in the new value is taken to be perfected by the registration that perfected the purchase money security interest in the proceeds; and

                     (c)  the new value is taken to be an account for the purposes of this Act (except for the purposes of this section or paragraph 12(3)(a) (account transferee’s interest taken to be security interest)).

             (4)  However, if the new value mentioned in paragraph (3)(c) would be an account for the purposes of this Act in the absence of that paragraph, the paragraph does not prevent the new value from being an account for the purposes of this section or paragraph 12(3)(a).

PPSA & Trusts

To say that the PPSA’s position regarding Trusts is confusing would be an understatement.

The most relevant guidance comes from Schedule 1 of the PPS Regulations (the text for which I’ve reproduced at the end of this article).

That guidance appears to be stating that where a company is a trustee of a Trust that has an ABN and “holds or has an interest in collateral” any new registration should be made by reference to the Trust’s ABN. 

Unfortunately, there is no guidance as to the situation where the company is a trustee of a Trust that has an ABN but that Trust does not hold or have an interest in the collateral forming the security interest.

If we also look at the manner in which the PPSR has designed its own Web Service for registering security interests (see screenshot below) we can see that where the Grantor is an organisation with an ACN the issue as to whether a Trust is involved simply does not arise.

Only when the Grantor is identified as an organisation without an ACN (ARBN or ARSN) does the user get presented with the option to identify the Grantor by its Trust ABN (see screenshot below).

Under basic contract law principles your contract of supply is made with a company with an ACN and your Retention of Title clause enables you, in the event of that company’s non-payment, to recover from that company goods you have supplied.  Your security interest should therefore, in my opinion, be registered against your contractual party, i.e., by the ACN of the company forming your contractual party.

However, there is no doubt that the waters are substantially muddied by the PPSA’s ill-conceived addition of Trusts as eligible Grantors and there may be some mileage in a belt and braces approach involving a second registration against the Trust ABN.

UPDATE

The PPSR has now changed its on-line form and made matters a bit clearer regarding when to lodge registrations against trusts.  Now, when identifying that your Grantor has an ACN the user is presented with the following:

Presumably, the user is being encouraged at this stage to change their mind and select 'No' to the ACN question and register using the Trust ABN.



Please note that this guidance should not be used in place of proper legal advice and, although my work gives me some experience and familiarity with the PPSA/PPSR, I am not a legal professional by any stretch of the imagination (I don't get paid nearly enough for that!).

Ps. As threatened above, the following is the ‘relevant’ text from the Personal Property Securities Regulations 2010:

1.5           Secured party or grantor is a trustee

     (1)       For items 1 and 2 of the table in subsection 153 (1) of the Act, this clause applies if the secured party or grantor is:

                (a)    a body corporate that is a trustee of a trust that:

                          (i)    has an ABN; and

                         (ii)    does not have an ARSN; or

               (b)    any other trustee of a trust.

     (2)       The details mentioned in each item of the table, from the source mentioned for the item, are prescribed for the trustee mentioned in the item.

     (3)       For subclause (2), the prescribed details are:

                (a)    for a trustee that is an individual — the details mentioned in the item of the table in clause 1.2 that:

                          (i)    applies to the trustee; and

                         (ii)    has the lowest item number; and

               (b)    in any other case — the details mentioned in the item of the table that:

                          (i)    applies to the trustee; and

                         (ii)    has the lowest item number.

     (4)       In this clause:

trustee details means:

                (a)    the ABN allocated to the enterprise carried on by the trust; or

               (b)    the ACN or ARBN allocated to the trustee; or

                (c)    the name of the trust or trustee.

     (5)       Item 1 of the table applies only to a registration by the Registrar under subsection 333 (2) of the Act.

Item	Trustee	Details	Source
1	Trustee of a trust for which details have been included on the transitional register, for a migrated security interest	Trustee details, as recorded on the transitional register	Transitional register
2	Trustee of a trust that holds or has an interest in collateral in the course of, or for, an enterprise that has been allocated an ABN	ABN	Australian Business Register
3	Trustee of any other trust	Trustee details mentioned in paragraph (3) (a)	Source mentioned in paragraph (3) (a)

(Note: the Paragraph (3)(a) referred to in the above table only concerns itself with situations where the Grantor is an individual)

PPSR & Unfair Preferences

It has always seemed a considerable unfairness that the more efficient your credit team is at collecting outstanding monies from delinquent debtors the more likely you are to fall foul of a liquidator’s unfair preference claims and be required to pay back whatever money you’d been able to recover.

Fortunately, it is likely that the introduction of the PPSA will bring with it some significant improvements in this regard.

But first, let’s recap the unfair preferences situation as it applied in the pre-PPSA environment.

After checking to ensure there is enough money in the company to enable them to recoup their fees, one of the first things a liquidator will do is draw up a list of all the suppliers the company paid money to within the last six months (the precise period may extend further but the six months example is sufficient for our purposes).  Once that list is compiled they will then remove all the suppliers who had registered charges against the company, ie, the secured creditors, and write to all the others asking for the money back.

The theory being that the company would already have been spiralling down into insolvency at the time the payments were made and that it would be unfair on all the other creditors of the company who had not been paid to deny them a share of any monies that the company may have been making available during that downward spiral.  [See Section 588F of the Corporations Act 2001]

One of the key criteria for the liquidator to make such a claim is that the creditor receiving the payment was not a secured creditor, with a large part of the definition of a secured creditor resting on whether the creditor’s security had been registered.  Generally, the security would be in the form of a fixed or fixed and floating charge registered with ASIC.

Our ‘typical’ supplier trading under a Retention of Title clause would find that whilst the intention of their reservation of ownership might have been to secure payment its form was not that of a security interest and, in any event, it wasn’t registered anywhere.  Thus while our supplier may be able to get any unpaid for goods returned to them they would be expected to return any monies paid to them during the 6 months prior to the liquidator being appointed.

The introduction of the PPSA, however, changes matters considerably. 

1. Retention of Title arrangements are now recognised as security interests; and
2. The Personal Property Securities Register provides a place for such a security interest to be registered.

Technically, the PPSA recognises Retention of Title arrangements as representing a security interest in substance (even though its form might not express it as such) and the Corporations Act has been amended [Section 51E] to define a ‘secured creditor’ as being one whose debt is the subject of a security interest under the PPSA.

Therefore, provided that your Retention of Title security interest is properly registered with the PPSR you should now find that your new status as a secured creditor will protect you against claims of receiving unfair preference payments.

Those of you who like their happy endings neat and tidy feel free to stop reading now, while any amongst you who tend to stay at a movie after the credits roll just in case there‘s one final twist can have another paragraph.

Under Section 588FA(2) of the Corporations Act, a debt will be secured only to the value of the security. 

This basically means that to defend against a claim of unfair preference a supplier will need to be able to show that a payment of, say, $20,000 received four months earlier was supported by at least $20,000 worth of ROT secured stock held at that time.  In the case of one or two isolated deliveries and payments this should not be too much of a problem but it could be a little more difficult in the case of more frequent deliveries and payments of irregular values, particularly if there has also been trading taking place that did not involve the use of ROT terms.

At the end of the day it will almost certainly be up to the supplier to demonstrate that sufficient security was in place to support the value of payments received.

Challenges to the PPSA’s Transitional Rules

In the run up to the introduction of the PPSR on 30^th January 2012 I spent quite a bit of time explaining to businesses the difference between Transitional and Non-Transitional security interests.

In general terms my explanation went along the following lines:

In order for a Retention of Title clause to be effective once the PPSR comes in, that ROT needs to be ‘perfected’.  If the credit agreement that contained the ROT clause was entered into before 30^th January then it is automatically deemed to have been ‘perfected’ by PPSA legislation for up to two years.  If the credit agreement was entered into after that date, however, it would need to be registered on the PPSR in order to be ‘perfected’.

(I appreciate that there are circumstances whereby ‘perfection’ can also be achieved through possession or control but these would not have been relevant to the businesses consulting with me.)

There would also be some discussion about the absence of fees for registering a Transitional Security Interest during the two year grace period but generally I felt that the whole ‘Transitional vs Non-Transitional’ issue was pretty well understood and accepted.  Until, that is, I started to have letters from liquidators/Receivers or their solicitors referred to me in respect of trading arrangements that originated well before the PPSR’s 30^th January commencement date.

One, for example, expresses the following view:

“The PPSA sets up a transitional regime whereby security interests arising prior to 30^th January 2012 are automatically perfected by force of the legislation for a temporary period.  Interests that arise on or after that 30^th January 2012 will only be perfected, however, if the interest has been registered prior to delivery of the goods.”

Another takes a slightly different tack but still focuses on the timing of individual security interests:

“It is our view that your Terms & Conditions of Sale, as attached to your company’s Credit Account Application, do not constitute a security agreement.  In our view a security agreement is only created when the contract of sale is formed including those conditions.

In the context of the relationship between a vendor and purchaser of goods, a contract of sale is formed in respect of particular goods only when the goods are ordered and the order is accepted. Where no evidence of acceptance of an order can be provided, the contract will be formed upon delivery.

Given a number of your security agreements via the contracts were formed after 30^th January, and were not registered, you do not have a security interest in any goods where the goods were supplied after 30^th January 2012.”

While both the above approaches use slightly different needles they are essentially in the same vein, ie, the timing of individual security interests determines the applicability of the PPSA’s transitional arrangements rather than the underlying agreement that gave rise to those interest.

In considering these issues the PPSR has a comparatively useful Fact Sheet on ROTs and Leasing that has some useful entries on the subject. I've put the link to the full document at the bottom of this article but the key passages for our current purposes are as follows:

In order to give businesses an opportunity to adjust to PPS reform and the need for registration on the PPS Register in particular, a 24 month transitional period exists from registration commencement time (RCT).

The effect of this transitional period is that ROT suppliers or lessors who have entered into agreements that create security interests in the property supplied or leased before RCT will have two years to register those interests.

It is important to note that it is the agreements that must predate RCT, the security interests (for example, by way of supply the goods) may arise after this time. Agreements entered into after RCT are not subject to the transitional arrangements.

It is important to note that the PPS Act does not require a registration to be made in respect of all supplies or leases to the same buyer or lessee. A single registration may cover subsequent security interests in property that is supplied under later agreements

The PPSR is clarifying three things here:

1.       There is a distinction between the agreement that gives rise to the security interest and the security interest itself;

2.       Provided the agreement creating the security interest predates 30^th January any subsequent security interests that arise from that agreement (whether before or after 30^th January) are subject to the transitional arrangements; and

3.       One registration is sufficient to cover multiple security interests where revolving supply contracts are involved.

Thus an agreement that creates a security interest can exist quite separately to the security interest associated with individual supplies and an agreement put in place prior to 30^th January 2012 (RCT) can apply to security interests that come into being after that date.  It is the date of the agreement (ie, the initial credit agreement between Supplier and Buyer) that determines whether the PPSR’s transitional arrangements apply and not the date individual security interests arise.

Before anyone points out that an information note, while possibly giving an indication as to intent, is no substitute for the rules themselves I’ll now bulk out this article with a few relevant extracts from the Personal Property Securities Act (2009) itself.

Section 307 of the Act defines a “transitional security agreement” as being

“a security agreement that is in force immediately before the registration commencement time, and that continues in force at and after that time.”

Section 308 of the Act defines a “transitional security interest” as being

“a security interest provided for by a transitional security agreement, if:

                     (a)  in the case of a security interest arising before the registration commencement time—this Act would have applied in relation to the security interest immediately before the registration commencement time, but for section 310; or

                     (b)  in the case of a security interest arising at or after the registration commencement time:

                              (i)  the transitional security agreement as in force immediately before the registration commencement time provides for the granting of the security interest; and

                             (ii)  this Act applies in relation to the security interest.”

Note:          Section 310 provides that this Act only starts to apply to security interests at the registration commencement time.

Section 321 of the Act provides that

“a transitional security interest in collateral is taken to have attached to the collateral immediately before the registration commencement time, whether the security interest arises before, at or after the registration commencement time.”

Section 322 of the Act provides that

“A transitional security interest in collateral is perfected from immediately before the registration commencement time, whether the security interest arises before, at or after the registration commencement time”.

Thus, to refer back to the assertions made by liquidator/receivers that the PPSR’s transitional arrangements do not apply to those deliveries made under long-standing trading relationships that extend beyond 30^th January 2012; I think it is clear that both the intent and letter of the Act are against them.

The suppliers will, of course, still need to establish that a valid Retention of Title clause was present in the original credit agreement with their buyer and that subsequent deliveries were made subject to the terms of that original agreement.

P

Link to the PPSR's Info Sheet on ROTs & Leasing:

http://www.ppsr.gov.au/AsktheRegistrar/FactSheets/Documents/Retention-of-title-and-leasing.pdf