Top 5 Registration Errors

I came across an article in ‘Lawyers Weekly’ a couple of days ago, suggesting that more than 80% of businesses listing on the PPSR have made errors that may limit or invalidate their rights.

While this doesn’t really give much idea of the scale of the problem – it certainly isn’t intended to mean that 80% of all registrations are somehow wrong – it clearly reinforces the idea that the PPSR is far more demanding than it should be for a public register.

So, what are the most common errors that businesses are making?

Based, purely on my own observations, the following are the top 5 key problem areas.

Identifying the Grantor – Businesses seem much more comfortable using ABNs than ACNs and attempt to stick them in wherever possible. To the extent that they will treat an ABN and ARBN as one and the same, shoehorning a version of the ABN into a field designed to identify (primarily) overseas companies registered in Australia.

PTY LTD and PTY companies will have an ACN and failing to use that ACN when lodging a registration against them will have serious consequences.

When it comes to the PPSR, there is no such thing as ‘close enough is good enough’.  Grantors must be identified strictly in accordance with the PPSA’s rules.  When a third party wants to find out what security interests exist against a given company, they are guided by the PPSR to search by ACN.  If a search under that company’s ACN does not reveal your security interest it will almost certainly be considered invalid.

Forgetting about the Trust – Unfortunately for those who like simple rules such as “always use a company’s ACN to lodge a registration”, there is an exception where Trusts are involved. 

Where a company is acting as trustee of a trust (and that trust holds an ABN) the registration should be lodged against the ABN of the Trust.  Given that it is possible for a company to purchase both in its own right and in its capacity as a trustee, I tend to advocate lodging a registration against both.

“I don’t understand the question so I’ll leave it blank” – I’m positive that lack of customer reference numbers (or similar) included in registrations has a lot to do with the fact that the PPSR’s chosen term for this is ‘Giving of Notice Identifier’.  It is hard to think of a more awkward, less user-friendly term.  However, while failing to make an entry in GONI won’t cause too much of a problem, leaving the ‘Purchase Money Security Interest’ option blank for the same reason will be a lot more problematic!

Anyone selling subject to a Retention of Title clause, under a consignment stock arrangement, or leasing goods will lose virtually all their much deserved priority should they fail to tick this box.  

Don’t understand the definition of a PMSI?  No worries just tick the box anyway when you’ve got a Retention of Title clause in your terms.

Not taking stock – Even when the terms should be relatively familiar, such as in the case of “Is the collateral Inventory?” we see frequent problems. When asking why a supplier didn’t designate their interest as being over inventory, answers have included, “but it wasn’t inventory, we had to cut it to shape for them”, “we had to order it in specially”, or simply, “I didn’t think it was important”.

Firstly, everything in a PPSR registration is important.  Secondly, if you are selling goods that your buyer is going to be on-selling, using as part of their own end-product for on-sale, or using up in a production process or similar, it will be inventory. Failure to identify it as such could easily mislead a debtor financier or factor into thinking they can take clear title to accounts receivables, for example.  And, under the PPSA, if an error in registration can mislead it will, more than likely, be deemed ineffective.

Processing Proceeds – ROT suppliers are leaving the ‘Are proceeds to be claimed?’ question blank far too frequently.  While they may know what proceeds are, what they may not be aware of is their entitlement to claim proceeds for the on-sale of the goods they have supplied.

As a general rule, if you tick the PMSI box, you should also tick the Proceeds box.

While there are plenty of other opportunities for mistakes to be made (claiming a control of assets you don’t have, poorly thought out collateral descriptions etc), the above certainly represent the conjunction of the most common and most impactful.

Of course, the biggest error would be not to lodge a registration at all!

PPSR & ‘Complicated Scenarios’

During the late 12^th and early 13^th centuries, the then Pope was having some difficulties with what, he deemed to be, heretical Catholics – those whose beliefs were out of step with the orthodox Catholic teachings of the time.  This resulted in some pretty horrific acts, particularly in southern France, and none more so than the massacre at Beziers in July 1209.

The town of Beziers was seen as a stronghold of Catharism (the heretics) but also included a fair-sized population of orthodox Catholics.  When ordered to attack the town, the story goes that a young soldier asked the Pope’s representative, Arnaud Amalric, how he would be able to tell the difference between orthodox Catholics and the heretic Cathars.  The reply has been filtered down through history to us as ‘Kill them all and let God sort them out”.

I feel a little uncomfortable quoting Amalric in a context as mundane as the PPSR but I’ve found myself increasingly resorting to advice along the lines of:

‘When in doubt, lodge a registration’ or

‘It’s better to have a registration you don’t need than need a registration you don’t have’ and 

‘Register them all and let God sort them out’.

Personally, I don’t really like the ‘scatter gun’ approach, I prefer a little more surgical precision, but there comes a point where the issue is not just about being right but also about avoiding getting caught up in expensive, long, drawn out arguments where you need to demonstrate that you are right.

While the PPSR has been with us for well over 4 years now, there is still a surprising lack of legal precedent established and there are a number of areas where argument is commonplace. 

The extent to which a Transitional registration is still appropriate despite minor amendments to terms & conditions; when is it appropriate to register against a Trust and when against the trustee of that trust; and to what extent a PMSI registration can also perfect a non-PMSI element are just a few of the more contentious areas.

In a recent question that was put to me, a client is trading with a buying group where invoices will be paid by one entity and yet goods will be delivered to, and on-sold by, a number of separate, albeit, related entities.  Who should the registration be lodged against?

Without going into the specific terms, my advice was, effectively, two-fold:

1. You register against the entity, or entities, that have demonstrably accepted your retention of title clause; and
2. Register against them all – at least one of the registrations is bound to be right!

The second response isn’t one I’m particularly proud of, but suppliers regularly face complicated scenarios such as these and legal advice can be expensive.  A PPSR registration, on the other hand, will cost as little as $6.80.  

Not sure which of 10 companies to register against?  

Asking a law firm to check your agreements and advise, will result in an expenditure of anything up to $1000; by comparison, lodging a registration against each of the 10 companies, just to be on the safe side, will cost $68.

And, as I suggested earlier, just because you’ve had legal advice, probably very good legal advice, doesn’t mean you won’t still get an argument from a liquidator who believes they have received equally good legal advice.

Is there a downside to multiple registrations in such circumstances?

The PPSA allows for appeals to be made by Grantors that believe a registration is unreasonable but, for any penalties or claim for damages to be made against the registering supplier, it would need to be demonstrated that the supplier didn’t have a ‘reasonable belief’ that the registration would be appropriate.  Again, there are no legal precedents that help us very much here, but, the more complicated the scenario, the more difficult it would be to demonstrate that the supplier’s registrations were not a reasonable response to a complex situation.

So, while I don’t particularly want to align myself with a 13^th century, blood-thirsty religious fanatic, my advice may often be ‘Register them all and let God sort them out’.

PPSR & Preference Claims

I hadn’t realised until recently how long it’s been since I’d posted on the subject of (Unfair) Preference Claims.

However, there have been some developments since that time, including a particularly interesting legal judgement recently, and an update is appropriate.

For a refresh on the basics, you can find my earlier post here.

In this post, I’m going to be looking at:

• The standing of a Retention of Title clause when it comes to determining whether a payment was secured or not; and
• The Corporations Act’s problem with Transitional security interests.

New light was potentially shed on the options for mounting a defence against a liquidators’ preference claim in Justice Edelman’s ruling in Hussain v CSR Building Products Limited regarding the payments made by FPJ Group Pty Ltd.

The ruling runs to some 248 numbered paragraphs and covers many aspects of the standard preference claim defence available to suppliers – running account, good faith and the test for insolvency – but what concerns us here is the Judge’s conclusions regarding the role an unregistered Retention of Title clause played in determining whether the supplier, CSR, received payments in respect of an “unsecured debt”.

Justice Edelman found that there were sufficient references in the Corporations Act to a Retention of Title right being, in substance, a form of security that, while in the circumstances CSR may not satisfy the definition of a ‘secured creditor’, their Retention of Title right was sufficient to render the debt they were owed ‘not unsecured’.

It will be interesting to see to what extent this view is allowed to stand unchallenged because it certainly seems to run counter to a line liquidators have been taking with the, apparent, support of section 51 of the Corporations Act.

Section 51 is one of the relatively recent additions to the Corporations Act brought in to harmonise with the introduction of the PPSA. It’s a very short section and states:

“ In this Act:"PPSA security interest " (short for Personal Property Securities Act security interest) means a security interest within the meaning of the Personal Property Securities Act 2009 and to which that Act applies, other than a transitional security interest within the meaning of that Act.”

Effectively, the Corporations Act is acknowledging that the holder of a security interest that is recognised as such under the PPSA will be deemed to be a secured creditor.  But it also goes on to say ‘except for transitional security interests’.

While this aspect of the Corporations Act does not impact upon a creditor’s status when pursuing outstandings upon the appointment of a liquidator, it has been used to impact upon a supplier’s rights to retain alleged preferential payments.

When a supplier seeks to defend themselves against a liquidator’s preference claim by asserting they were a secured creditor, the liquidator will, invariably, reject the defence on the basis that their PPSR registration was lodged as ‘Transitional’.

This has given rise to a widespread call from intermediaries, brokers, and other assorted advisors, that suppliers should lodge fresh non-transitional registrations to secure their interests.

While this may not hurt (and may improve a supplier’s chances of a successful outcome) there is an element of confusing the wrapping for the gift. 

The Corporations Act does not exclude security interests registered as transitional; it excludes security interests that are transitional.  Registering an interest as non-transitional does not suddenly make that underlying interest non-transitional just as attempting to perfect a non-transitional security interest with a transitional registration will not meet with success.

So, while transitional registrations are to liquidators as red rags are to bulls, putting non-transitional registrations in place will certainly be a good idea, for liquidators who take the trouble to look closely, they may not be sufficient.

However, for those liquidators, there is always the ruling of Justice Edelman to fall back on!