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.

Simplifying the Registration Process - Review Recommendations

When the results of the official Review of the PPSA were released earlier this year, I was tempted to hurriedly put out a number of posts describing its recommendations.  However, this temptation was tempered somewhat by the realisation that, not only was it something of a major job trying to sort through 394 recommendations in a 542 page report, it was highly unlikely that any of the report’s recommendations were likely to be implemented in the very near future.  

This was not from of any lack of confidence in the quality of the recommendations but merely because of the sheer number of recommendations being made and the fact that it took well over a year for the last PPSR amendment Bill to be passed addressing only a single issue (not counting the time taken to decide that a Bill was appropriate in the first place!).

Now that I’ve stuck my toe in the water of the Report’s recommendations in my last, catchily titled, post on the Cross-Collateralisationof PMSIs, I thought I’d draw attention to some of the Report’s recommendations aimed at simplifying the registration experience.

 Consumer property or commercial property?  - Recommendations 86 and 87 propose doing away with the distinction entirely.  No more confusion caused by the uninitiated thinking that ‘commercial property’ means the same thing as commercial premises.

Purchase Money Security Interest (PMSI) applies? - The PPSR’s ‘PMSI Box’ is widely misunderstood with many registrations rendered largely ineffective because a secured party didn’t understand what was meant by a Purchase Money Security Interest.  In both Canada & NZ there is no requirement to ‘flag’ a registration as a PMSI but, instead, PMSI priority will be determined by the nature of the security interest itself whenever competing security interests need to be assessed.  Where ROT suppliers are concerned, recommendation 241 proposing the removal of the PMSI Box is one of the biggest (if not the biggest) recommendations contained in the report.

The collateral is inventory? -  Recommendation 88 proposes doing away with the question, finding that it added little value and merely served to create confusion and uncertainty – as well as an opportunity for liquidators to dismiss an otherwise correct registration.

Current assets are subject to control? – On of the least understood of the questions facing anyone trying to lodge a registration against inventory, the Report’s recommendation 89 also proposes removing this question, again finding that it added little value and that it’s absence would be less confusing.

This registration is subordinate to another? – Again, this is found to be merely confusing and absent of value, thus recommendation 90 advocates its deletion.

Proceeds to be claimed? – Recommendation 180 seeks to make it clear that if a security interest over goods supplied is properly perfected by registration then it should automatically apply to any proceeds from those goods, thus recommendation 98 proposes the removal of the proceeds question when lodging a registration.

Giving of Notice Identifier (GONI) – Recommendation 122 suggests doing away with the expression “GONI” on the register and replacing it with a term that more clearly indicates its purpose as the supplier’s internal client reference number.  GONI was always a ridiculous and misleading term for something that was otherwise so straightforward.

In conclusion, should the Report’s recommendations be adopted, lodging a registration in the future will be simply a matter of identifying the grantor/buyer, choosing a collateral class, entering a brief (but suitably vague) description, choosing a registration period and pressing submit. Too easy!!

But, as I said at the outset, don’t expect much to happen in the short term.

Cross-Collateralisation of PMSIs

One of the more easily missed of the PPSA Review Report recommendations compiled by Bruce Whittaker concerns the ‘cross-collateralisation of PMSIs’.

For trade credit suppliers still coming to terms with the concept of PMSIs, the idea that these can be cross-collateralised might be a step too far too soon.  However, rather than simply causing eyes to glaze over this could well be very good news for trade credit suppliers who simply want to make their Retention of Title (ROT) clauses as effective as possible.

In order to put the recommendation in its proper context we’ll need to briefly revisit the ROT in a pre-PPSA environment.

At its simplest the ROT will be a provision in a supplier’s terms of trade that states that their buyer won’t get title to the goods being supplied until those goods have been fully paid for.

Over time the ‘simple’ ROT was gradually enhanced to allow for on-sale and for on-sale receipts to be ring-fenced for the suppliers benefit; to allow the supplier rights to enter the buyer’s premises to recover goods etc; and, eventually, to provide that, not only would title remain with the supplier until those goods were paid for but also that title would remain with the supplier until all monies owed by the buyer to the supplier had been paid regardless of how those outstandings had arisen.  Thus was born the All Monies Clause.

The All Monies Clause would allow a supplier, with outstanding debt, to recover their product from an insolvent buyer regardless as to whether that specific product had been paid for or not.

Fast forward to the introduction of the PPSA and its priority rules. The PPSA determined that priority of competing security interests should be decided by the date that security interest was registered on the PPSR – the earlier the registration the higher the priority. The exception to this was the creation of the Purchase Money Security Interest (PMSI) which, effectively, created a super priority in cases where the collateral being used as security was securing its own purchase price. In other words, an ROT arrangement would be given a super priority over other competing security interests regardless as to how much earlier those other interests might have been registered.

However, although a ‘simple’ ROT clause would meet the criteria for PMSI treatment, what about the All Monies clause?  Under the All Monies clause the goods delivered by the supplier were not just being used as security for their own purchase price they were also being used as security for any other outstanding debt the buyer owed to the supplier!  So while a security interest could be registered for the All Monies clause it would not merit the PPSA’s PMSI/super priority status and would have to ‘fight it out’ with competing security interests held by other creditors, many of whom may well have registered earlier.

The situation is further complicated where the supplier’s product is such that paid-for goods delivered last month might be completely indistinguishable from unpaid-for goods delivered last week – while the security over the unpaid-for goods has super priority, the All Monies interest over the paid-for goods does not. Do the few remaining goods on the buyer’s warehouse floor represent goods that had been paid for or goods that had not?  Unless the supplier is able to demonstrate that those specific goods had not been paid for they are likely to lose their super priority claim over them.

This is the scenario that the Review Report’s recommendation addresses – why should an unpaid supplier fail in their bid to exercise their properly registered and perfected security interest simply because paid-for goods and unpaid-for goods are indistinguishable?  This is the concept behind the ‘cross-collateralisation of PMSIs’ and although it isn’t intended to apply where there are no problems in distinguishing paid-for goods from unpaid-for goods it will make a big difference to suppliers of a more homogenous product or where serial numbers do not appear in invoices/delivery notes etc.

While there is no indication of any timetable for even discussing Bruce Whittaker's report recommendations let alone implementing them, delving into his proposals is an excellent way of getting a better understanding of the current operation/interpretation of the PPSA.