A long-standing credit agreement is not enough to determine Transitional status

The 7^th March 2014 saw a little bit of clarity being brought to one of the PPSA’s notorious grey areas.  

The clarity came in the form of a judgment in the Supreme Court of Victoria and the grey area concerned the applicability of the PPSA’s transitional rules to Retention of Title clauses enshrined in long-standing Terms & Conditions.

The case concerned the May 2013 collapse of the cleaning company, Swan Services Pty Ltd and a claim by one of its creditors, Central Cleaning Supplies (Aust) Pty Ltd, that they should be able to rely on their Retention of Title clause to recover unpaid for equipment.

 

The liquidators argued that, since the introduction of the Personal Property Securities Act (PPSA), any goods subject to an ‘unperfected’ security interest would vest with them and, as Central Cleaning Supplies had not perfected their Retention of Title security interest on the Personal Property Securities Register (PPSR), the equipment they had supplied would be subject to the liquidators’ control.

Central Cleaning Supplies countered with reference to the PPSA’s Transitional Arrangements – a means by which security interests arising from long-standing agreements could be effectively ‘grandfathered’ into being ‘perfected’, without need for formal registration, for up to 2 years.  While the 2 year Transitional Period has now ended it was certainly applicable at the time Central Cleaning Services was challenging the liquidators for return of their equipment.

The case was put before Justice Ferguson to find the correct interpretation.

In her deliberations it was determined that, although Swan Services had entered into a credit agreement with Central Cleaning Services before the PPSA came into effect, the security represented by Central Cleaning Services’ Retention of Title clause was not actually incorporated into either the credit agreement or the standard terms & conditions embraced by that credit agreement.  Rather, the Retention of Title clause appeared in a Conditions of Sale document that formed part of individual invoices issued as and when deliveries were made.

Therefore, the initial credit agreement did not act as an overarching agreement out of which individual security interests were created (as would be necessary for the transitional arrangements to apply) but instead each invoice was held to create its own security agreement and security interest.  In order to perfect its Retention of Title clause, Central Cleaning Services could not, therefore rely on the PPSA’s transitional arrangements and should have registered their security on the PPSR as a non-transitional interest.

While it might often be convenient to refer to the date of a credit application in order to decide if subsequent dealings create transitional or non-transitional interests suppliers must not lose sight of the fact that it is the acceptance date of the actual document that imposes the security condition that will be the determining factor.

Where there is any doubt I would strongly recommend a non-transitional registration.

Central Cleaning Supplies (Aust) Pty Limited v Elkerton and Young as liquidators of Swan Services Pty Limited (in Liquidation) [2014] VSC 61

The End of the Transitional Period - What did it mean?

While it probably won’t have escaped your attention that the PPSA’s Transitional period came to an end at midnight of 31/01/2014, you are likely to be substantially less aware that security holders can, nevertheless, continue to register transitional security interests on the PPSR.  What is more, transitional registrations will continue to be free of charge from the PPSR.

It is, however, important to note that any registration identified as transitional must arise from a security agreement as in force on or before 30/01/2012. If your security interest relates to a later security agreement, registering that interest as transitional will almost certainly invalidate that registration.

You should note that a number of insolvency practitioners have indicated that, where any later amendment to pre-30/01/2012 Terms & Conditions has taken place, any subsequent security interests could not be deemed to be transitional.

If you are not confident you have documents dated prior to 30/01/2012 evidencing your rights to your security interest you will have a much easier time of it if you register your interest as non-transitional.

Obviously, the facility to continue lodging transitional registrations begs the question as to what all the fuss was about with the end of the transitional period.

Well, the key change is that any registrations lodged from 01/02/2014 onwards, whether transitional or non-transitional, will only be effective from the date of registration – there is no longer any provision for ‘counting back’.

Certainly the biggest losers out of those who failed to register a transitional security interest before the end of the transitional period would be banks or financiers securing a loan.  A bank registering collateral for their ‘transitional’ loan on 31/01/2014 would have their ‘seniority’ counted back to 30/01/2012 whereas if they had registered a day later their ‘seniority’ would be determined by their actual registration date and they would thus lose out to anyone who had registered earlier even though their loan agreement might have been entered into later.

While this might still be an issue for trade credit suppliers it is certainly less of an issue provided they don’t leave it too long before they register their security interests.  The longer the gap between the end of the transitional period and when a supplier finally lodges their registration the greater the risk that they will lose out.

Suppliers wanting to perfect a Purchase Money Security Interest (PMSI) based on a retention of title clause must register prior to the goods they are supplying being delivered (or, in the case of supply of non-inventory items, within 15 days of delivery).  

PPSA – Changes proposed for those hiring serial numbered goods.

19^th March saw the tabling of the Personal Property Securities amendment (Deregulatory measures) Bill 2014 in parliament.  Not the most helpfully titled Bill, its contents are nevertheless pleasantly short and to the point and concern themselves with making life easier for small and medium sized businesses hiring out equipment that can be classified as either motor vehicles, watercraft or aircraft.

The Current Position

At the moment if you are leasing goods to another business for a period of 12 months or more (or for an indefinite period) you need to register that lease as a security interest on the PPSR in order to protect your ownership rights in the event that the business leasing your goods goes into administration. 

However, if the goods you are leasing can be defined as motor vehicles, watercraft or aircraft, then the qualifying criteria that the leasing period be at least 12 months is reduced to 90 days and hirers need to lodge registrations on the PPSR for comparatively short term leases in order to protect their ownership.

The Proposition

This Bill proposes to amend the Personal Property Securities Act 2009 (PPSA) so that leases of motor vehicles, watercraft and aircraft of 90 days or more will no longer be deemed to be PPS leases for the purposes of the PPSA.  This will minimise the need for small and medium hire businesses to make registrations in respect of leases of a term of less than 12 months.

The change will bring the PPSA into alignment with personal property securities (PPS) regimes in other common law countries (such as New Zealand and Canada) where a lease is deemed to be subject to PPS laws where the lease is for more than 12 months or an indefinite term. 

By reducing the number of transactions giving rise to PPS leases, the Bill should substantially reduce the compliance cost born by small and medium hire businesses.

Conclusion

The original decision in the PPSA to operate a two tier system for leased goods, one for serial numbered goods (motor vehicles etc) and another for everything else, seemed an unnecessary complication that provided no obvious benefit to anyone and a lot of pain for anyone unfortunate enough to have their equipment fall under the very broad definition of ‘motor vehicle’.

The decision to rectify this should be welcomed.

The provisions of the Bill will take effect not later than 6 months from it receiving Royal Assent.