PPSA & Accessions

To start with, let’s just clarify the applicable definition. 

Where a supplier supplies goods that are installed as part of a building, they become fixtures and, just as would have been the case in pre-PPSA days, the supplier’s retention of title security interest over those goods is, effectively, lost.  However, where a supplier supplies goods that are installed in, or fitted to, a non-real estate piece of property they become accessions. 

In pre-PPSA days, as soon as goods were incorporated into another product they were deemed to have lost their individual identity and the supplier’s security interest over those goods was lost; however, since PPSA the supplier’s security interest can continue in the finished product (section 88 of the PPSA refers).

Moreover, the PPSA’s default priority rules state that the security interest a supplier maintains over their accession takes priority over any claim any other security holder might have to the finished product (section 89).

Now, while section 123 of the PPSA states that a secured party may seize collateral by any lawful method if the debtor is in default under their security agreement, in the case of accessions, the secured party is required to give at least 10 business days’ notice of their intention to remove their product (section 95) and then must ensure that the goods are removed in such a manner as to not cause additional damage to the product in which it is installed (section 92). 

The grantor may apply to the courts for an order postponing the removal of the accession or determining a value to be paid by the grantor to the secured party to allow them to keep the accession in place (section 97).

However, the PPSA is not the only Act that necessarily applies!  In the event an administrator is appointed then the Corporations Act (2001) comes into play.  Once an administrator has been appointed, suppliers/creditors are unable to make claims for property held by their buyer unless they have the administrator’s consent or permission from the court (s440B of the Corporations Act).

Regardless of the super-priority a properly perfected PMSI might give to a supplier of retention of title secured goods, the provisions of the Corporations Act will prevent them from recovering any of their goods without the consent of the administrator.

Although the supplier may not be able to claim back their property immediately, neither is the administrator generally able to sell or dispose of it (s442C of the Corporations Act).  Because the goods are the subject of a perfected PPSA security interest, the administrator must act in the interests of the secured party and not sell or dispose of the goods without either the permission of the secured party or of the courts.

Unfortunately, there is one rather significant exception to this restriction on the administrator on-selling ROT secured property – that is where such an on-sale is in the ‘ordinary course of the company’s business’.

Thus, if you have supplied shafts to an assembler and wholesaler of hammers then the administrator would be perfectly within their rights to sell the completed hammers even though you may have demanded the return of your goods under your perfected PMSI (s442C(2) and (8) of the Corporations Act refer).

The administrator is, however, required to act ‘reasonably’ in exercising their power of sale (s442B) and has some fairly strict rules to follow regarding the manner in which they must deal with the proceeds from such sale (s442CC(2) of the Corporations Act refers).  These boil down to ensuring that the proceeds are applied proportionately to those creditors that hold a priority security interest in those goods.

For example, if you have supplied $10,000 worth of hammer shafts and I have supplied $20,000 of hammer heads and the administrator disposes of the finished product for, say, $24,000 then you will benefit from $8,000 of the proceeds and I will benefit from $16,000 – ie, proportionate to the value of our contribution to the finished product comprising our respective accessions.

To the extent that we are still owed money (your outstanding $2,000 and my outstanding $4,000) we will have to deal with the administrator as unsecured creditors.

Amendment Demands - Section 178

In an earlier article, I discussed the importance of Section 151 of the PPSA and the requirement that there be a reasonable belief that the security interest being registered on the PPSR either exists or is likely to exist.  Click here for that article. 

So while that article addressed a supplier’s right to lodge a registration, this article will consider the buyer’s rights when it comes to demanding that it be removed.

Section 178 of the PPSA is the most immediately relevant here and sets out two key criteria for a buyer to demand that a registration lodged against them be removed:

(a)          The obligation owed by a debtor to the secured party is not secured by collateral described in the registration; or

          (b)          The particular collateral in which the person has an interest does not secure any obligation owed by a debtor to the secured party.

These criteria are very similar to each other and, in exploring a variety of scenarios there is certainly some cross-over between the two.

Essentially, a buyer/debtor may demand that a registration be discharged if there is no collateral as described in the supplier’s registration or if there are no monies owed by them to the supplier that are secured by the described collateral.

Scenarios

Probably, the most common situation where such criteria would apply is where a supplier has supplied goods subject to a retention of title clause and was subsequently paid in full.  The supplier has either simply overlooked their obligation to remove their PPSA registration or legitimately believed there was a likelihood of repeat business in the near future.  While a supplier may have the right to lodge/maintain a registration in the reasonable expectation that trading might take place, a buyer has a superior right to demand the removal of such a registration.

Fortunately, a little less common, s178 criteria could also apply where a supplier has incorrectly described their collateral in their PPSA registration as constituting an item of inventory whereas the goods in question are clearly non-inventory items.  In such a scenario, even though there may be monies owed by the buyer to the supplier, it is not technically secured by the collateral as per the registration’s description.

We could also have a situation where the registration has been lodged correctly and there is money owed by the buyer to the supplier in respect of collateral delivered by the supplier but the collateral has been on-sold or otherwise ‘used up’ – there is therefore no collateral against which the supplier’s security interest can ‘bite’.  What about the supplier’s claim to proceeds?  Well a pre-condition for a proceeds claim is that the proceeds be directly or indirectly attributable to the sale of the supplier’s collateral and washing around in a busy bank account will tend to disguise any attribution quite effectively.  We may also have a supplier selling something like bleach or disinfectant that has been used up by the buyer generating no tangible proceeds.

So if there are no monies outstanding on the account or there is no collateral against which a supplier’s security interest can attach then the buyer is well within their rights to request that the supplier’s registration be discharged.

So how should the buyer go about getting the registration discharged?

In an ideal world the buyer would phone or email their supplier, gently point out that the registration against them appears to be serving no purpose and politely ask that it be removed at the supplier’s earliest convenience.  Unfortunately, what seems to be a lot more common are  strident demands, indignant protestations, and veiled threats of legal action and fines.

Under section 178 the buyer/grantor should address an amendment demand to the secured party’s address for service (found on their registration) outlining their reasons for the registration to be discharged or otherwise amended.

While section 178 provides no timescale for the discharge/amendment to take place, section 179 allows for escalation to the PPSR Registrar if the secured party has not responded appropriately within 5 business days.

Once the Registrar becomes involved they will issue the secured party with an amendment notice.  That amendment notice will reiterate the amendment demanded and invite a written response by the end of a further 5 business days.

Should the Registrar not receive any response from the secured party during this time-frame they will either amend or discharge the registration in line with the grantor’s amendment demand.

Where the secured party does respond in good time with an argument against discharging or amending the registration, the Registrar will make their decision based on the information provided by the secured party and ‘any other relevant information’.

Reference to the PPSR Registrar is, however, not the grantor’s only recourse should the secured party fail to respond satisfactorily to their initial amendment demand.  The grantor may choose, instead, to take the matter to court.

The PPSA is understandably silent on timescales once the matter has entered the court system but, as with similar legal processes, both grantor and secured party will have the opportunity to argue their positions before the court and should a decision be rendered in favour of the grantor then it will take the form of an instruction to the PPSR Registrar to effect the requested amendment/discharge.

So what about the threats of fines?

That part of the PPSA that concerns itself with Amendment Demands (part 5.6) is quite silent on the matter of penalties although there may be some application of section 151 that can be brought into play where the grantor suggests that there was no justification for the original registration in the first place.  While I’m not aware of any penalties having been applied for frivolous or unjustified registrations, section 151 certainly provides for civil penalties of up to 250 penalty points (equivalent to $42,500 at time of writing).

So far I’ve seen a lot more bluff & bluster and overly aggressive demands than I have civil and politely composed requests – possibly because the polite requests get acted upon straightaway whereas the aggressive ones tend to get referred to people like me for their advice – but the rules and timescales for action are clearly laid out and are unaffected by the tone chosen by the grantor.