When Does the PPSA's Transitional Period End?

Just a quick post on the subject of the end of the PPSA's two year Transitional period.

With the transitional period due to expire soon I have seen a lot of articles and posts referencing this important point in time and urging prompt action on the part of security holders.  

However, there seems to be a lack of clarity over when, precisely, the transitional period is due to end; some advise that the deadline is 30/01/2014 while others vaguely state “January 2014” or "the end of January 2014".

30th January 2014 is a tempting date because the Register came into effect on the 30th January 2012 and, perhaps for this reason, seems to be the most common deadline date quoted.

However, the precise end date is defined in legislation - The Personal Property Securities Regulations 2010 - in which, at Part 9.3, it is written:

This Part [the Transitional provisions] ceases to have effect after the end of the month that is 24 months after the registration commencement time.

Thus, the transitional arrangements do not apply from 1st February 2014 onwards and the last point in time at which a transitional security interest may be registered as such will be immediately before midnight (Canberra time) on 31st January 2014.

PPSR End of Year Statistics

The Insolvency and Trustee Service Australia (ITSA) has recently released their statistics for activity on the PPSR for the quarter ending 30th June 2013.

Probably not surprisingly, out of over 1.5 million searches conducted (the busiest quarter of the 2012/13 year), the vast majority (61.4%) were searches of motor vehicle serial numbers with the balance pretty much taken up by searches for registrations against organisations (32.2%). 

543,620 registrations were lodged on the Register during the quarter with an overwhelming majority (87.8%) being non-transitional registrations.

Interestingly, at 354,937, the number of discharges was equivalent to almost two thirds of the number of new registrations lodged giving 188,683 in net new registrations.  However, with the total number of registrations as at the end of June (7,366,053) showing only a 111,721 increase over the equivalent figure reported for the end of the previous quarter, this leaves us with a discrepancy of just under 77,000.

ITSA provides no explanation for the loss of 77,000 registrations during the quarter.  Conceivably they have all expired naturally (although that does seem a particularly high figure this early in the life of the PPSR given that the register virtually encourages registrations for up to at least 7 years) or perhaps someone will find that they have slipped down the back of a cupboard somewhere.

Motor vehicles are the most common collateral class listed on registrations on the PPSR. As at 30 June 2013, there were 3,998,373 current registrations on the PPSR of this class.  ALLPAPs (with and without exceptions) came in second with just under half that number and then ‘Other Goods’ registrations at 1.23 million.

The full set of statistics released by ITSA can be found at the following link:

https://www.itsa.gov.au/about-itsa/ppsr/ppsr-statistics/ppsr-quarterly-statistics/june-2013-ppsr-quarterly-statistics/june-2013-ppsr-quarterly-statistics-report

A PPSA Rant

This is probably a post that might be better saved for some sort of anniversary but I feel the need to vent a little and remind those who still read these ramblings of this blog’s title. (update: at the time of writing this blog was called "The Poorly Planned Securities Register")

The PPSR has been in place for 18 months now, the ability to lodge transitional security interest registrations will expire in 6 months’ time and we have 18 months to wait until a legislated review of the operations of the PPSA is due to be reported to the responsible Minister (s343).

I suppose my main concern is that the eventual review will spend an inordinate amount of time re-hashing the Register’s first few weeks or so of operation when it was beset by technical problems before making a brief observation that there was ‘some debate’ concerning the application of the Act’s transitional rules but, as the transitional period would, by then, have been long concluded, decline to make any proposals for improvement.

While any dithering by secured parties over whether to register an interest as transitional or non-transitional will certainly come to an end by the close of January 2014, there will still be millions of transitional registrations on the PPSR ripe for challenge by insolvency practitioners anxious to maximise the assets under their administration.

The Transitional vs Non-Transitional issue looks to be with us for a considerable time and, while it would be easy to blame insolvency practitioners and lawyers keen to stretch the meaning of every word and phrase in the Act, the responsibility for this rests squarely with the drafters of the Act.

It also rests with those who failed to make their intentions clear and with those who didn’t seem to realise that the implications of this Act were so substantial that the whole of the country should be informed of its existence. 

It rests with whoever set up the PPSR’s Help Desk, which, when faced with any question that doesn’t involve a ‘press this button’ or ‘click that link’ answer, declines to help and instead suggests that the caller obtains legal advice or contacts a PPSR broker.  An issue of which I’m only too well aware as anyone googling ‘PPSR Broker’ invariably appears to end up laying the question at my doorstep.

We don’t need to get legal advice when we renew our vehicle rego; pretty much any other situation where a regular repeated registration ‘type’ activity takes place does not necessitate immediate reference to a lawyer.  And yet the, supposedly, simple determination as to whether I am eligible to register an interest as transitional or not has become a legalminefield.

We have situations where suppliers with ‘allmonies’ clauses on their retentions of title feel obliged to lodge two separate registrations against the same grantor, just to be on the safe side, as the PPSA does not make it sufficiently clear whether a single PMSI designated registration would be sufficient.

If I take one of my guitars to a well-known guitar shop to sell on my behalf only to find that my ownership counts for nothing in the event the guitar shop goes bust then I think it is quite legitimate to feel aggrieved at a government that changed the laws dealing with such ownership considerations without letting me know and advising me on the available remedies – yet this was exactly what happened to those dealing with JacksonsRare Guitars at the end of last year.

If the strata plan, charity or sports association I am selling to has an ABN, why can’t I use that ABN when I lodge my security interest against them?

Why are the PPSA’s rules on Trusts so convoluted that the best advice we can give is to adopt a belt and braces approach and lodge separate registrations against the trust and its trustee?

Why does it cost nothing to register an indefinite transitional registration but $140.00 to amend it in any significant way?

Why does the PPSR require us to differentiate between an ACN, and ARSN and an ARBN?  They each have 9 digits and are searchable on ASIC so why add a further layer of complication and scope for dispute to an already fraught area?

Why does the PPSA’s definition of a Motor Vehicle include equipment and machinery that quite obviously is not a motor vehicle?  I may do a separate post on this issue but anyone who deals in agricultural equipment that may be towed by a tractor for any distance should look seriously into the issue.

OK, rant over for now (although I reserve the right to post a Part Two at some point).

The Dangers of Amended Terms & Conditions

For us simple folk, the basic difference between ‘transitional’ and ‘non-transitional’ under the PPSA boils down to the simple question – is this a long-standing customer or a new account?

If a supplier’s trading account was in place prior to the PPSR’s start date on 30/01/2012 then any on-going security interests would be dealt with under the PPSA’s transitional rules, after that date and the transitional rules do not apply.

[My earlier post at http://ppsr-blog.blogspot.com.au/2012/05/challenges-to-ppsas-transitional-rules.html should be referred to for an explanation for identifying a transitional security interest.]

Why is the transitional/non-transitional designation so important?

Well, for one thing, the PPSA provides for a 2 year period during which transitional security interests are deemed to have been perfected without needing to be registered.  This is designed to give trade credit suppliers plenty of time to get around to putting all their long-standing accounts on the register before the end of January 2014 deadline.

So a transitional security interest is basically an existing account that hasn’t yet been registered on the PPSR?

Well, not quite.  When you make a registration on the PPSR one of the first questions you get asked is whether the registration is for a transitional or non-transitional security interest.  So PPSR registered interests may also be ‘transitional’. This is because the rules for determining priority are applied differently depending upon the transitional status of the security interest.

Where you have two equivalent security interests competing for the same collateral, priority is given to the security interest that was registered first; UNLESS one or more of the security interests was a transitional security interest in which case those interests are deemed to have been perfected immediately before the PPSR came into effect.

Now it has been argued that, as the PPSR acts as a notice filing system rather than a transaction filing system, aside from those pesky priority issues, it shouldn’t really matter if a registration is designated as a transitional or non-transitional security interest, what really matters is that the presence of a security interest has been made public and interested parties can be made aware of its existence.  The extension of this argument is that if a security interest was wrongly identified as transitional then an Insolvency Practitioner (IP) could simply ignore its transitional designation and treat the security interest as if it were non-transitional. 

A little like a piece of children’s craft work having its age category mislabelled when being entered into a school craft fair, the piece of work should simply be re-allocated to the correct age category and judged accordingly.

Unfortunately, I haven’t seen any evidence of this argument gaining much in the way of traction and many IPs continue to be quick to pounce on any instance where they believe a registration was wrongly categorised as an opportunity to dismiss a supplier’s claim to secured creditor status.  IPs are effectively disqualifying the child’s craft work from the whole competition rather than assessing it in its correct category.

Ok, it sounds harsh but no-one really expected IPs to be the sort to go around kissing babies and patting puppy dogs and if a supplier can’t tell the difference between a long-standing account and a new account then surely they’ve got to take some responsibility for that?

If only it were that straightforward. 

The issue we are now seeing involves instances where suppliers have made changes to the terms & conditions of their original agreements with their long-standing customers, perhaps to make reference to the PPSA or to clarify how payments are to be allocated, or any of a myriad of sensible variations and amendments.

If any of those changes were introduced after the PPSR came into effect on 30/01/2012 then IPs are arguing that the transitional rules can no longer apply to any subsequent security interests.

That may be understandable if the changes to the initial agreement were done in such a way as to form a completely new agreement but most variations are done so as to maintain the integrity of the original agreement.

That may be so but that might not be good enough under the PPSA. 

Section 308(b) of the PPSA defines a transitional security interest as

…a security interest provided for by a transitional security agreement, if:

(b)  in the case of a security interest arising at or after the registration commencement time:

(i) the transitional security agreement as in force immediately before the registration commencement time [30/01/2012] provides for the granting of the security interest;

The specific wording at issue is the reference to the security agreement “as in force” prior to 30/01/2012.

If we assume that the PPSA’s drafters knew what they were doing (a bit of a stretch I know) then we must consider what inferences need to be drawn from their drafting choices. 

They could simply have referred to a transitional security interest as being one that arises from a security agreement “in force” before 30/01/2012 but instead they chose to refer to a security agreement “as in force” before that date.  While the former would not be without its ambiguities, the choice to include the additional two letters appears to lend support to the suggestion that it is not merely the agreement that needed to be in place before 30/01/2012 but that version of the agreement which gave rise to the security interest in question.

If a later version of the credit agreement was introduced after 30/01/2012 then it would be that later version, it is argued, which would be deemed to have created the security interest and thus the transitional rules would not apply.

That’s an awful lot to read into the inclusion of a single two letter word.

Indeed it is and there is no obvious clarification of intent in the original PPS Bill’s Explanatory Memorandum which simply states that:

“A security interest would be a transitional security interest ….. where the security agreement is entered into prior to the registration commencement time and allows for the creation of the security interest”.

However, if there is one thing we’ve learned since the PPSR began it is that IPs will be only too happy to exploit any chink in a supplier’s registration if it means they can increase the value of the grantor’s assets they get to play with.

Therefore, if a supplier’s Terms & Conditions were amended after 30/01/2012 and that supplier wants to avoid a long, drawn out (and potentially unsuccessful) argument with an IP, they should ensure they have a non-transitional registration in place in addition to any transitional registrations.

Hopefully legal precedent will be established that suggests such a belt and braces approach is unnecessary but, until then, this approach appears to be the best way to avoid the risk of losing security interests and/or priority.

This is almost certainly an issue where suppliers would be wise to obtain their own legal advice.

When Transitional Arrangements Don’t Apply

The PPSA and its transitional provisions got another run through the courts in the case of The Receivers of Maiden Civil (P&E) Pty Ltd & Others v Queensland Excavation Services Pty Ltd & Others NSWSC 852 in which a decision was handed down last week.

In many ways the case is not especially noteworthy (other than by virtue of involving the PPSA) and is mainly being cited as confirming what was pretty much accepted anyway:

That the supplier of unpaid for goods will lose them to the liquidator of the company to which they had been supplied unless the supplier holds a perfected security interest over them.  (Section 267 of the PPSA refers).

This will apply whether the goods have been supplied under a contract of sale, leasing arrangement, consignment stock agreement etc.

In the case of Maiden Civil v QES the supply was under a long term leasing arrangement.

Leasing arrangements are deemed by the PPSA to automatically qualify for security interest status by their very nature (sections 12 and 13 of the PPSA refer).

What was particularly interesting to me; however, was why the court determined that the lessor’s security interest had not been perfected by the PPSA’s transitional rules.  The leasing arrangement had been put in place long before the start date of the PPSR and there was nothing about the lease that exempted it from the purview of the PPSA so why no transitional protection?

The answer appears to lie in section 322(3) of the PPSA. 

322(1) covers when the perfection of a transitional security interest begins, 322(2) covers when that perfection ends and 322(3) covers exceptions as follows:

(3)               Subsections (1) and (2) do not apply to a transitional security interest in collateral if the interest is of a class prescribed by regulations made for the purposes of this subsection.

Unfortunately, this didn’t make things much clearer to me until I opened up the Personal Property Securities Regulations 2010.  This is a formal legislative instrument that, among other things, provides a definition of Motor Vehicle and Watercraft and provides some rules relating to access to the PPS Register.

It also, at regulation 9.2, clarifies what is meant at 322(3) of the PPSA, by stating:

         (1)   For subsection 322 (3) of the Act, a transitional security interest is prescribed if, before the registration commencement time it was:

               (a)    registrable on a transitional register, under legislation that conferred priority on security interests that are registered; and

               (b)    not registered.

What this means in practice is that, because at the time of entering into the Leasing arrangement there was already a perfectly good pre-PPSR register in place for registering such interests (in this instance the NT Register of Interests in Motor Vehicles and Other Goods) that was not used, the PPSA’s transitional rules will not apply.

Basically, if you didn’t have your act sufficiently together to register your security interests on the appropriate register before the PPSR was introduced then you can’t rely on the PPSA’s transitional rules to save you when things go wrong!

There’s an excellent overview of the full circumstances of the Maiden Civil case to be found at http://www.herbertsmithfreehills.com/insights/legal-briefings/key-ppsa-decision-nswsc-confirms-vesting-of-unperfected for anyone interested in reading further.

Transitional Rules Revisited

It’s been over a year now since I described what I saw as the intent behind the PPSA’s Transitional arrangements and how a number of insolvency practitioners were seeking to negate that intent with their far more restrictive interpretations (click here for my original piece).

Since that time we have remained without any legal precedent that could be used to determine the issue once and for all.  However, as the 17^th month of the PPSR’s operation drew to a close (the end of June 2013 for those not wanting to count), Justice Beech and the Supreme Court of Western Australia stepped up to the crease and took a pretty healthy swing at the issue.

The Case

In 1998, Supplier Pty Ltd and Buyer Pty Ltd entered into a credit agreement containing a Retention of Title clause intended to provide terms and conditions applicable to future deliveries made by Supplier to Buyer.  Supplier was also the beneficiary of a guarantee from Mr Guarantor committing Mr Guarantor to making good any shortfall in monies owing to Supplier in the event of Buyer’s non-payment.

Back to the present day and the issue being considered is the extent to which Supplier Pty Ltd is able to maintain a caveat over real estate property held by Mr Guarantor by way of protecting the effectiveness of his guarantee.  Mr Guarantor has argued that Supplier’s failure to register their ROT security interest against Buyer Pty Ltd increases the likelihood of a higher value claim against Mr Guarantor’s property and thus maintaining the caveat would be unfair.

Supplier Pty Ltd argues that their ROT interest over Buyer Pty Ltd has been perfected by the PPSA’s Transitional provisions and does not need to be specifically registered in order to be effective.

The Judgement

Unfortunately for us, Justice Beech was not required to rule on whether Supplier’s ROT security interest was, in fact, perfected under the Transitional rules but merely to adjudge whether Supplier Pty Ltd had a ‘seriously arguable’ case.  

Fortunately for us, His Honour considered that Supplier had indeed demonstrated a seriously arguable case that:

• The 1998 document constituted an agreement that would govern future deliveries;
• The 1998 agreement gives retention of title rights in respect of each delivery;
• The 1998 agreement is a security agreement as defined in the PPSA;
• As the 1998 agreement was in force and ‘active’ at the time the PPSR went live, it constitutes a transitional security agreement (s307); and
• As the 1998 agreement provides for the granting of security interests, any security interest associated with deliveries made subject to the terms of that agreement will be transitional security interests (s308).

So while WA’s Supreme Court decision may not have been decisive for our purposes it gives a clear indication that our views as to the intention of the PPSA’s Transitional arrangements are likely to be upheld should they be presented in court and must seriously dent the confidence of those IPs attempting to argue differently.

Remember, however, that all terms & conditions, all credit agreements and all ROT clauses are not created equal and much will depend upon how each have been drafted and to what extent and in what manner they may have been amended or updated since the PPSA came into effect. 

For those who want to investigate this particular case more closely, the decision to which I refer was in relation to Industrial Progress v Wilson and others.  Don’t bother trying to look up Supplier Pty Ltd v Mr Guarantor.

Planned Increases to PPSR Charges

The Insolvency and Trustee Service Australia (ITSA) - the organisation that operates the PPSR - has recently issued a Cost Recovery Impact Statement (CRIS).  

While the purpose of the CRIS is to demonstrate how ITSA recovers its PPSR related costs it also includes a proposal for increases to its fee structure for those registering and searching on the Register.

ITSA has undertaken a review of its PPSR operations in the first 12 months, including a comparison of estimated transactions volumes and revenue. Revenue in the current financial year is tracking approximately 4% below the initial forecast, due to the mix of transactions being more weighted to the lower end of the spectrum than expected. 

The proposed fee structure reflects price increases across each category. Search fees are proposed to increase by $0.30 per transaction and registrations ranging from $0.60 (for the highest volume category) to $10.00.  

Thus:

Duration	Current Charge	Proposed Charge
Up to 7 years	$7.40	$8.00
7 to 25 years	$37.00	$40.00
No stated end date	$130.00	$140.00
Minor amendments	$3.70	$4.00
Other amendments	As per registration charges
Searching the Register	$3.70	$4.00

Due to very low demand and the availability of alternative options, the ITSA National Service Centre will no longer be offering services for registrations and amending finance statements.  Apparently, out of a total of 1,466,308 registrations in the first year of operations, only 21 were lodged through the National Service Centre.

The new charges are scheduled to be introduced for the 2013/14 financial year.

PPSA & Consignment Stock

Under a Consignment Stock arrangement Company A supplies goods to Company B without passing ownership until such time as those goods are used or sold by Company B – at that point in time a payment obligation between Company A and Company B is created.  Any unused/unsold goods will usually be returned to Company A.

The Personal Property Securities Act treats the structure of Consignment Stock arrangements as providing a security interest for Company A in the goods supplied (PPSA Sections 12(2)(h) and 12(3)(b) refer).

The PPSA goes on to allow for such a security interest to be designated a Purchase Money Security Interest (PMSI) thus allowing Company A a greater priority claim over the goods they  supplied than, say, the holder of a general security agreement over all the assets of Company B (PPSA Section 14(1)(d) refers).

So, as with Leasing arrangements and Retention of Title clauses, it is not necessary for the terms of a Consignment Stock arrangement to specifically describe the agreement as a form of security for it to nevertheless be considered as such in the event of an administrator being attached to Company B.

Unfortunately, this can be something of a double-edged sword. 

Whenever the PPSA provides for an arrangement/agreement to be treated as a security interest it also allows for an administrator to vest the goods/collateral in question along with the rest of the assets of the debtor company UNLESS that security interest has been correctly registered on the PPSR.

Bringing this home quite strikingly was the entry into liquidation last month of Jacksons Rare Guitars Pty Ltd in Annandale, in Sydney’s inner west.  At the time a voluntary administrator was first appointed, Jacksons had over 100 clients who were using Jacksons to sell their instruments on a consignment basis representing almost $850,000 of the total stock.

In a pre-PPSA world the individual consignors could have relied upon consignment notes to prove ownership and claim back their instruments but, since PPSA, if they failed to register their consignment on the PPSR (and I’m not aware of any who did) their precious guitars would be vested by the liquidator with the rest of Jacksons’ stock and sold off for the benefit of, primarily, other creditors.  Unfortunately, it is the post-PPSA scenario that is currently playing itself out in Annandale.

While we continue to bemoan the poor promotion the Federal Government has engaged in regarding letting small and medium sized businesses know about the implications and requirements of the PPSR let us spare a thought for the lack of promotion towards the general public who may first become aware of the Register at the same time as they’re being told that they can’t have their guitar back!

When Should a PPSA Registration be Discharged?

Section 151 of the PPSA allows for registration of a security interest where the Secured Party has a reasonable belief that the collateral identified in the registration will become the subject of a valid security interest in their favour.

Because of the requirement under the Act for security interests taken in inventory to be registered in advance of the debtor/grantor taking possession there will inevitably be circumstances where a registration is in place but not yet applying to specific collateral held by the debtor/grantor.

This is particularly the case in circumstances involving on-going supply, or the reasonable expectation of on-going supply.

If a supplier is approached to open a credit account for a new customer then, provided that credit account includes a provision for a security interest (such as a Retention of Title clause), the opening of that account should be deemed to create a sufficiently reasonable belief in the likelihood of a security interest attaching to collateral thus satisfying the requirements of Section 151.

Similarly, unless it has been specifically stated that the sole purpose of that new credit account is to accommodate a one-off purchase, it would not be unreasonable for that supplier to anticipate a measure of continued/repeat business once the initial purchase under the account has been completed.

However, where there are no longer any reasonable grounds for anticipating on-going business/orders (and there are no monies outstanding on the account) then the registration should be discharged within 5 business days from the point at which there stopped being reasonable grounds for anticipating on-going business.

A clear and unambiguous point at which it could be determined that ‘reasonable grounds’ ceased to exist would be the date the Secured Party received confirmation from the debtor/grantor that no further purchasing was anticipated, possibly accompanied by a request to discharge the registration.  At such point the Secured Party would have 5 business days to discharge the registration.

Unfortunately, real life often does not present us with ‘clear and unambiguous’ events and it is quite likely that many suppliers will have open credit accounts on their books that have been inactive for some time.  At what point does it no longer become reasonable to sustain a belief in the likelihood of further trade (and thus the imminent attachment of their security interest)?  Disappointingly, the PPSA provides no guidance in this and legal precedents have yet to be set so we may well be entering ‘how long is a piece of string’ territory.

However, before suppliers relax too much they should note that part 4 of Section 151 places the burden of proof firmly on the shoulders of the Secured Party (supplier) in establishing the reasonableness of maintaining a registration in the absence of any current trading!

While this shifting of the burden of proof to require the ‘accused’ to prove their ‘innocence’ may come as a rude awakening to those whose legal expertise comes from watching episodes of ‘Law & Order’, those who have to deal regularly with liquidators or the Taxman will simply see this as par for the course.

Although I appreciate that it is much more easily said than done, suppliers’ primary defence against claims of unreasonable registrations will be tight and efficient credit control procedures, regular monitoring of accounts and good communication with customers. 

At a bare minimum credit departments should make sure they have “Discharge PPSR Registration” as a priority item on their check-list whenever an account is closed.

The relevant portions of Section 151 referred to above are reproduced below:

151  Registration—belief about security interest

Requirements for collateral to secure obligation etc.

             (1)  A person must not apply to register a financing statement, or a financing change statement, that describes collateral, unless the person believes on reasonable grounds that the person described in the statement as the secured party is, or will become, a secured party in relation to the collateral (otherwise than by virtue of the registration itself).

Civil penalty:

                     (a)  for an individual—50 penalty units;

                     (b)  for a body corporate—250 penalty units.

             (2)  If a financing statement, or a financing change statement, that describes collateral has been registered on the application of a person, the person must, within the period covered by subsection (3), apply to register a financing change statement to amend the registration to end its effect with respect to the collateral, if:

                     (a)  the person described in the statement as the secured party has never, since the statement was registered, been a secured party in relation to the collateral (other than by virtue of the registration itself); and

                     (b)  there are no reasonable grounds (or there are no longer any reasonable grounds) for the belief mentioned in subsection (1).

Civil penalty:

                     (a)  for an individual—50 penalty units;

                     (b)  for a body corporate—250 penalty units.

             (3)  The period covered by this subsection is as soon as practicable, or 5 business days, whichever is earlier, after:

                     (a)  if there never have been, since the statement was registered, reasonable grounds for the belief mentioned in subsection (1)—the day of the registration time, or the amendment time, for the financing statement or financing change statement; or

                     (b)  if there are no longer any reasonable grounds for that belief—the day when there stopped being reasonable grounds for the belief.

             (4)  A person who wishes to establish that there were reasonable grounds for the belief mentioned in subsection (1) (at any particular time) bears an evidential burden in relation to the matter.

PPSA & Real Estate (more fun!)

The approaches from the solicitors of prospective purchasers of real estate to have unrelated PPSR registrations lifted show no sign of abating.  

Scenario

Eyes & Ears Pty Ltd sells and installs audio visual equipment; a portion of their stock is bought from Sight n Sound Ltd.

Sight n Sound sell to Eyes & Ears on credit terms subject to a Retention of Title clause.  While this clause allows for Eyes & Ears to on-sell the goods that Sight n Sound has supplied it also provides for Sight n Sound to be able to recover any unsold Sight n Sound sourced products for which Eyes & Ears have failed to make payment in a timely manner.

Under the Personal Property Securities Act Cth 2009 (PPSA), such a Retention of Title clause is treated as a security interest (Section 12(2)(d) refers) and, as such, Sight n Sound has registered that security interest on the Personal Property Securities Register (PPSR). 

In accordance with the PPSR’s rules Sight n Sound has registered their security interest as follows:

Collateral Type:      Commercial Property (as distinct from Consumer Property);

Collateral Class:      Other Goods (the PPSR does not provide for a more specific designation for tangible property that is not required under the Act to be identified by serial number);

Inventory:              Yes (to identify the use to which the goods being sold are put);

PMSI:                     Yes (designating the security interest as a Purchase Money Security Interest, this identifies that the goods/collateral in question are acting as security for their own purchase); and

Proceeds:               Yes – All present & after acquired property (recognising the rights of Eyes & Ears to on-sell their product, Sight n Sound’s security interest extends to any proceeds arising from such on-sale, regardless of the form such proceeds might take, as long as the original supply remains unpaid).

Eyes & Ears is in the process of selling real estate property and the solicitor acting on behalf of the prospective purchaser has asked that Sight n Sound release the real estate property in question from the charge they have registered on the PPSR as a condition to the real estate transaction progressing.

Opinion

1.    The PPSA does not apply to collateral in the form of real estate or to any fixtures   attached to such property.

Confirmation is available from the PPSR’s web site at www.ppsr.gov.au where it clearly states that:

Under the Personal Property Securities Act 2009 (Cth), personal property is defined as any form of property other than land, buildings or fixtures that form part of it or a right (such as water rights), entitlement or authority.

Reference may also be made to Section 8(1)(j) of the PPSA which specifically identifies fixtures as an item of property to which the Act does not apply and Section 10 which defines the Act’s use of the term fixtures.

          8  Interests to which this Act does not apply

(1)               This Act does not apply to any of the following:

(j)         an interest in a fixture;

and

10  The Dictionary

                        In this Act:

                        fixtures means goods, other than crops, that are affixed to land.

2.    Sight n Sound’s security interest resides solely in goods supplied by Sight n Sound to Eyes & Ears as well as to any proceeds arising from the sale or disposal of those goods for as long as monies remain outstanding to Sight n Sound for the sale of those goods.  Sight n Sound’s registration does not perfect any security interest in any other property or assets held by Eyes & Ears.

3.    Even were there to be some hitherto unheard of interpretation of the PPSA which would allow that Act to apply to real estate property in this context and collateral from Sight n Sound was incorporated into that real estate property then Sight n Sound’s PPSR registration should still not be considered an obstacle to the sale of that property by virtue of Section 32 of the PPSA.

Section 32 effectively extinguishes Sight n Sound’s continued security interest in the goods themselves, once those goods have been on-sold, and transfers that interest to any proceeds arising from the on-sale.

32  Proceeds—attachment

            (1)        Subject to this Act, if collateral gives rise to proceeds (by being dealt with or otherwise), the security interest:

            (a)        continues in the collateral, unless:

            (i)         the secured party expressly or impliedly authorised a disposal giving rise to the proceeds; or

            (ii)        the secured party expressly or impliedly agreed that a dealing giving rise to the proceeds would extinguish the security interest; and

            (b)        attaches to the proceeds, unless the security agreement provides otherwise.

The nature of Sight n Sound’s Terms and Conditions of Sale (in which their Retention of Title clause is to be found) and Sight n Sound’s designation in their PPSR registration of their security interest residing in Inventory both expressly and impliedly authorise the disposal of their goods by Eyes & Ears thus enabling the purchaser of their on-sale to take those goods free of any continuing security interest.

While there may be exceptions to such a situation should the collateral in question be described by serial number in Sight n Sound’s registration that is clearly not the case in this instance.

Had the sale of real estate been a normal part of the business of Eyes & Ears it would have also been relevant to have quoted Section 46 of the PPSA which allows for purchasers of the on-sale to take such property free of any security interest where the on-sale would constitute an action “in the ordinary course of the seller’s business”.

46  Taking personal property free of security interest in ordinary course of business

(1)        A buyer or lessee of personal property takes the personal property free of a security interest given by the seller or lessor, or that arises under section 32 (proceeds—attachment), if the personal property was sold or leased in the ordinary course of the seller’s or lessor’s business of selling or leasing personal property of that kind.

Conclusion

Not only is there no justification for Sight n Sound to discharge their correctly registered security interest but to do so would seriously impact upon the effectiveness of Sight n Sound’s security interest in respect of its on-going trading with Eyes & Ears.

Similarly, there is no justification/need for Sight n Sound to make any amendments to their existing registration.

While it is not considered at all necessary and would only serve a ‘cosmetic’ purpose it would not prejudice the effectiveness of Sight n Sound’s security interests were Sight n Sound to execute a Deed of Release along the lines of the draft shown after the following disclaimer.

Disclaimer

Please note that nothing in this document should be taken as formal legal advice and neither the author nor his employer accept any liability for any negative outcome that may arise from actions taken after it has been read.

Deed of Release

Addressee:                   [the entity seeking the release]

Secured Party:             [your company – as per your PPSR registration]

Grantor:                       [the debtor – as per your PPSR registration]

Security Interest: Any security interest (including a “security interest” as defined under the Personal Property Securities Act 2009 (Commonwealth)) held by the Secured Party in respect of the Released Property.

Date:                            [date this release is intended to take effect]

Released Property:       [description of the property for which the release is required]

The Released Property is released from the Security Interest on the date of this deed.  Nothing in this deed releases, terminates or otherwise affects any debts or liabilities of the Grantor or any other person secured by any Security Interest to the extent such debts or liabilities remain outstanding at the date of this deed or arise after the date of this deed.

This document is governed by the law in [insert relevant State of jurisdiction] and the Secured Party submits to the nonexclusive jurisdiction of the courts of that place.

Executed by the Secured Party as a deed poll

EXECUTED AS A DEED by

as attorney for   ………………………….     under power of attorney dated  ……………….

in the presence of: ........................................................

Signature of witness: ........................................................

Name of witness (block letters): ........................................................

By executing this deed the attorney states that the attorney has received no notice of revocation of the power of attorney.