The PPSA and Retention of Title

There are a whole heap of introductory articles written about the Personal Property Securities Act (PPSA) and the Personal Property Securities Register it created. Most start off by telling you that it is “one of the most significant commercial law reforms in recent times” and that it has “changed the concept of ownership as we know it”.

Hyperbole aside, the PPSA certainly does shake things up a bit, but if your concept of ownership is built around the old maxim of possession being nine tenths of the law then you may find that you're not quite as wrong now as you used to be.

Under a Retention of Title clause (sometimes referred to as a Romalpa clause by people who like to show off their knowledge of UK insolvency law cases from the seventies) a seller writes into their contractual terms that they will retain ownership of the goods being sold until the purchaser finishes paying for them. The purchaser may take possession of the goods and make use of them but legal ownership will not pass to the purchaser until they have fulfilled their payment obligations to the seller.

Should the purchaser go into receivership or liquidation while the Retention of Title (RoT) is still in play then, in a pre-PPSA world, the receiver should respect the seller's title to the unpaid goods and allow the seller to recover the unpaid-for portion of the goods before the receiver then goes on to dispose of the remaining assets of the purchaser as they see fit.

Now that the PPSA is in play, however, the RoT is no longer treated as a mechanism of ownership but as one of security. The logic being that retaining title was merely a means to protect the seller's position with regards getting paid and as such it should be dealt with as an instrument of security and compete with all the other security interests other creditors may have against the purchaser.

So far so good; but how does the RoT seller's security interest compete with the interests of other creditors?

The traditional approach would be to adopt a 'first in time' principle. But to do that would be to give all the priority to, say, the purchaser's bank that has probably had a general security interest in place attaching to all of the purchaser's assets since the purchaser first came into being. A 'first in time' approach would seriously disadvantage the seller in this instance and, indeed, if the seller had been aware of the bank's existing interest the seller may well have decided not to conduct business on credit terms with the purchaser in the first place.

In order to get around the problem of an early security holder stifling future trade and to try and ensure some parity between pre and post PPSA environments, a special category of security interest was invented – the Purchase Money Security Interest (PMSI – it rhymes with 'flimsy' if you feel like using the term in conversation).

A PMSI applies when a security interest is taken in collateral to the extent that it secures all or part of its purchase price; i.e. if you don't pay me for this widget I get to take the widget back; eg, goods sold under a Retention of Title clause.

While the 'first in time' approach applies to most security interests, those with a PMSI designation effectively leapfrog all others and certainly rank ahead of more general security interest holders such as the purchaser's bank. Thus a receiver now has to ensure that a PMSI holder's security interest is dealt with first before they go on to dispose of the remaining assets of the purchaser as they see fit.

All well and good. The particularly prolix PPSA has, at great expense, returned us to the position we were in before it was enacted. We can now give one last admiring shake of the head as we contemplate the intellectual powerhouse that is our Government and promptly forget about the whole thing and get back to simply doing business. Or not.

Unfortunately for those of us who are happiest when they don't actually have to do anything, the PPSA also brought in the idea of 'perfection'. Note: There are a whole load of little jokes and ironies that will go through your mind at this point; don't worry, it's inevitable when the term 'perfection' is used in the context of Government legislation - just take a moment and then we'll carry on.

Under PPSA it's not enough that a security interest exists, in order to be effective against other security interests it needs to be perfected.

The most common form of perfection as time goes by will be by registration. For this purpose the PPSA created the Personal Property Securities Register (PPSR). The PPSR exists as computer servers in air-cooled splendour somewhere in the bowels of Canberra although a call-centre operating out of Adelaide lends it a more human aspect. The PPSR serves as both a place for security holders to register their interests and a facility for interested parties to search to see what registrations exist either for a specific purchaser or for specific goods (such as motor vehicles and aircraft).

Registrations are encouraged to be made via the PPSR's own web site (www.ppsr.gov.au) and the registration process is claimed to be comparatively straightforward (presumably the comparison is with completing a combined tax return and insurance claim) although there are third-party providers who can make this process much easier. NCI (www.nci.com.au) probably provides the most user friendly facility primarily by focusing to a large extent on RoT security holders and simply not bothering at all with consumer securities.

So what happens if you don't register?

I mentioned earlier that PMSI security holders automatically jumped to the top of the heap when it came to the ranking of security interests. Bottom of that heap, however, are all those security interests that have not been perfected. An RoT clause may have been drafted by the legal profession's equivalent of Shakespeare but if the security interest isn't perfected it could end up ranking behind something scribbled out on the back of a beer mat.

So if you want an RoT you put in place today to provide you with the same strength of security you would have had with it pre-PPSA then you must register it on the PPSR.

There is a safety net for security interests that were already in place by the time the PPSR came into operation (30^th January 2012). These are termed 'transitional' security interests and are deemed to be perfected by legislation until 30^th January 2014.

At the time of writing there is an assertion by the receivers of Wow Audio Visual that transitional security interests perfected by legislation don't apply to deliveries made after 30^th January 2012 but this is clearly a nonsense and will undoubtedly be challenged in the courts if the receivers fail to take a more sensible line.

Although I'm reluctant to make a rod for my own back, coming up we'll have discussions on the application of the PPSA to RoT All Monies clauses, proceeds and commingling as well as PPS Leases, consignment stock and lenders PMSIs among other things.

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