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.