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.

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

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

PPSA - Parting with Possession & Bailments

It is funny to think that it wasn’t so very long ago that PPSA experts were trying their hardest to expand everyone’s thinking when it came to security interests – it wasn’t just charges, liens and guarantees, it was also Retentions of Title and Leases.  Well, perhaps the message has been getting home because we’re now seeing requests for advice regarding the registration of collateral whenever it may spend time out of its owner’s possession.

Scenario

LUMBERJACKS have legal title of recently felled trees, they then transfer possession (but not ownership) of those trees to PLANKERS who saw the trees into usable planks of wood and then transfer possession of the wood back to LUMBERJACKS.

LUMBERJACKS have a contractual obligation to make payment to PLANKERS for their value added services.

While it is likely, depending upon the Terms & Conditions agreed to by both parties, that PLANKERS may have a valid security interest in the wood to protect themselves against the possibility that LUMBERJACKS default on their obligation to make payment for PLANKERS’ value added services the question arises as to whether LUMBERJACKS have a PPSA security interest in the wood to protect themselves from the possibility of the wood, while in the possession of PLANKERS, being swept up by a receiver/liquidator appointed to PLANKERS.

In addressing this issue it is useful to set the context by reminding ourselves that the PPSA was established, in large part, to ensure an equitable treatment of security interests.  An applicable security interest under the PPSA is one that uses personal property to secure a payment obligation.

While, for example, a Retention of Title clause included in a supply agreement technically constitutes a statement of ownership, because its effect is to secure a payment obligation it is treated as a security interest and is brought under the auspices of the PPSA.  Similar inclusions have been made for leasing arrangements where a lessor has the right to recover goods in the possession of a lessee in the event of default of the lessee’s payment obligations.

However, in the scenario defined above there is no payment obligation on the part of PLANKERS to LUMBERJACKS and, whilst the goods may be in the possession of PLANKERS their recovery by LUMBERJACKS would be conducted purely on the grounds of ownership rather than as collateral under a security interest and therefore outside the bounds of the PPSA.

A more typical day to day example might be to think of having to lodge a PPSA registration every time you park your car in a car park against the possibility that the car park owners go bust while you are doing your shopping and the liquidators sweep up your car in the process.

Similarly, because the wood in question cannot be deemed a security interest under the terms of the PPSA, any receiver/liquidator appointed to PLANKERS would be unable to use the PPSA to harvest that collateral for the benefit of other creditors.  LUMBERJACKS should thus be able to rely on common law to repossess their own property just as they would have been able to do in a pre-PPSA environment.

Having stated the above, there is provision under the PPSA for a security interest to be created in the case of Bailments. 

A Bailment is formed by delivery of personal property without transfer of title by a bailor to a bailee for a particular purpose giving rise to a duty of care.  Upon completion of the particular purpose the bailee is obliged to return the bailed property (or deal with it as directed).

It could be argued that the arrangement between LUMBERJACKS and PLANKERS constitutes just such an arrangement.

Bailments are included in the PPSA under Section 13 of the act wherein it describes the meaning of a PPS Lease.  I’ve included the relevant section at the end of this article for reference.

In summary, PPS Leases are covered under the PPSA so long as the lease (or bailment) exceeds a defined length of time or, if for a shorter time, can be optionally extended to exceed that defined length of time.

In the case of serial numbered goods (motor vehicles, watercraft, aircraft etc) that defined length of time is 90 days and in all other cases (such as coil steel) is 12 months.

Where the lease or bailment is for a shorter period of time the PPSA does not apply.

Thus, it would appear that in the event of LUMBERJACKS common law rights being 

challenged in this regard there is the additional fall-back position of the PPSA’s applicability being ruled out by the length of the LUMBERJACKS/PLANKERS bailment (presuming PLANKERS take significantly less than 12 months to add their value).

Extract from the Personal Property Securities Act 2009, Chapter 1, Part 1.3, Division 3.

13 Meaning of PPS lease

             (1)  A PPS lease means a lease or bailment of goods:

                     (a)  for a term of more than one year; or

                     (b)  for an indefinite term (even if the lease or bailment is determinable by any party within a year of entering into the lease or bailment); or

                     (c)  for a term of up to one year that is automatically renewable, or that is renewable at the option of one of the parties, for one or more terms if the total of all the terms might exceed one year; or

                     (d)  for a term of up to one year, in a case in which the lessee or bailee, with the consent of the lessor or bailor, retains uninterrupted (or substantially uninterrupted) possession of the leased or bailed property for a period of more than one year after the day the lessee or bailee first acquired possession of the property (but not until the lessee’s or bailee’s possession extends for more than one year); or

                     (e)  for goods that may or must be described by serial number in accordance with the regulations, if the lease or bailment is:

                              (i)  for a term of 90 days or more; or

                             (ii)  for a term of less than 90 days, but is automatically renewable, or is renewable at the option of one of the parties, for one or more terms if the total of all the terms might be 90 days or more; or

                            (iii)  for a term of less than 90 days, in a case in which the lessee or bailee, with the consent of the lessor or bailor, retains uninterrupted (or substantially uninterrupted) possession of the leased or bailed property for a period of 90 days or more after the day the lessee or bailee first acquired possession of the property, (but not until the lessee’s or bailee’s possession extends for 90 days or more).

             (2)  However, a PPS lease does not include:

                     (a)  a lease by a lessor who is not regularly engaged in the business of leasing goods; or

                     (b)  a bailment by a bailor who is not regularly engaged in the business of bailing goods; or

                     (c)  a lease of consumer property as part of a lease of land where the use of the property is incidental to the use and enjoyment of the land; or

                     (d)  a lease or bailment of personal property prescribed by the regulations for the purposes of this definition, regardless of the length of the term of the lease or bailment.

Bailments for value only

             (3)  This section only applies to a bailment for which the bailee provides value.

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