Is there a deadline for lodging a PPSR registration?

When should I lodge a registration?

Once a liquidator is appointed to a debtor, they are allowed to ignore any security interests registered during the 6 months leading up to their appointment if they hadn’t been lodged within 20 business days of the security agreement being formed. 

In a trade credit context, the security agreement is usually the completed credit application incorporating the supplier's Terms & Conditions (which, in turn, would be expected to include their Retention of Title right).

Thus, if a supplier fails to lodge their registration within 20 business days of receiving a credit limit application, they risk losing their security rights if a liquidator is appointed within the next 6 months.

Separately, the supplier needs to register their Retention of Title right before they deliver their goods to their customer in order to make sure they don't lose any Purchase Money Security Interest (PMSI) rights to which they might be entitled.  Although, where the goods represent a product that will be kept by the buyer for their own use, the PPSA allows an additional 14 days' grace.

When should a PPSR registration be lodged?

In general terms, the answer is ‘as soon as possible’ and, in this context, that means, as soon as the supplier has a reasonable belief that they may be doing business with the grantor in question and that such business will involve the granting of a security interest.

In order to avoid falling foul of the Corporations Act, the supplier’s registration should be lodged within 20 business days of their security agreement being formed. For trade credit suppliers, that security agreement will usually be represented by the signing of the initial credit application by which the supplier’s Terms & Conditions of trade are accepted (provided, of course, that those T&Cs contain the supplier’s security rights – usually in the form of a Retention of Title clause).

If the registration is not lodged within that 20 business day period, the supplier runs the risk that, if their customer falls insolvent in the next 6 months, a liquidator will be able to use section 588FL of the Corporations Act to, effectively, ignore the registration.

I’ve written at greater length on the implications of section 588FL HERE.

Obviously, if the supplier misses that 20 business days window, they should still go ahead and register on the PPSR as soon as possible, it just means that they’ll need to keep their fingers crossed that a liquidator doesn’t get appointed during the next 6 months – once 6 months have elapsed with no liquidator in sight, the supplier can relax.

If we put aside for one moment the Corporations Act provisions, the other key timing issue concerns the effectiveness of your Purchase Money Security Interest (PMSI) rights.

As we know, Retention of Title suppliers, those providing goods on a Consignment Stock basis, and long-term leasers of equipment automatically qualify for having the security arrangements that those trading practices represent designated as PMSIs, thus entitling them to a super-priority over any earlier (or later) registered general security interests.

However, in order to ensure their PMSI right is effective, the registration must be lodged within specific time frames:

Where the Collateral is Inventory	Before the grantor takes possession of the goods
Where the Collateral is not Inventory	Within 15 business days of the grantor taking possession of the goods

Any registration lodged outside of those time frames will still be valid, but it won’t benefit from the super-priority that the PMSI designation would otherwise afford.

If repeat supplies are involved, suppliers should remember that even though they may have registered too late for the first few deliveries, a registration will still be effective over later deliveries.

When does the Grantor take possession?

I recently had cause to read a helpful summary of a decision by the South Australian Supreme Court in the matter of Allied Distribution Finance Pty Ltd v Samwise Holdings Pty Ltd [2017] SASC 163.  While much of the background to the case is a little fiddly, I’ll give a short ‘broad strokes’ summary in order to help demonstrate why this might be a very useful decision for the hire industry.

For those wanting a more detailed look, I recommend the summary HERE  or, for those that want a real thrill, the full text of the judgment can be found HERE.

The case concerned Bill’s Motorcycles – a dealer, selling and servicing Kawasaki motorcycles.  Bill’s had been financing its floor stock with one financier but then struck an agreement with another (Allied Distribution Finance – ADF).  Bill’s stock of 40 motorcycles (secured by the original financier) was bought out by Kawasaki and, effectively, sold to ADF.  Bill’s maintained possession of the motorcycles and ADF lodged a PMSI registration on the PPSR to perfect its security interest over them.

When Bill’s went into administration a couple of months later, there was a dispute concerning those 40 motorcycles between Samwise, the holder of a General Security Interest (AllPAAP) over all Bill’s assets and ADF as a PMSI holder.

While a PMSI will usually take priority over an AllPAAP, in this case, Samwise argued that because Bill’s was already in possession of the motorcycles at the time ADF lodged their PMSI registration,  ADF had failed to meet the time-scale requirements of section 62 of the PPSA.

Section 62, effectively, states that, in order to achieve PMSI priority over inventory items, a registration must be lodged before the grantor obtains possession of the property.

Samwise argued that, as Bill’s had already been in possession of the motorcycles for some time before ADF lodged their registration, ADF was not entitled to PMSI priority.

In his judgment, Justice Blue determined that, in the overall context, the implication of section 62 should be taken to mean that the registration must be lodged before the grantor obtains the type of possession that would entitle them to grant a PMSI interest in the property.

Thus it is the grantor’s possession in the role of PMSI grantor that matters, rather than their mere physical possession of the property.

While this is unlikely to be of any assistance to trade credit suppliers forgetting to perfect their Retention of Title rights in time, it may have implications for the long-term hire industry.

Last year, the Government made changes to the manner in which hires and leases were caught up by the PPSA.  In short, the changes involved leases for less than 2 years no longer needing to be registered on the PPSR.  Where a lease was established for an indefinite period that may or may not extend beyond 2 years, the new legislation only required a registration to be put in place once that 2-year limit was breached.

When I posted about the new legislation, I wrote:

In order to be eligible for PMSI super priority where the collateral being used is designated as a non-inventory item, the perfecting registration must be lodged within 15 business days of the lessee taking possession of the property.

 However, where an indefinite lease is concerned and the lessor doesn’t lodge their registration until it becomes clear the lease may extend beyond the new 2 year qualifying period, that 15 business days period may long since have passed leaving the lessor’s claim to their equipment to fall behind those of other general security holders with registrations already in place.

Justice Blue’s decision in the Bill’s Motorcycles case suggests that, while a lessee may have been in physical possession of property for 729 days, it will only be at the 2 year mark they have possession in the capacity of a grantor of a PMSI right and it should, therefore, be at that 2 year point when the PPSA’s 15 business days countdown for a PMSI eligible registration should commence.

Whether this interpretation is sufficient to also satisfy the Corporations Act’s dreaded section 588FL is another matter! 

Dangers for the Unwary when Trading with an Administrator

While this post might be of passing interest to those wanting to refresh their knowledge regarding the Corporations Act’s intersection with the PPSA, it’s main import is for those who may be invited to trade with a company under administration.

I wrote on the subject of late registrations being vulnerable to vesting by insolvency practitioners in The PPSA vs The Corporations Act, but a new spin on the issue has arisen following a judgement in Re Ten Network Holdings Ltd (Administrators Appointed)(Receivers & Managers Appointed) [2017] FCA 1144 that highlights a further problem with this aspect of the Corporations Act.

By way of a very brief recap, if you fail to register your security interest within 20 business days of your security agreement being entered into AND your buyer goes into external administration within the following 6 months, Section 588FL of the Corporations Act allows the insolvency practitioner to ignore your security interest.

However, 588FL also provides for vesting of a supplier’s security interest where it arises (and is subject to a registration) AFTER the appointment of an insolvency practitioner.

While it might be understandable for clearly late registrations to be ignored, what about those situations where a supplier is invited to supply goods to the buyer after it has been placed into administration?

Not all companies that go into administration end up being liquidated, many, given some temporary relief by the appointment of an administrator, are able to trade out of their problems, perhaps subject to a Deed of Company Arrangement (DOCA).  However, under the provisions of s588FL any supplier entering into an agreement to supply won’t be able to lodge an effective PPSR registration to perfect their Retention of Title (ROT) rights because such rights (and registration) arose after the appointment of the insolvency practitioner.  Thus, if the company turns out to be unable to trade out of its problems, and the administrator becomes a liquidator, the supplier’s ROT rights will end up being vested with the insolvent estate.

Not exactly a ‘fair’ outcome for the supplier.

However, all is not lost as the Corporations Act (section 588FM) allows the Courts to extend the date beyond the ‘critical date’ for a valid PPSR registration provided it would be “just and equitable” to do so.

The recent Ten Network judgement suggests that the Courts will be prepared to grant such an extension provided they can be reassured that to do so would be in the best interests of both the other creditors and the company in administration. 

It has also been suggested that the timing of the application for the order will be relevant, in that the time to apply for the extension (and lodge the registration) should be a great deal closer to the commencement of trading than to any eventual liquidation.

Perfection by Possession or Control

For ease of communication and in service of providing the degree of emphasis required, it’s quite common for me to say that

“If you don’t register your security interest on the PPSR, you might as well not have one”.

However, it’s easy to forget that there are other means by which a security interest might be perfected.  In addition to Perfection by Registration, there is also Perfection by Control and Perfection by Possession.

Perfection by Control is the sort of thing usually only available to Banks, where they are able to treat a Grantor’s bank account with them as collateral under a security agreement – although the Grantor may own the contents of that account, the Bank will have day to day control. 

Another variation might possibly involve a Grantor’s Stockbroker who is able to exercise controlling rights over their client’s portfolio.  If the client had granted their stockbroker a security interest over their securities account, then, by virtue of their day to day control of those securities, the stockbroker would not need to register that security interest in order for it to be effective.

It is also been adjudged possible for those exercising control over satellites or other space objects from a ground station to be able to use that control to perfect a relevant security interest.

While this form of perfection is not likely to be available to a trade credit supplier, they would nevertheless do well to note that Perfection by Control trumps any other form of perfection.

Thus, if you supply a space satellite subject to a Retention of Title clause, your PMSI super-priority, perfected by registration, will be outranked by any general security interest that might be held over that satellite by whichever third party happens to be flicking the switches and pressing the buttons controlling that satellite.

Satellites aside, Perfection by Control primarily applies to intangible forms of collateral – ones where it is not possible to perfect over them by possession and the ability to exercise control is used as the functional equivalent of possession.

The issue of Perfection by Possession is fairly topical given a recent court judgement in the case of Knauf Plasterboard versus the liquidators of Plasterboard West P/L trading as Retroflex.

Retroflex had granted Knauf a general security interest in all their present and future property via a security deed.  Unfortunately, Knauf omitted to register that deed on the PPSR and it was only some 20 months later, when it became obvious that Retroflex may have been struggling, that Knauf finally got around to lodging their registration.  Barely a week then passed before Retroflex defaulted under the deed and Knauf appointed Receivers to protect their interests. This was followed a couple of days later by Retroflex appointing liquidators.

The liquidators took the view that because Knauf’s security deed had been lodged within 6 months of their appointment and not within 20 days of the security deed being entered into, section 588FL of the Corporations Act allowed the collateral subject to that deed to vest with Retroflex.

I’ve written previously on the subject of the dreaded section 588FL and its implications at PPSA vs The Corporations Act (which also includes a brightly coloured chart!).

While on the face of it the liquidators were correct, Knauf argued that in addition to the registration, they had also achieved perfection of their security interest by possession – such possession taking place with their appointment of the Receivers.

While there were other issues at play, not least the dubious process Retroflex used to appoint liquidators, the court determined that:

• Merely appointing receivers is not sufficient to constitute ‘possession’ if the property in question appears to remain in the possession of the grantor/debtor; and
  
• When the receivers took steps to exercise their rights under the security deed, their actions would be taken as equivalent to a seizure of the property.

Under section 21 of the PPSA, possession as a result of seizure (or repossession) is explicitly excluded as a form of possession sufficient to achieve perfection under the Act.

New PPSA Amendment passes its first reading

The first day of the new season saw the Government introduce the Personal Property Securities Amendment (PPS Leases) Bill 2017.

As the element in parentheses indicates, the Bill concerns an amendment to the manner in which the PPSA deals with leasing arrangements.

At present the PPSA only applies to leases that run for longer than one year, are for a shorter period but allow for extensions that would take them beyond one year, or are for an indefinite period.

The new Bill basically takes that one year qualifying period and extends it to two years.

But before anyone suggests holding off on lodging that backlog of registrations you’ve got piling up, the Bill (if enacted) isn’t intended to apply retrospectively and it’s anybody’s guess as to when it will actually come into effect given that the last amendment of this nature took 15 months to pass and another 3 months to get Royal Assent!

Clearly a lot of lobbying has been taking place behind the scenes because, at least from my point of view, this Bill is something of a surprise – there was certainly no recommendation in the official review of the PPSR to extend the PPS Lease period.

However, the Bill does incorporate an element of one of the Review’s recommendations where indefinite leases are concerned.  If passed, indefinite leases will only require registration once the goods being leased have actually been in the possession of the Grantor for the two year period. 

While this will obviously be a substantial relaxation of the rules for businesses that essentially deal in short term hires but don’t explicitly identify a maximum end date, it will be interesting to see how this ties in to the Corporations Act - s588FL of which pretty much requires registration within 20 business days of the leasing agreement being signed to avoid risking losing hired goods to any liquidator appointed within 6 months of the actual registration date.

UPDATE: This Bill was formally passed on Thursday 11th May and will come into effect as soon as it has Royal Assent.

Clive Palmer vs the PPSA

I’ve just read an 'excited' article by The Australian, entitled “Clive Palmer firms jump queue of creditors for Queensland Nickel” which you can read here (although you may get caught out by The Australian’s paywall).

The meat of the article concerns the ‘last minute’ registration on the PPSR of security interests against Queensland Nickel by companies in which Clive Palmer has an interest.

“Four days before Clive Palmer’s Queensland Nickel Industries collapsed into voluntary administration, two of his companies staked a claim on all of the refinery’s assets in an apparent attempt to squeeze out redundant workers and other creditors.”

The article goes on to say that,

“Legal experts said the manoeuvre could disadvantage sacked workers, already furious at being denied access to their redundancy entitlements.”

Apparently, The Australian and its ‘legal experts’ are not especially familiar with the workings of the PPSA or the Corporations Act once insolvency practitioners become involved.

Firstly, any creditor who had lodged a security interest on the PPSR prior to Palmer’s recent registrations will benefit from greater priority under the PPSA (at least a dozen of which were registered under the facilities that I personally oversee).

But, perhaps more importantly, in the context of The Australian’s article, are the implications of the Corporations Act for security interests registered within 6 months of a company failure.

While I’ve previously explored this at some length in my post ‘The PPSA vs The Corporations Act’, the short version is that 588FL of the Corporations Act provides a very clear deadline by which a registration needs to be lodged in order to be effective against a liquidator.

If a registration was not lodged within 20 business days of the security interest coming into force or was lodged during the 6 months leading up to the liquidator’s appointment, then “The PPSA security interest vests in the company” and the creditor’s security rights are effectively lost.

So, while opportunistic, last minute registrations may make for a relatively entertaining news story, they don’t make for very effective security.

The PPSA vs The Corporations Act

September’s court judgement in Pozzebon (Trustee) v Australian Gaming and Entertainment Ltd (in liq) has brought to the fore a butting of heads between the Personal Property Securities Act and the Corporations Act.

Much of our concern with the PPSA has been to do with interpreting it in such a way as to ensure that our security interests are as effective as possible.  The issue can be seen as twofold:

• Ensuring our security interests benefit from as high a ranking as possible when compared with those interests of other creditors; and
• Protecting ourselves against the risk that an unperfected security interest will vest in our debtor’s insolvent estate.

Part 2.6 of the PPSA (sections 54 to 77) concerns itself with addressing the various scenarios that might rank one creditor’s interest above another’s while section 267 provides liquidators with the incentive to try to invalidate your registration by allowing them to take ‘ownership’ of any security interests that have not been properly perfected.

For now, we’re going to look a little more closely at section 267.

Section 267 effectively states that, when an ‘external administration event’ takes place, any security interest that has not been perfected at that point will vest in the grantor.  In other words, if an insolvency practitioner is appointed to your debtor before you’ve had the opportunity to register your security interest on the PPSR, you will lose your rights to whatever collateral you had under that interest.  In fact, the PPSA appears, almost, to be supporting a ‘nick of time’ registration approach.  Providing you get your registration lodged before the administrator is appointed (or the application for winding up submitted, or the sequestration order given etc) your interest should be perfected and thus protected from the nasty section 267.

Unfortunately, buried within s267 is a little bit of small print as follows:

Note 2:   See also Division 2A of Part 5.7B of the Corporations Act 2001.

Surely that’s not going to be too important?  After all, Note 1 was pretty innocuous (Note 1: For the meaning of company, see section 10).  How bad could Division 2A of Part 5.7B of the Corporations Act be?

Well, it turns out that Division 2A can be pretty bad!

The meat of Division 2A is in section 588FL, entitled “Vesting of PPSA security interests if collateral not registered within time”.  It turns out that, contrary to the apparent ‘nick of time’ support of the PPSA, there is, in fact, a much more tangible deadline by which a registration needs to be lodged in order to keep your collateral out of the hands of a liquidator.

If your registration was not lodged within 20 business days of your security interest coming into force and was lodged during the 6 months leading up to the liquidator’s appointment, then “The PPSA security interest vests in the company” and you lose your collateral to the liquidator!

So, even though you have a properly perfected security interest, registered correctly, within the deadlines set under the PPSA, the liquidator may still be able to ignore that registration and take your goods anyway by virtue of the Corporations Act.

And if, for a moment, you are thinking that this must just be a theoretical argument that wouldn’t apply in real life, then let me remind you that this piece started with reference to Pozzebon (Trustee) v Australian Gaming and Entertainment Ltd (in liq).

• In December 2013 the Pozzebons loaned Australian Gaming and Entertainment Ltd (AGEL) $250,000 with the loan secured against AGEL’s personal property.
• On 19 May 2014 the Pozzebons registered their security interest on the PPSR.
• On 26 May 2014 Administrators were appointed to AGEL with liquidators following some 2 weeks later.

While the Pozzebons may have beaten the clock in terms of the PPSA they fell foul of the Corporations Act and breached the 20 business days’ time limit under 588FL as well as the registration being within 6 months of the external administration ‘event’.  Such was the judgement of Justice Collier towards the end of September in rejecting the Pozzebon claim that their security interest be honoured.

By way of summary, I've drawn up the following flow chart to show how important the timing of a PPSR registration will be under the Corporations Act: