PPSR - Ticking the Inventory Box

Should I designate my goods as ‘Inventory’ or not?

The correct answer depends upon how your customer will be dealing with the goods being supplied.

It is a common misunderstanding that whether the goods are 'inventory' or not depends upon how they are treated by the supplier.  I've heard suppliers, when asked why they didn't designate their goods as inventory, say, "Because they weren't inventory items, we had to make them specially".

Under the PPSA, an item of property can be inventory if sold to one business or non-inventory when sold to another - it all depends upon the use to which the buyer will put the property in question:

• If the goods are for on-sale, 

• for inclusion into an end-product that will be on-sold, or

• consumed as part of the customer’s business (eg, fuel for a transport company, or disinfectant for hospital), 

then they should be designated as ‘Inventory’.  Otherwise, the inventory designation should be left blank.  

While the official review of the PPSR recommended doing away with the 'inventory question' because of the confusion it causes, for the time being, it is still required as part of the registration process and, if you get it wrong, you will find it difficult to enforce your registration.

Update to the PPSR - R6d

A small update went into the PPSR over the weekend.  The main change has been long awaited and should be welcomed by all.

Previously, when lodging a new registration, the expiry period options only allowed for 25-year and indefinite periods to be chosen, for any other period, a specific date needed to be added:

With one of the most common registrations periods preferred by trade credit suppliers being 7 years, having to specifically add an end date was, not only a nuisance but also fraught with the opportunity for error.

This has now been fixed and users from this morning onwards are able to simply select a 7-year registration period and let the PPSR calculate the end date:

Not an especially radical change but one that should make life just a little bit easier, and that's nice.

Registering against Trusts

It’s been well over 4 years since I last dedicated a post here to the issue of trusts, so, while the earlier article still holds up well, it’s probably about time I revisited the subject and freshened up what we know.

Firstly, I’ll preface what follows with Recommendation 110 from the Official Review of the Personal Property Securities Act completed just over 2 years ago and, as far as I can tell, no closer to having the vast majority of its 394 recommendations adopted.

Recommendation 110: That the Regulations be amended so that a registration to perfect a security interest over trust assets should be made against the relevant details for the trustee, rather than the ABN or other identifying details for the trust.

Why did the Official Review make this recommendation?

Well, let’s look at what the rules for registration look like when a Trust is involved.

Unfortunately, those rules won’t be found in the Personal Property Securities Act itself, but in the Personal Property Securities Regulations 2010,  wherein you will be treated to some of the most convoluted ‘guidance’ I’ve come across in relation to the PPSA.

 

To save you the agony, I’ve summarised the key guidance:

• If the Trustee is a corporate body and has an ARSN (Australian Registered Scheme Number – pretty unlikely for trade credit transactions) then the registration should be lodged against the 9 digit ARSN.
• If the Trustee is any other kind of body (or individual) and the relevant Trust has an ABN, the registration should be lodged against the Trust’s ABN (this is probably the most likely scenario).
• If the Trustee is a corporate body but its Trust does not have an ABN (unlikely) then the registration should be lodged against the Trustee’s ACN.
• If the Trustee is an individual but the Trust does not have an ABN, then registrations should be against the individual’s details – usually, full name and date of birth.

The first problem that springs to mind lies with simply knowing whether the company that is interested in becoming your customer is acting as a Trustee or not.  Your potential customer may simply omit mentioning that they are acting on behalf of a Trust.  How is the poor supplier to know?

While the supplier may discover that there is a Trust, not knowing whether the potential customer is acting in their capacity as Trustee or purchasing in their own right will either leave the supplier open to opting for the wrong type of registration or going to the trouble and expense of lodging two registrations ‘just to be safe’.

Where does the supplier stand if goods are supplied to a company with a Trust that doesn’t have an ABN (and thus registered against the ACN of the company) only to find out later that an ABN has since been obtained for the Trust? 

Interestingly, the same rules that apply to identifying Grantors also apply to identifying Secured Parties when setting up their Secured Party Groups on the Register.  However, while failing to identify the Grantor in absolute accordance with the PPSA’s rules may lead to the registration being deemed ineffective, the situation is not as dire when it comes to identifying Secured Parties. 

As found in Future Revelation Ltd v Medica Radiology & Nuclear Medicine Pty Ltd[2013] NSWSC 1741, the determining factor will be whether the registration would be revealed during a properly conducted search – while it would not be found in the case of a wrongly identified Grantor, an incorrectly identified Secured Party’s registration would still show up in Grantor based search results.

In summary, where Trusts are involved, the PPSA’s registration rules are horrible, ill-conceived and confusing but… we’re stuck with them for the foreseeable future and, as far as companies are concerned, I advocate a belt & braces approach of lodging registrations against both the Trust ABN and the Trustee’s ACN.

Is that it? (Notice Filing System vs Transaction Filing System)

Once they get past the PPSR’s jargon of purchase money security interests, giving of notice identifiers, subordinated registrations etc, many of my trade credit clients have something of an ‘is that it?’ reaction. They’d been gearing themselves up to having to list part numbers and order references only to find that simply choosing the collateral class category of ‘Other Goods’ was pretty much all that was required. Understandably, there’s an element of anti-climax and concern that they should be doing more when it comes to describing the goods/collateral involved.

The answer to their concerns, to my way of thinking, rests very much in the nature of the register that the PPSR was set up to be. 

Prior to the PPSR, company security interests were registered on the ASIC Register of Company Charges.  The ASIC register acted as a Transaction filing system, whereby the document that acted as the security interest was filed in its entirety – a 30 to 40 page Registered Charge document signed by both parties being the most common.

Although the PPSR replaced ASIC’s register, the PPSR has been established as a Notice filing system whereby the secured party is merely required to announce that it has a security interest (or is likely to have a security interest).  The actual security interest – usually represented for trade credit suppliers by a Retention of Title clause in their terms and conditions – would need to be kept separately and brought out at any time evidence is required that the security interest asserted by the registration on the PPSR actually existed.

The registration on the PPSR, therefore, does not define the security interest or the collateral to which it applies, but instead merely needs to describe it in a manner that would provide an indication as to its nature for interested third parties.  Where the ASIC register stored 40 page documents, the PPSR stores the equivalent of an electronic post-it note.

Thus, when a supplier lodges a registration perfecting their Retention of Title security interest, they are putting others on notice that they have an interest, the precise details of which may be separately available from them in response to any third party enquiry – such as might be required from an insolvency practitioner should the customer fall over.

When a liquidator (or similar) is appointed to a company, they will conduct a search of the PPSR to see who is asserting they have a security interest.  They will then write to each of these asking for the evidence that such an interest exists and is consistent with the general description provided by their lodgement on the PPSR.  It is at this point that suppliers will need to detail the specific items of collateral to which their security interest applies and provide evidence of the relevant acceptance by the customer of their security rights.

Specific serial numbers are only required to be provided as part of a PPSR registration when that registration concerns motor vehicles, watercraft, aircraft and certain other weird and wonderful types of collateral such as Intellectual property patents and plant breeders’ rights.

Inserting serial numbers in Collateral description fields of ‘Other Goods’ registrations may be of some assistance to a liquidator in identifying specific stock – although promptly providing that information separately upon request would be just as helpful – but can create a rod for suppliers’ backs in as much as any typo or omission would render the effectiveness of that registration subject to challenge.  It would also take the supplier down the path of having to either lodge multiple registrations every time a fresh delivery was made or constantly amending existing registrations – an administrative burden I’m sure they could do without.

If a security interest is in the form of an accepted Retention of Title clause then an ‘Other Goods’ registration, describing the collateral as that supplied by the secured party and the interest as a Purchase Money Security Interest (PMSI) should be sufficient, if registered in a timely fashion, to secure a supplier’s rights to those goods until such time as they have been fully paid for and assure the supplier of a higher ranking interest over those goods than any other creditor in the event the customer falls insolvent.