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.
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