PPSR End of Year Statistics

The Insolvency and Trustee Service Australia (ITSA) has recently released their statistics for activity on the PPSR for the quarter ending 30th June 2013.

Probably not surprisingly, out of over 1.5 million searches conducted (the busiest quarter of the 2012/13 year), the vast majority (61.4%) were searches of motor vehicle serial numbers with the balance pretty much taken up by searches for registrations against organisations (32.2%). 

543,620 registrations were lodged on the Register during the quarter with an overwhelming majority (87.8%) being non-transitional registrations.

Interestingly, at 354,937, the number of discharges was equivalent to almost two thirds of the number of new registrations lodged giving 188,683 in net new registrations.  However, with the total number of registrations as at the end of June (7,366,053) showing only a 111,721 increase over the equivalent figure reported for the end of the previous quarter, this leaves us with a discrepancy of just under 77,000.

ITSA provides no explanation for the loss of 77,000 registrations during the quarter.  Conceivably they have all expired naturally (although that does seem a particularly high figure this early in the life of the PPSR given that the register virtually encourages registrations for up to at least 7 years) or perhaps someone will find that they have slipped down the back of a cupboard somewhere.

Motor vehicles are the most common collateral class listed on registrations on the PPSR. As at 30 June 2013, there were 3,998,373 current registrations on the PPSR of this class.  ALLPAPs (with and without exceptions) came in second with just under half that number and then ‘Other Goods’ registrations at 1.23 million.

The full set of statistics released by ITSA can be found at the following link:

https://www.itsa.gov.au/about-itsa/ppsr/ppsr-statistics/ppsr-quarterly-statistics/june-2013-ppsr-quarterly-statistics/june-2013-ppsr-quarterly-statistics-report

A PPSA Rant

This is probably a post that might be better saved for some sort of anniversary but I feel the need to vent a little and remind those who still read these ramblings of this blog’s title. (update: at the time of writing this blog was called "The Poorly Planned Securities Register")

The PPSR has been in place for 18 months now, the ability to lodge transitional security interest registrations will expire in 6 months’ time and we have 18 months to wait until a legislated review of the operations of the PPSA is due to be reported to the responsible Minister (s343).

I suppose my main concern is that the eventual review will spend an inordinate amount of time re-hashing the Register’s first few weeks or so of operation when it was beset by technical problems before making a brief observation that there was ‘some debate’ concerning the application of the Act’s transitional rules but, as the transitional period would, by then, have been long concluded, decline to make any proposals for improvement.

While any dithering by secured parties over whether to register an interest as transitional or non-transitional will certainly come to an end by the close of January 2014, there will still be millions of transitional registrations on the PPSR ripe for challenge by insolvency practitioners anxious to maximise the assets under their administration.

The Transitional vs Non-Transitional issue looks to be with us for a considerable time and, while it would be easy to blame insolvency practitioners and lawyers keen to stretch the meaning of every word and phrase in the Act, the responsibility for this rests squarely with the drafters of the Act.

It also rests with those who failed to make their intentions clear and with those who didn’t seem to realise that the implications of this Act were so substantial that the whole of the country should be informed of its existence. 

It rests with whoever set up the PPSR’s Help Desk, which, when faced with any question that doesn’t involve a ‘press this button’ or ‘click that link’ answer, declines to help and instead suggests that the caller obtains legal advice or contacts a PPSR broker.  An issue of which I’m only too well aware as anyone googling ‘PPSR Broker’ invariably appears to end up laying the question at my doorstep.

We don’t need to get legal advice when we renew our vehicle rego; pretty much any other situation where a regular repeated registration ‘type’ activity takes place does not necessitate immediate reference to a lawyer.  And yet the, supposedly, simple determination as to whether I am eligible to register an interest as transitional or not has become a legalminefield.

We have situations where suppliers with ‘allmonies’ clauses on their retentions of title feel obliged to lodge two separate registrations against the same grantor, just to be on the safe side, as the PPSA does not make it sufficiently clear whether a single PMSI designated registration would be sufficient.

If I take one of my guitars to a well-known guitar shop to sell on my behalf only to find that my ownership counts for nothing in the event the guitar shop goes bust then I think it is quite legitimate to feel aggrieved at a government that changed the laws dealing with such ownership considerations without letting me know and advising me on the available remedies – yet this was exactly what happened to those dealing with JacksonsRare Guitars at the end of last year.

If the strata plan, charity or sports association I am selling to has an ABN, why can’t I use that ABN when I lodge my security interest against them?

Why are the PPSA’s rules on Trusts so convoluted that the best advice we can give is to adopt a belt and braces approach and lodge separate registrations against the trust and its trustee?

Why does it cost nothing to register an indefinite transitional registration but $140.00 to amend it in any significant way?

Why does the PPSR require us to differentiate between an ACN, and ARSN and an ARBN?  They each have 9 digits and are searchable on ASIC so why add a further layer of complication and scope for dispute to an already fraught area?

Why does the PPSA’s definition of a Motor Vehicle include equipment and machinery that quite obviously is not a motor vehicle?  I may do a separate post on this issue but anyone who deals in agricultural equipment that may be towed by a tractor for any distance should look seriously into the issue.

OK, rant over for now (although I reserve the right to post a Part Two at some point).

The Dangers of Amended Terms & Conditions

For us simple folk, the basic difference between ‘transitional’ and ‘non-transitional’ under the PPSA boils down to the simple question – is this a long-standing customer or a new account?

If a supplier’s trading account was in place prior to the PPSR’s start date on 30/01/2012 then any on-going security interests would be dealt with under the PPSA’s transitional rules, after that date and the transitional rules do not apply.

[My earlier post at http://ppsr-blog.blogspot.com.au/2012/05/challenges-to-ppsas-transitional-rules.html should be referred to for an explanation for identifying a transitional security interest.]

Why is the transitional/non-transitional designation so important?

Well, for one thing, the PPSA provides for a 2 year period during which transitional security interests are deemed to have been perfected without needing to be registered.  This is designed to give trade credit suppliers plenty of time to get around to putting all their long-standing accounts on the register before the end of January 2014 deadline.

So a transitional security interest is basically an existing account that hasn’t yet been registered on the PPSR?

Well, not quite.  When you make a registration on the PPSR one of the first questions you get asked is whether the registration is for a transitional or non-transitional security interest.  So PPSR registered interests may also be ‘transitional’. This is because the rules for determining priority are applied differently depending upon the transitional status of the security interest.

Where you have two equivalent security interests competing for the same collateral, priority is given to the security interest that was registered first; UNLESS one or more of the security interests was a transitional security interest in which case those interests are deemed to have been perfected immediately before the PPSR came into effect.

Now it has been argued that, as the PPSR acts as a notice filing system rather than a transaction filing system, aside from those pesky priority issues, it shouldn’t really matter if a registration is designated as a transitional or non-transitional security interest, what really matters is that the presence of a security interest has been made public and interested parties can be made aware of its existence.  The extension of this argument is that if a security interest was wrongly identified as transitional then an Insolvency Practitioner (IP) could simply ignore its transitional designation and treat the security interest as if it were non-transitional. 

A little like a piece of children’s craft work having its age category mislabelled when being entered into a school craft fair, the piece of work should simply be re-allocated to the correct age category and judged accordingly.

Unfortunately, I haven’t seen any evidence of this argument gaining much in the way of traction and many IPs continue to be quick to pounce on any instance where they believe a registration was wrongly categorised as an opportunity to dismiss a supplier’s claim to secured creditor status.  IPs are effectively disqualifying the child’s craft work from the whole competition rather than assessing it in its correct category.

Ok, it sounds harsh but no-one really expected IPs to be the sort to go around kissing babies and patting puppy dogs and if a supplier can’t tell the difference between a long-standing account and a new account then surely they’ve got to take some responsibility for that?

If only it were that straightforward. 

The issue we are now seeing involves instances where suppliers have made changes to the terms & conditions of their original agreements with their long-standing customers, perhaps to make reference to the PPSA or to clarify how payments are to be allocated, or any of a myriad of sensible variations and amendments.

If any of those changes were introduced after the PPSR came into effect on 30/01/2012 then IPs are arguing that the transitional rules can no longer apply to any subsequent security interests.

That may be understandable if the changes to the initial agreement were done in such a way as to form a completely new agreement but most variations are done so as to maintain the integrity of the original agreement.

That may be so but that might not be good enough under the PPSA. 

Section 308(b) of the PPSA defines a transitional security interest as

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

(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 [30/01/2012] provides for the granting of the security interest;

The specific wording at issue is the reference to the security agreement “as in force” prior to 30/01/2012.

If we assume that the PPSA’s drafters knew what they were doing (a bit of a stretch I know) then we must consider what inferences need to be drawn from their drafting choices. 

They could simply have referred to a transitional security interest as being one that arises from a security agreement “in force” before 30/01/2012 but instead they chose to refer to a security agreement “as in force” before that date.  While the former would not be without its ambiguities, the choice to include the additional two letters appears to lend support to the suggestion that it is not merely the agreement that needed to be in place before 30/01/2012 but that version of the agreement which gave rise to the security interest in question.

If a later version of the credit agreement was introduced after 30/01/2012 then it would be that later version, it is argued, which would be deemed to have created the security interest and thus the transitional rules would not apply.

That’s an awful lot to read into the inclusion of a single two letter word.

Indeed it is and there is no obvious clarification of intent in the original PPS Bill’s Explanatory Memorandum which simply states that:

“A security interest would be a transitional security interest ….. where the security agreement is entered into prior to the registration commencement time and allows for the creation of the security interest”.

However, if there is one thing we’ve learned since the PPSR began it is that IPs will be only too happy to exploit any chink in a supplier’s registration if it means they can increase the value of the grantor’s assets they get to play with.

Therefore, if a supplier’s Terms & Conditions were amended after 30/01/2012 and that supplier wants to avoid a long, drawn out (and potentially unsuccessful) argument with an IP, they should ensure they have a non-transitional registration in place in addition to any transitional registrations.

Hopefully legal precedent will be established that suggests such a belt and braces approach is unnecessary but, until then, this approach appears to be the best way to avoid the risk of losing security interests and/or priority.

This is almost certainly an issue where suppliers would be wise to obtain their own legal advice.

When Transitional Arrangements Don’t Apply

The PPSA and its transitional provisions got another run through the courts in the case of The Receivers of Maiden Civil (P&E) Pty Ltd & Others v Queensland Excavation Services Pty Ltd & Others NSWSC 852 in which a decision was handed down last week.

In many ways the case is not especially noteworthy (other than by virtue of involving the PPSA) and is mainly being cited as confirming what was pretty much accepted anyway:

That the supplier of unpaid for goods will lose them to the liquidator of the company to which they had been supplied unless the supplier holds a perfected security interest over them.  (Section 267 of the PPSA refers).

This will apply whether the goods have been supplied under a contract of sale, leasing arrangement, consignment stock agreement etc.

In the case of Maiden Civil v QES the supply was under a long term leasing arrangement.

Leasing arrangements are deemed by the PPSA to automatically qualify for security interest status by their very nature (sections 12 and 13 of the PPSA refer).

What was particularly interesting to me; however, was why the court determined that the lessor’s security interest had not been perfected by the PPSA’s transitional rules.  The leasing arrangement had been put in place long before the start date of the PPSR and there was nothing about the lease that exempted it from the purview of the PPSA so why no transitional protection?

The answer appears to lie in section 322(3) of the PPSA. 

322(1) covers when the perfection of a transitional security interest begins, 322(2) covers when that perfection ends and 322(3) covers exceptions as follows:

(3)               Subsections (1) and (2) do not apply to a transitional security interest in collateral if the interest is of a class prescribed by regulations made for the purposes of this subsection.

Unfortunately, this didn’t make things much clearer to me until I opened up the Personal Property Securities Regulations 2010.  This is a formal legislative instrument that, among other things, provides a definition of Motor Vehicle and Watercraft and provides some rules relating to access to the PPS Register.

It also, at regulation 9.2, clarifies what is meant at 322(3) of the PPSA, by stating:

         (1)   For subsection 322 (3) of the Act, a transitional security interest is prescribed if, before the registration commencement time it was:

               (a)    registrable on a transitional register, under legislation that conferred priority on security interests that are registered; and

               (b)    not registered.

What this means in practice is that, because at the time of entering into the Leasing arrangement there was already a perfectly good pre-PPSR register in place for registering such interests (in this instance the NT Register of Interests in Motor Vehicles and Other Goods) that was not used, the PPSA’s transitional rules will not apply.

Basically, if you didn’t have your act sufficiently together to register your security interests on the appropriate register before the PPSR was introduced then you can’t rely on the PPSA’s transitional rules to save you when things go wrong!

There’s an excellent overview of the full circumstances of the Maiden Civil case to be found at http://www.herbertsmithfreehills.com/insights/legal-briefings/key-ppsa-decision-nswsc-confirms-vesting-of-unperfected for anyone interested in reading further.

Transitional Rules Revisited

It’s been over a year now since I described what I saw as the intent behind the PPSA’s Transitional arrangements and how a number of insolvency practitioners were seeking to negate that intent with their far more restrictive interpretations (click here for my original piece).

Since that time we have remained without any legal precedent that could be used to determine the issue once and for all.  However, as the 17^th month of the PPSR’s operation drew to a close (the end of June 2013 for those not wanting to count), Justice Beech and the Supreme Court of Western Australia stepped up to the crease and took a pretty healthy swing at the issue.

The Case

In 1998, Supplier Pty Ltd and Buyer Pty Ltd entered into a credit agreement containing a Retention of Title clause intended to provide terms and conditions applicable to future deliveries made by Supplier to Buyer.  Supplier was also the beneficiary of a guarantee from Mr Guarantor committing Mr Guarantor to making good any shortfall in monies owing to Supplier in the event of Buyer’s non-payment.

Back to the present day and the issue being considered is the extent to which Supplier Pty Ltd is able to maintain a caveat over real estate property held by Mr Guarantor by way of protecting the effectiveness of his guarantee.  Mr Guarantor has argued that Supplier’s failure to register their ROT security interest against Buyer Pty Ltd increases the likelihood of a higher value claim against Mr Guarantor’s property and thus maintaining the caveat would be unfair.

Supplier Pty Ltd argues that their ROT interest over Buyer Pty Ltd has been perfected by the PPSA’s Transitional provisions and does not need to be specifically registered in order to be effective.

The Judgement

Unfortunately for us, Justice Beech was not required to rule on whether Supplier’s ROT security interest was, in fact, perfected under the Transitional rules but merely to adjudge whether Supplier Pty Ltd had a ‘seriously arguable’ case.  

Fortunately for us, His Honour considered that Supplier had indeed demonstrated a seriously arguable case that:

• The 1998 document constituted an agreement that would govern future deliveries;
• The 1998 agreement gives retention of title rights in respect of each delivery;
• The 1998 agreement is a security agreement as defined in the PPSA;
• As the 1998 agreement was in force and ‘active’ at the time the PPSR went live, it constitutes a transitional security agreement (s307); and
• As the 1998 agreement provides for the granting of security interests, any security interest associated with deliveries made subject to the terms of that agreement will be transitional security interests (s308).

So while WA’s Supreme Court decision may not have been decisive for our purposes it gives a clear indication that our views as to the intention of the PPSA’s Transitional arrangements are likely to be upheld should they be presented in court and must seriously dent the confidence of those IPs attempting to argue differently.

Remember, however, that all terms & conditions, all credit agreements and all ROT clauses are not created equal and much will depend upon how each have been drafted and to what extent and in what manner they may have been amended or updated since the PPSA came into effect. 

For those who want to investigate this particular case more closely, the decision to which I refer was in relation to Industrial Progress v Wilson and others.  Don’t bother trying to look up Supplier Pty Ltd v Mr Guarantor.