Section 64 and Maintaining Access to Finance

What is a Section 64 letter?

Note: It is important to have an understanding of a supplier's right to 'proceeds' in order to properly appreciate the role of Section 64 of the PPSA.  You can get a quick briefing on proceeds here.

Section 64 letters are designed to fix the problem caused when a supplier’s claim to proceeds of on-sale conflicts with a financier trying to get ‘clean’ security for an accounts receivables package (also known as debtor financing).

If a financier is being asked to finance a business’s on-sale of goods it is reasonable for them to want to take security over the money the business will receive from that on-sale.  However, where the original supplier of those goods has a Retention of Title clause and has registered it correctly as a PMSI, they are entitled to the first ranking security right over monies received from the on-sale of their unpaid-for goods.

Unless a compromise is reached the buyer may have his access to finance curtailed and the supplier will possibly run a greater risk of late payment or even non-payment.

The compromise included in Section 64 of the PPSA, involves the financier giving the supplier 3 weeks’ notice of their intention to lodge a registration over their customer’s proceeds from sales.  The registration they lodge at that time will take precedence over the supplier’s – BUT ONLY FOR THE PROCEEDS ELEMENT – and, in return, the supplier’s security rights will transfer from the proceeds of on-sale to the proceeds from the financier’s finance package.

Sometimes the 3 week wait is too much for the financier and their customer and, as a result, the supplier will be urged to discharge their registration, allow the financier time to lodge their registration, then put their registration back in place.  This is NOT beneficial to the supplier and would mean that they would be sacrificing their right to proceeds without any commensurate right to a share in the finance to show for it.

PPSA Pitfalls

I've been asked to compile some speaking notes for a colleague who wants to talk about some of the PPSA pitfalls we have become aware of since the PPSR opened for business at the end of January this year.  

While this is far from an exhaustive list (this is for a speaking engagement after all and it doesn't take long for eyes to glaze over once the subject of PPSR is raised) I nevertheless thought it might be helpful to reproduce it here.

• Don’t rely on an independent body such as a judge, court or the PPSR itself to determine the validity of your security interest under the PPSA – more often than not such issues will be decided by a receiver acting on behalf of a bank who will have a vested interest in defeating any competing rights you hold.
  
• Where the PPSA requires goods to be registered by serial number you must not make any mistakes in recording that serial number on the PPSR as any error is likely to invalidate the registration without it having to be demonstrated that anyone was misled by that error.
  
• Banks are frequently (wilfully?) misunderstanding PPSR registrations and asking suppliers to discharge registrations to enable the bank to put their own registration in place – they are then ‘generously allowing’ the supplier to re-register their own interest!  Do not fall for this!
  
• If your debtor/grantor is a company with an ACN and you do not specifically register against that ACN then your registration will almost certainly be deemed to be invalid.
  
• Timeliness is very important. Do not allow your new credit agreements to pile up with the intention of registering  them all at the end of the month.
• Where your goods are destined to form part of your buyer’s inventory (WIP, end product etc.) you need to register before you make delivery.
• Where you are selling equipment that will not be on-sold you need to register not later than 15 days from delivery.
  
• Do not confuse ARBNs with ABNs – an ARBN (Australian Registered Body Number) is a 9 digit number issued by ASIC, most commonly to overseas companies whereas an ABN is an 11 digit number issued by the Australian Business Register.  We have seen a lot of invalid registrations arise from this confusion.
  
• While the PPSA does not require you to obtain prior permission from your buyer to register your security interest against them it does require you to notify them once you have lodged your registration. (With the right wording in your agreed Terms & Conditions, however, you can have your buyers waive their rights to receive such notification).
  
• PPSR registration is not enough to justify your claim against an administrator; you will still need to be able to provide the documents that demonstrate you have the valid security interest you are claiming with your registration.
  
• Most know that Retention of Title clauses justify PPSR registration but don’t overlook the need to also register consignment stock and long-term leasing arrangements.
  
• Make sure that your staff who are actually lodging your registrations understand what they are doing – we see many instances where they seem confused by terms such as ‘inventory’ and ‘Retention of Title’ let alone ‘Purchase Money Security Interest’.
  
• It is better to have a PPSR registration you don’t need than to need a registration you don’t have.
  
• Do I need to register all my security interests – No, only the ones you want to be effective.

Section 64 of the PPSA

OUR CLIENT has a properly registered security interest lodged on the PPSR in respect of a Retention of Title clause included in their terms & conditions with THEIR BUYER.

Because OUR CLIENT’S security interest is in the form of a Retention of Title clause it entitles OUR CLIENT to have designated their security interest as a Purchase Money Security Interest (PMSI) thus giving OUR CLIENT a higher level of priority for their security than might otherwise be the case.

OUR CLIENT’S security interest also extends to any proceeds that might arise from THEIR BUYER on-selling or otherwise using/disposing of the goods subject to the retention of title.

However, as far as those proceeds are concerned (just the proceeds, not the actual goods OUR CLIENT has supplied) THE BUYER’S BANKERS are advising OUR CLIENT that they have a competing claim to the proceeds by virtue of a debtor financing facility they have put in place with THEIR BUYER.  THE BUYER’S BANKERS are suggesting that, in the event of THEIR BUYER entering into receivership or liquidation, their claim on the proceeds will rank higher than OUR CLIENT’S claim.  While this position may be subject to challenge, Section 64 of the PPSA certainly gives them grounds for this view.  In return for being pushed down the priority pecking order for proceeds, OUR CLIENT will automatically have their PMSI rights expanded to include a share in the money being advanced by THE BUYER’S BANKERS in so much as it relates to the sale of product originating from OUR CLIENT.

While I’ve yet to see any examples of this being challenged/upheld in practice, OUR CLIENT should proceed on the basis that, while they have the highest priority security interest over the goods they are specifically supplying, they probably now only have a second level priority over any proceeds that may arise from the subsequent sale of those goods by THEIR BUYER.

No action is required on OUR CLIENT’S part. 

On the one hand, the presence of THE BUYER’S BANKERS’ debtor financing may give OUR CLIENT some additional comfort that finance is being made available to THEIR BUYER to make payments to its suppliers but on the other, if THEIR BUYER does fail, the extent to which their security interest can be stretched to include income from goods OUR CLIENT supplied but which have subsequently been sold by THEIR BUYER has been weakened.

We have seen banks and other financiers try to ‘encourage’ suppliers who have registered PMSI interests to discharge their registrations or otherwise grant releases where the bank is looking to securitise its book debt financing facilities but issuing such notices under Section 64 of the PPSA is the correct way for banks to go about this and better achieve their ends.

As per usual, I have reproduced below the actual text from Section 64 of the Act:

64  Non‑purchase money security interests in accounts

Non‑purchase money security interest in account as original collateral has priority over purchase money security interest in account as proceeds of inventory

             (1)  Despite subsection 62(2), a non‑purchase money security interest (the priority interest) granted for new value in an account as original collateral and perfected by registration has priority over a perfected purchase money security interest that is granted by the same grantor in the account as proceeds of inventory, if:

                     (a)  the registration time in respect of the priority interest occurs before the earlier of the following times:

                              (i)  the time at which the purchase money security interest is perfected;

                             (ii)  the registration time in respect of the purchase money security interest; or

                     (b)  both of the following conditions are met:

                              (i)  the secured party holding the priority interest gives a notice in accordance with subsection (2) to the secured party holding the purchase money security interest;

                             (ii)  the notice is given at least 15 business days before the earlier of the day on which the registration time for the account occurs and the day the priority interest attaches to the account.

Note 1:       This section is subject to sections 57 (perfection by control) and 71 (chattel paper).

Note 2:       The period mentioned in paragraph (b) may be extended by a court under section 293.

             (2)  A notice is given in accordance with this subsection if:

                     (a)  the notice is in the approved form; or

                     (b)  the notice:

                              (i)  contains a description of the inventory to which the notice relates; and

                             (ii)  sets out the effect of subsection (1).

Perfected purchase money security interest in both proceeds and new value

             (3)  If a person has a purchase money security interest in an account as proceeds of inventory that is subordinate to a non‑purchase money security interest under subsection (1):

                     (a)  the person is taken to have a purchase money security interest in both the proceeds of the inventory and in the new value mentioned in subsection (1); and

                     (b)  the purchase money security interest in the new value is taken to be perfected by the registration that perfected the purchase money security interest in the proceeds; and

                     (c)  the new value is taken to be an account for the purposes of this Act (except for the purposes of this section or paragraph 12(3)(a) (account transferee’s interest taken to be security interest)).

             (4)  However, if the new value mentioned in paragraph (3)(c) would be an account for the purposes of this Act in the absence of that paragraph, the paragraph does not prevent the new value from being an account for the purposes of this section or paragraph 12(3)(a).