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Tuesday 21 October 2014

PPSR Registration Stats

Yesterday (20/10/14), AFSA released its quarterly statistics for the PPSR.

After the 'excitement' of the first quarter figures (which captured the race to register before the 2 year Transitional period expired), this quarter, and the previous quarter, show little of interest by way of registrations; although, it is slightly interesting to note the continued growth in searches of the Register.





Total number of registrations reached 8,305,528 by 30th September and the collateral classes covered show a clear domination by registrations of interests over Motor Vehicles:


Agriculture 66,818
Aircraft 12,639
All present and after acquired property 1,774,352
All present and after acquired property, except 220,432
Financial property 29,199
Intangible property 85,319
Motor vehicle 4,239,378
Other goods 1,834,231
Watercraft 43,160



Thursday 9 October 2014

PPSA – The Americans don’t like it!

Many will have heard by now of the action being taken by KordaMentha, as receivers of Forge Group, against the US Company, APR Energy. 

The Forge Group had been leasing two power generators worth $50 million from APR Energy on a long-term basis.  Once Forge went into administration, this lease was deemed to be a security interest under the PPSA and, because it had not been registered on the PPSR, considered vested in Forge for the administrators to do with as they will.  APR is, understandably, not best pleased with this prospect and the argument is going to be heard in court.

However, my interest in this article is not so much with the ins and outs of the legal case so much as it is with the extent to which US interests, supportive of APR’s position, have been so prominent in the submissions given to Bruce Whittaker’s statutory review of the PPS Act.  The following are a few choice extracts from some of the contributions:

APR is currently being caused severe economic hardship as a result of an illegal seizure of its property by a major Australian financial institution and the liquidators for an Australian power generation company. …
At the heart of the dispute is a most unfortunate claim under color of the PPS Act by Forge and ANZ Bank to possess and take title to APR’s Gas Turbines, valued at US$64 million, without due process of law and without compensation of any kind to APR…
Forge’s largest creditor, ANZ Bank, through its appointed managers and receivers, is seeking to illegally convert APR’s Gas Turbines as payment for a substantial debt owed by Forge to ANZ Bank. 

Former member of the US Congress, Lincoln Diaz-Balart.


I have recently learned about your review of the Personal Property Security Act (PPSA) and would like to urge you to take into consideration the devastating effects of Section 13 of the PPSA for American companies doing business in Australia.
As you know, Section 13 allows certain entities to make false claims against property that is owned by American companies and being leased to Australian individuals and businesses. Under this law, American companies can loose hundreds of thousands of dollars in equipment to the Australian government in the event of bankruptcy. This is extremely troubling and Section 13 should be modified to prevent this.

The City of South Houston Chamber of Commerce. (Note: Section 13 of the Act provides a definition of what constitutes a PPS Lease).


We are consistently looking to expand into new markets where there is stability and opportunity.
I am, therefore, concerned about what I have learned about Australia's recent Personal Property Securities Act 2009 (PPS Act). As I understand it, Australia's PPS Act is being used by unscrupulous entities to illegally seize American-owned property and hold it for ransom. Failure by the owner to record its ownership interest can lead to the loss of everything from
vehicles and plant machinery to shares, intellectual property and contractual rights. 
For small businesses like mine, the loss of even one machine under such a scenario could be catastrophic. You tack on subsequent legal fees and companies like mine can find themselves in a hole from which they cannot remove themselves. In short, the PPS Act has turned the idea of doing business in Australia from an appealing to a dangerous gamble.

Barbara Woerner, Vice President of James Woerner Inc, New York.



Section 13 of the PPS Act will allow unscrupulous entities to register bogus security interests in leased property owned by companies doing business with BD Global. Treatment of lease agreements as security interests under the PPS Act allows Australian companies to improperly list leased property as security for a commercial loan. If the loan is in default, the lessor, which is often an American company has lost all rights to the property.

Blaine D. Hone, CEO of BD Global, Utah.



The PPSA has created an opportunity for dishonest entities in Australia to seize American-owned property and hold it hostage. By registering bogus "security interests" in property that is owned by American companies and leased in Australia, these entities are attempting to secure the property and quash the ownership rights of American companies. This has created a very dangerous and unstable situation for local companies that export valuable equipment to Australia pursuant to short-term lease agreements.

Thaddeus M Jones, Illinois House of Representatives, 29th District.


Needless to say, these submissions all include a reminder of the important contribution US companies make to Australia and the extent to which that will be jeopardised without some special treatment being extended to US/foreign companies under the PPSA.


While it would be easy to be snide about the characterisation of what is happening in the APR Energy case as ‘dishonest’, ‘bogus, ‘improper’, ‘illegally seize’, ‘hold for ransom’ etc, and to be cynical about what could be interpreted as veiled threats, there is, nonetheless, the very real issue that the Australian Government introduced the PPSA and then kept (relatively) quiet about its implications. 


Where were the press, TV, and radio advertisements announcing that if you didn’t register your credit sale or lease of goods you ran the risk of losing your property?  Where were the massive billboards saying ‘register it or lose it’?


Wednesday 8 October 2014

The PPSA vs The Corporations Act

September’s court judgement in Pozzebon (Trustee) v Australian Gaming and Entertainment Ltd (in liq) has brought to the fore a butting of heads between the Personal Property Securities Act and the Corporations Act.

Much of our concern with the PPSA has been to do with interpreting it in such a way as to ensure that our security interests are as effective as possible.  The issue can be seen as twofold:

  • Ensuring our security interests benefit from as high a ranking as possible when compared with those interests of other creditors; and
  • Protecting ourselves against the risk that an unperfected security interest will vest in our debtor’s insolvent estate.


Part 2.6 of the PPSA (sections 54 to 77) concerns itself with addressing the various scenarios that might rank one creditor’s interest above another’s while section 267 provides liquidators with the incentive to try to invalidate your registration by allowing them to take ‘ownership’ of any security interests that have not been properly perfected.

For now, we’re going to look a little more closely at section 267.

Section 267 effectively states that, when an ‘external administration event’ takes place, any security interest that has not been perfected at that point will vest in the grantor.  In other words, if an insolvency practitioner is appointed to your debtor before you’ve had the opportunity to register your security interest on the PPSR, you will lose your rights to whatever collateral you had under that interest.  In fact, the PPSA appears, almost, to be supporting a ‘nick of time’ registration approach.  Providing you get your registration lodged before the administrator is appointed (or the application for winding up submitted, or the sequestration order given etc) your interest should be perfected and thus protected from the nasty section 267.

Unfortunately, buried within s267 is a little bit of small print as follows:

Note 2:   See also Division 2A of Part 5.7B of the Corporations Act 2001.

Surely that’s not going to be too important?  After all, Note 1 was pretty innocuous (Note 1: For the meaning of company, see section 10).  How bad could Division 2A of Part 5.7B of the Corporations Act be?

Well, it turns out that Division 2A can be pretty bad!

The meat of Division 2A is in section 588FL, entitled “Vesting of PPSA security interests if collateral not registered within time”.  It turns out that, contrary to the apparent ‘nick of time’ support of the PPSA, there is, in fact, a much more tangible deadline by which a registration needs to be lodged in order to keep your collateral out of the hands of a liquidator.

If your registration was not lodged within 20 business days of your security interest coming into force and was lodged during the 6 months leading up to the liquidator’s appointment, then “The PPSA security interest vests in the company” and you lose your collateral to the liquidator!

So, even though you have a properly perfected security interest, registered correctly, within the deadlines set under the PPSA, the liquidator may still be able to ignore that registration and take your goods anyway by virtue of the Corporations Act.

And if, for a moment, you are thinking that this must just be a theoretical argument that wouldn’t apply in real life, then let me remind you that this piece started with reference to Pozzebon (Trustee) v Australian Gaming and Entertainment Ltd (in liq).

  • In December 2013 the Pozzebons loaned Australian Gaming and Entertainment Ltd (AGEL) $250,000 with the loan secured against AGEL’s personal property.
  • On 19 May 2014 the Pozzebons registered their security interest on the PPSR.
  • On 26 May 2014 Administrators were appointed to AGEL with liquidators following some 2 weeks later.

While the Pozzebons may have beaten the clock in terms of the PPSA they fell foul of the Corporations Act and breached the 20 business days’ time limit under 588FL as well as the registration being within 6 months of the external administration ‘event’.  Such was the judgement of Justice Collier towards the end of September in rejecting the Pozzebon claim that their security interest be honoured.

By way of summary, I've drawn up the following flow chart to show how important the timing of a PPSR registration will be under the Corporations Act:



Friday 22 August 2014

Someone else has possession of my goods; do I need to lodge a PPSR registration against them?

Given the number of statements we’ve seen suggesting that the PPSA ‘completely changes our concept of ownership’ and the horror stories revolving around legal owners losing their property, it is quite natural to explore all the possibilities when it comes to protecting your property under the PPSA.  Should I be lodging a PPSA registration each time my property leaves my possession?

If you are renting warehouse space, if you are having your goods transported by an independent haulier, if you are locating your IT infrastructure off-site, should you be lodging a registration?


The PPSA lists a number of circumstances that may give rise to a security interest where one would not otherwise think in terms of traditional ‘security interests’.  The most common examples for us are, of course, retention of title clauses, consignment stock arrangements and leases; however, under this last category, the PPSA actually uses the term PPS Lease.

A PPS Lease may be a lease or bailment of goods for a year or more or for an indefinite period (section 13 of the Act refers).

Bailment is a common law concept where possession of personal property is transferred from one person (the bailor) to another person (the bailee) for purposes other than the transfer of ownership.  The example often given is where a restaurant or theatre (the bailee) provides an attended cloakroom free of charge to its customer (the bailor) for the safekeeping of their hats and coats.

While there are similarities with Leasing, leasing typically involves the lessee not merely taking possession of the lessor’s property but also making use of it and putting it to the lessee’s own purpose.  The concept behind bailments is more geared to safekeeping.

If we take the example of a business looking to locate their computer servers off-site at a third party’s premises, they are the bailor, placing their intellectual (and physical) property in the possession of another party, the bailee, for their safekeeping.  The arrangement is, presumably intended to be comparatively long term and thus there is, prima facie, a good case for it being treated as a PPS Lease.

However, at s13(2)(b) of the Act we are advised that a PPS Lease does not include a bailment by a bailor who is not regularly engaged in the business of bailing goods.

Our example business is a company engaged in the business of selling widgets thus ‘bailing’ its intellectual property would probably not be an activity associated with its main business.  I’d like to think that such an interpretation would stand up in court but, in the absence of legal precedent in Australia, we have to resort to querying NZ legal cases.  The closest we get in NZ seems to be the case of Rabobank New Zealand v McAnulty in 2011 where it was determined that the owners of a racehorse put out to stud with the bailee were regularly engaged in the business of profiting from their horse rather than engaged in bailments.

The final criteria for a bailment being a PPS Lease occurs at s13(3) wherein it is stated that a bailment will only be a PPS Lease where “the bailee provides value”.

While the computer storage facility will certainly be providing a valued service (that of hosting our business’s servers) I suspect that the Act is intending a much more narrow definition of ‘value’, specifically monetary payment or similar.

So, to summarise:

Our business is likely to be engaged in what might be considered, under common law, as a bailment of their intellectual property to the third party’s off-site computer facility.

This bailment would be deemed under the PPSA as a PPS Lease and thus be registrable on the PPSR provided:

1.            It is for a year or more, or for an indefinite period; and
2.            Our business is regularly engaged in bailing their property; and
3.            The off-site hosting company is providing ‘value’ (possibly payment) in their role as bailee.


While (1) above is probably satisfied, (2) and (3) are probably not, therefore, such an arrangement is unlikely to be registrable under the PPSA.  

It then follows that, if the bailment arrangement does not meet the full criteria for being a PPS Lease, a liquidator attached to the bailee would not be able to vest the bailor’s property as part of the bailee’s assets.

UPDATE: Since May 2017 the eligibility period for a lease or bailment being considered a PPS Lease has increased from 1 to 2 years.  For an indefinite lease or bailment, the PPSA will only apply once the 2 year period has elapsed.

Wednesday 20 August 2014

PPSA Statutory Review - Interim Report

Under the terms of the Personal Property Securities Act (2009) a review of the performance of the act is required to be completed by the end of January 2015.

That review has already started and, following an initial consultation exercise completed in July, an interim report has been issued.  



The review is being conducted by Bruce Whittaker, a lawyer specialising in financial services and commercial financing arrangements.  His interim report runs for 53 pages and says:

  • Not enough people are aware of the PPSA; and
  • Those that are aware of it tend not to understand it.

Radical stuff!

Mr Whittaker also advises that he is "not minded at this stage to recommend any specific amendments to the Act, the Regulations or the operation of the register." Instead, he wants to focus on further consultations that, in addition to representing a continued information gathering exercise, would also serve to further spread understanding and enlightenment on the subject of the PPSA and increase industry's sense of ownership of the Act.

So, instead of suggesting taking a scalpel (knife, axe, bludgeon) to those parts of the Act responsible for generating so much confusion in the trade credit and finance industry and debate between opposing teams of lawyers, we will be treated to some questionnaires?

If you want your own copy of the interim report it can be found at the Attorney General's website at:

http://www.ag.gov.au/Consultations/Pages/StatutoryreviewofthePersonalPropertySecuritiesAct2009.aspx



Wednesday 16 July 2014

PPSA & Commingling

Before the PPSA came in, if a supplier with a Retention of Title (ROT) had their goods mixed in with other indistinguishable product from other suppliers (as might be the case with fuel, sand, lumber, grain etc.) they would immediately lose those ROT rights.  However, the PPSA’s commingling provisions allow for a supplier’s rights to continue even when the goods that they have supplied can’t be told apart from goods supplied from other sources (Section 99 refers).

If we take the following scenario involving three suppliers, all delivering grain to the same buyer:

Supplier A has supplied $10,000 of grain,
Supplier B has supplied $15,000 of grain, and
Supplier C has supplied $5,000 of grain.

Each supplier is still owed the full amount for the grain they supplied. Each supplier has lodged a valid registration of their ROT rights on the PPSR.

However, when the liquidators performs their stock-take, they find that the buyer only has $18,000 worth of grain in his silo with no records to identify whether that grain was received from Supplier A, B, C or any combination of the three.

Section 102 (2) of the PPSA states that, in such circumstances:

If more than one perfected security interest continues in the same product or mass, each perfected security interest is entitled to share in the product or mass according to the ratio that the obligation secured by the perfected security interest bears to the sum of the obligations secured by all perfected security interests in the same product or mass.

While the above sentence starts off appearing to make sense, by the end of the third line you know it’s going to take multiple readings to get the sense of it! 

Essentially, what the PPSA is saying is that because Supplier A was responsible for a third of the overall supply of grain they should be considered a secured creditor in respect of a third of the grain still left in possession of the buyer (ie, $6,000); Supplier B would benefit from half ($9,000); with Supplier C getting the remaining sixth ($3,000).


If any of the suppliers had failed to lodge a valid registration on the PPSR then they don’t get to be party to the division of spoils.  Even where a supplier has lodged a valid registration but other suppliers have not, that supplier would not be allowed to benefit by more than the value of goods they supplied and which remain unpaid-for.

Wednesday 2 July 2014

Transitional or Non-Transitional - the short & shiny version

When the PPSR was introduced on 30/01/2012 the legislation effectively stated that any new security/credit agreements you entered into after that date would only be fully effective if they were promptly registered on the PPSR and that their effective date would be deemed to be the date of that registration.

However, where you already had an existing security/credit agreement in place before that 30/01/2012 start date, the PPSA’s transitional rules would deem any security interests arising from that agreement to have been rendered fully effective (without the need for registration) for a period of up to 2 years.  To be effective for more than 2 years, registration would be required.  

During that 2 year period these pre-existing security agreements would be deemed to have an effective start date of just before the PPSR’s 30/01/2012 commencement date.  Any of these transitional agreements that were registered on the PPSR during the 2 year period between 30/01/2012 and 31/01/2014 would also be allowed to ‘count’ their effective date back to before the start of the PPSR rather than the date of the registration itself.

Now that the 2 year window for keeping the pre-30/01/2012 ‘count-back’ has closed, all registrations being lodged on the PPSR have an effective date aligned to the date of registration.

The only real difference now between designating a registration as a transitional as opposed to a non-transitional security interest is that the PPSR does not levy a charge ($8.00) for registering transitional security interests.

UPDATE: The PPSR now charges exactly the same for lodging a Transitional registration as it does for a non-transitional registration.

Over the past 2 years or so we have seen many instances of insolvency practitioners attempting to invalidate or otherwise discredit security interests on the basis that they had been designated as transitional rather than non-transitional.  I have never come across an instance where the reverse has been the case.

  • If the agreement signed between you and your customer is dated after 30/01/2012 then you should register as non-transitional.
  • If your applicable terms and conditions have been amended since 30/01/2012 you should register as non-transitional.
  • If you can’t find a copy of your agreement with your customer then you should look to get a fresh one signed and register as non-transitional.
  • If your signed agreement doesn't incorporate your security agreement and your retention of title clause only appears on your invoice then you should register as non-transitional.
  • If you're in doubt register as non-transitional.


More information (and my personal contribution to the war on insomnia) can be found at:








Setting up a Secured Party Group on the PPSR


Every business that lodges a registration on the PPSR will have established themselves as a Secured Party Group (SPG) but, although the Register has provided some guidance as to which buttons to click and which fields to complete when setting up an SPG, I have been unable to find any guidance whatsoever when it comes to deciding upon the membership of an SPG.

A big part of the problem is that the SPG is an administrative rather than a legislative invention.  The Personal Property Securities Act makes absolutely no reference to secured party groups; it only talks in terms of secured parties.  The idea that secured parties needed to be members of a group came from those charged with designing the Register, although, to be fair it should be pointed out that the ‘group’ concept had already been introduced in the New Zealand PPSR almost a decade earlier.


When should an SPG comprise more than one Secured Party?

The vast majority of SPGs that I’ve helped set up have been made up of just one secured party and for most of those there was no question of adding any other body to the SPG, so, in what circumstances should multiple secured parties be considered in the formation of an SPG?

One obvious circumstance would be where one secured party operates in some form of partnership with another and both are party to the same credit/security agreement with the grantor. 

However, if such a partnership had its own ABN then the PPSA’s rules for identifying secured parties would require identification by the partnership’s ABN; each partner could only be identified as a secured party in its own right if their partnership did not have an ABN.

It is quite conceivable though, that a small group of related companies might, effectively, share the same credit/security agreement – one legal entity providing equipment, another providing spare parts, while a third provides maintenance services.  If each entity shared in the same collateral class, if a joint registration would have the same appearance as individual registrations, then it is easy to see the sense (both administratively and financially) in lodging one registration on behalf of the group rather than one for each individual member.


Drawbacks in secured parties grouping together in a single SPG

Fixed Membership

One of the first things to consider is that, once set up, the membership of an SPG cannot be changed.  If you already have an SPG in place and then later wish to add another secured party to it your only recourse is to establish a brand new SPG and transfer your existing registrations to that new SPG.  Similarly, if a secured party needs to be removed from an SPG, a new SPG needs to be created and existing registrations transferred across.

Fortunately, the PPSR’s process for transferring registrations can be relatively straightforward and inexpensive – providing you want to transfer all an SPG’s registrations or only one or two, otherwise, if you want to transfer, say, 400 out of 1000 registrations, it can be a very tiresome exercise indeed!

Challenges under the Act

Section 151 of the PPSA requires that secured parties not lodge a registration against a grantor unless they believe, on reasonable grounds, that the security interest they are attempting to perfect will materialise. 

Well, if secured party 1 (SP1) and secured party 2 (SP2) are both members of a Secured Party Group together and yet only SP1 has a trading relationship with the Grantor any registration lodged by the SPG against the Grantor would open SP2 up to the challenge that they did not have sufficient justification to identify as a secured party of the Grantor.

It is important to note that there are significant civil penalties for lodging a registration in breach of section 151.

Similarly, the Grantor could use section 178 of the PPSA to demand removal of the registration.  Section 178 allows for an amendment demand to be issued where:

 no collateral described in the registration secures any obligation (including a payment) owed by a debtor to the secured party.

While the registration might be quite valid in as much as it relates to the trading relationship between SP1 and the Grantor, its validity would be quite questionable as far as SP2 is concerned.

In order to resolve the situation in such a scenario, SP1 would need to establish a fresh SPG solely for its own use and transfer the disputed registration to that new SPG.  They could lodge a fresh registration under the new SPG and discharge the earlier registration but they would lose the effective start date of that registration (a significant loss if the registration concerned a transitional security interest).

Ownership changes

In addition to falling foul of aspects of the PPSA itself, unwise SPG groupings could also cause some commercial problems in the event that ownership changes take place within the group.

What if the business represented by SP2 is sold to new owners?  What if the sale is conducted in such a manner that the legal entity represented by SP2 (their ACN, for example) remains intact and only its shareholding and possibly its directors change?

There are no longer any common ties between SP1 and SP2 and yet both are members of the same SPG.  Clearly there will need to be new SPGs established for each of the secured parties but what transfers need to take place?  It might be fairly clear-cut in a number of instances where the customer bases of SP1 and SP2 do not overlap but what about those registrations where there is an overlap?  

A registration cannot be transferred to more than one SPG.  Either SP1 or SP2 will lose their registration and, while a fresh registration may only cost a few dollars, the loss of that registration also means a loss in the priority afforded by its registration start date – no small thing, particularly where transitional registrations are concerned!


Conclusion

It might sound from the foregoing that setting up an SPG with more than one secured party is more trouble than it’s worth but that need not be the case - and it should be pointed out that we’ve not exactly been inundated with s151 and s178 demands for removal of registrations based on the presence of an extraneous SPG member.

If SP1 and SP2 are both identified on your credit documentation; if your customer is signing an agreement with both parties; if SP1 and SP2 would each be lodging separate identical registrations against the same grantor had they not been members of the same SPG then there may be significant administrative and financial savings to be made by having both as members of the same SPG.

 And don’t forget that secured parties may be members of a number of different SPGs, therefore, SP1 could happily be a member of one SPG alongside SP2 while also being the sole member of its own SPG used to lodge registrations where there is no common agreement with SP2.

However, where each secured party has its own documentation; where there will be separate credit agreements even though there may be an overlap in customer base; where the nature of the collateral or the security interest might necessitate different registration needs; where it is not inconceivable that one of the secured parties might be sold off at some point in the future then it would be sensible for each secured party to establish its own SPG.

I’d suggest that the default position should be for each secured party to be the sole member of its own SPG and, only if a strong case can be made for a shared SPG, should a multiple membership arrangement be considered.



Tuesday 1 July 2014

PPSR Changes the Definition of 'Motor Vehicle'.

We all think we have a pretty good idea as to whether something is a motor vehicle or not.  And when it comes to cars, trucks, motor bikes etc we’re on pretty safe ground, but what about ride-on lawnmowers (or even a motorised lawnmower that isn’t a ride-on) or fork lift trucks or cranes or motorised shovels etc.?  This is where things become substantially less clear cut and we begin to grudgingly accept that a formal definition might not be a bad idea.  

However, the definition that the PPSA has been using may have been a little too all embracing:

The item is a motor vehicle under the PPS Act if it is built to be propelled wholly on land by a motor that forms part of it (but not if it runs on rails, tram lines or other fixed path), has a unique serial number and is also capable of travelling at more than 10km/hr OR has a total motor power greater than 200W.

I suspect that it is this speed OR power component of the definition that would allow certain lawnmowers to suddenly become motor vehicles.

However, from today (1st July 2014) this has all changed with that OR being changed to AND.

Yes, indeed, this is a massive shift and perhaps, at long last, all those that have been clamouring for this change will finally be able to rest easy.

The new motor vehicle definition is, henceforth:

The item is a motor vehicle under the PPS Act if it is built to be propelled wholly on land by a motor that forms part of it (but not if it runs on rails, tram lines or other fixed path), has a unique serial number and is also capable of travelling at more than 10km/hr AND has a total motor power greater than 200W.


By the way, there has been no change to that part of the definition that allows for property that can be towed at speeds of more than 10km/h to be classed as motor vehicles, such as caravans, trailers and…


???

Wednesday 4 June 2014

PPSA & Accessions


To start with, let’s just clarify the applicable definition. 

Where a supplier supplies goods that are installed as part of a building, they become fixtures and, just as would have been the case in pre-PPSA days, the supplier’s retention of title security interest over those goods is, effectively, lost.  However, where a supplier supplies goods that are installed in, or fitted to, a non-real estate piece of property they become accessions

In pre-PPSA days, as soon as goods were incorporated into another product they were deemed to have lost their individual identity and the supplier’s security interest over those goods was lost; however, since PPSA the supplier’s security interest can continue in the finished product (section 88 of the PPSA refers).

Moreover, the PPSA’s default priority rules state that the security interest a supplier maintains over their accession takes priority over any claim any other security holder might have to the finished product (section 89).

Now, while section 123 of the PPSA states that a secured party may seize collateral by any lawful method if the debtor is in default under their security agreement, in the case of accessions, the secured party is required to give at least 10 business days’ notice of their intention to remove their product (section 95) and then must ensure that the goods are removed in such a manner as to not cause additional damage to the product in which it is installed (section 92). 

The grantor may apply to the courts for an order postponing the removal of the accession or determining a value to be paid by the grantor to the secured party to allow them to keep the accession in place (section 97).

However, the PPSA is not the only Act that necessarily applies!  In the event an administrator is appointed then the Corporations Act (2001) comes into play.  Once an administrator has been appointed, suppliers/creditors are unable to make claims for property held by their buyer unless they have the administrator’s consent or permission from the court (s440B of the Corporations Act).

Regardless of the super-priority a properly perfected PMSI might give to a supplier of retention of title secured goods, the provisions of the Corporations Act will prevent them from recovering any of their goods without the consent of the administrator.

Although the supplier may not be able to claim back their property immediately, neither is the administrator generally able to sell or dispose of it (s442C of the Corporations Act).  Because the goods are the subject of a perfected PPSA security interest, the administrator must act in the interests of the secured party and not sell or dispose of the goods without either the permission of the secured party or of the courts.

Unfortunately, there is one rather significant exception to this restriction on the administrator on-selling ROT secured property – that is where such an on-sale is in the ‘ordinary course of the company’s business’.

Thus, if you have supplied shafts to an assembler and wholesaler of hammers then the administrator would be perfectly within their rights to sell the completed hammers even though you may have demanded the return of your goods under your perfected PMSI (s442C(2) and (8) of the Corporations Act refer).

The administrator is, however, required to act ‘reasonably’ in exercising their power of sale (s442B) and has some fairly strict rules to follow regarding the manner in which they must deal with the proceeds from such sale (s442CC(2) of the Corporations Act refers).  These boil down to ensuring that the proceeds are applied proportionately to those creditors that hold a priority security interest in those goods.

For example, if you have supplied $10,000 worth of hammer shafts and I have supplied $20,000 of hammer heads and the administrator disposes of the finished product for, say, $24,000 then you will benefit from $8,000 of the proceeds and I will benefit from $16,000 – ie, proportionate to the value of our contribution to the finished product comprising our respective accessions.


To the extent that we are still owed money (your outstanding $2,000 and my outstanding $4,000) we will have to deal with the administrator as unsecured creditors.


Monday 2 June 2014

Amendment Demands - Section 178


In an earlier article, I discussed the importance of Section 151 of the PPSA and the requirement that there be a reasonable belief that the security interest being registered on the PPSR either exists or is likely to exist.  Click here for that article. 

So while that article addressed a supplier’s right to lodge a registration, this article will consider the buyer’s rights when it comes to demanding that it be removed.

Section 178 of the PPSA is the most immediately relevant here and sets out two key criteria for a buyer to demand that a registration lodged against them be removed:

(a)          The obligation owed by a debtor to the secured party is not secured by collateral described in the registration; or
          (b)          The particular collateral in which the person has an interest does not secure any obligation owed by a debtor to the secured party.

These criteria are very similar to each other and, in exploring a variety of scenarios there is certainly some cross-over between the two.

Essentially, a buyer/debtor may demand that a registration be discharged if there is no collateral as described in the supplier’s registration or if there are no monies owed by them to the supplier that are secured by the described collateral.

Scenarios

Probably, the most common situation where such criteria would apply is where a supplier has supplied goods subject to a retention of title clause and was subsequently paid in full.  The supplier has either simply overlooked their obligation to remove their PPSA registration or legitimately believed there was a likelihood of repeat business in the near future.  While a supplier may have the right to lodge/maintain a registration in the reasonable expectation that trading might take place, a buyer has a superior right to demand the removal of such a registration.

Fortunately, a little less common, s178 criteria could also apply where a supplier has incorrectly described their collateral in their PPSA registration as constituting an item of inventory whereas the goods in question are clearly non-inventory items.  In such a scenario, even though there may be monies owed by the buyer to the supplier, it is not technically secured by the collateral as per the registration’s description.

We could also have a situation where the registration has been lodged correctly and there is money owed by the buyer to the supplier in respect of collateral delivered by the supplier but the collateral has been on-sold or otherwise ‘used up’ – there is therefore no collateral against which the supplier’s security interest can ‘bite’.  What about the supplier’s claim to proceeds?  Well a pre-condition for a proceeds claim is that the proceeds be directly or indirectly attributable to the sale of the supplier’s collateral and washing around in a busy bank account will tend to disguise any attribution quite effectively.  We may also have a supplier selling something like bleach or disinfectant that has been used up by the buyer generating no tangible proceeds.

So if there are no monies outstanding on the account or there is no collateral against which a supplier’s security interest can attach then the buyer is well within their rights to request that the supplier’s registration be discharged.

So how should the buyer go about getting the registration discharged?

In an ideal world the buyer would phone or email their supplier, gently point out that the registration against them appears to be serving no purpose and politely ask that it be removed at the supplier’s earliest convenience.  Unfortunately, what seems to be a lot more common are  strident demands, indignant protestations, and veiled threats of legal action and fines.

Under section 178 the buyer/grantor should address an amendment demand to the secured party’s address for service (found on their registration) outlining their reasons for the registration to be discharged or otherwise amended.

While section 178 provides no timescale for the discharge/amendment to take place, section 179 allows for escalation to the PPSR Registrar if the secured party has not responded appropriately within 5 business days.

Once the Registrar becomes involved they will issue the secured party with an amendment notice.  That amendment notice will reiterate the amendment demanded and invite a written response by the end of a further 5 business days.

Should the Registrar not receive any response from the secured party during this time-frame they will either amend or discharge the registration in line with the grantor’s amendment demand.

Where the secured party does respond in good time with an argument against discharging or amending the registration, the Registrar will make their decision based on the information provided by the secured party and ‘any other relevant information’.

Reference to the PPSR Registrar is, however, not the grantor’s only recourse should the secured party fail to respond satisfactorily to their initial amendment demand.  The grantor may choose, instead, to take the matter to court.

The PPSA is understandably silent on timescales once the matter has entered the court system but, as with similar legal processes, both grantor and secured party will have the opportunity to argue their positions before the court and should a decision be rendered in favour of the grantor then it will take the form of an instruction to the PPSR Registrar to effect the requested amendment/discharge.

So what about the threats of fines?

That part of the PPSA that concerns itself with Amendment Demands (part 5.6) is quite silent on the matter of penalties although there may be some application of section 151 that can be brought into play where the grantor suggests that there was no justification for the original registration in the first place.  While I’m not aware of any penalties having been applied for frivolous or unjustified registrations, section 151 certainly provides for civil penalties of up to 250 penalty points (equivalent to $42,500 at time of writing).

So far I’ve seen a lot more bluff & bluster and overly aggressive demands than I have civil and politely composed requests – possibly because the polite requests get acted upon straightaway whereas the aggressive ones tend to get referred to people like me for their advice – but the rules and timescales for action are clearly laid out and are unaffected by the tone chosen by the grantor.




Tuesday 27 May 2014

Notifying the Grantor – what are your obligations?

Every time you lodge a registration on the PPSR you will be provided with a Verification Statement confirming the details of your registration.  Every Verification Statement issued by the PPSR contains the following paragraph:





Section 157 of the Act advises that the Secured Party, upon receiving their Verification Statement:

must ensure that a notice of the statement, in the approved form, is given to the following persons as soon as reasonably practicable after the time of the registration event:
(a)          a person registered as a grantor in the registration immediately before the time of the registration event;
(b)          a person registered as a grantor in the registration immediately after the time of the registration event.

Essentially, 157 requires that notification is provided to the Grantor.  The rather convoluted wording at (a) and (b) is to allow for circumstances where a Verification Statement has been issued to recognise an amendment to an existing registration in which a Grantor has been removed from a registration.  In such an instance 157 is advising that the notification must be sent to the Grantor that has been removed from the registration as well as to the Grantor added to or remaining on the registration.

[Remember:  Verification Statements are not only issued when an initial registration is lodged, they are also issued when any amendments are made to that registration – every Verification Statement you receive brings with it an obligation to notify the Grantor.]

Section 157 goes on to allow for the Grantor to waive their rights to receive notification of a Verification Statement where the security interest arises from a commercial rather than consumer transaction.

The sort of waiver that a Grantor may sign will usually appear as a clause in a set of Terms & Conditions that are accepted when entering into a credit agreement.  The following are some examples of 157 waivers I've seen cropping up in such Terms:

The Purchaser acknowledges and agrees that the Supplier may apply to register a security interest in the Goods at any time before or after delivery of the Goods. The Purchaser waives its right under s 157 of the PPSA to receive notice of any verification of the registration.
Or
Pursuant to section 157 of the PPSA, unless otherwise agreed in writing by Us, You agree to waive the right to receive the Verification Statement in respect of any Financing Statement or Financing interest statement relating to the Security Interest.



So, now we have a clearer idea as to what the Act actually states, let’s look a bit more closely at how we provide our notification, what form should it take and what information should be included; when we need to provide notification; and what happens if we let things slip and don’t actually get around to notifying the Grantor.




How should we provide our notification?

While the PPSR talks about giving “a notice of” the Verification Statement in “the approved form”, they basically mean that you should send a copy of the Verification Statement itself.  Which, means forwarding a copy of the statement the PPSR email to you onto your Grantor.  So that this doesn’t hit your Grantor unaware, it would be helpful if you were to accompany the Verification Statement with a helpful explanation as to what this is all about.

I’d suggest something along the following lines:

Dear Valued Customer

PPSR: NOTICE OF VERIFICATION STATEMENT
Provided pursuant to section 157 of the Personal Property Securities Act 2009

This letter is to inform you of a registration we have lodged on the Personal Property Securities Register (PPSR) a copy of which accompanies this letter.

Our registration is strictly in relation to a security interest we maintain over the goods we supply in the form of a Retention of Title clause enshrined in our standard Terms & Conditions of Sale.

Our registration on the PPSR is purely a means to safeguard our position against any competing claims from other creditors and should not, as a matter of practicality, change our normal trading relationship with you nor indicate any concerns regarding your value to us as a trading partner.

Should you believe that our registration is not valid please contact the undersigned as soon as possible and we will be happy to work with you to resolve any misunderstanding.

We encourage you to visit the Government website, www.ppsr.gov.au, if you require further information on the PPSA.

Thank you for your ongoing support.

Yours faithfully


The PPSR did toy with the idea of providing a template for the formal notification rather than requiring a copy of the Verification Statement itself be issued and even went so far as to refer to this as an option in their earlier Verification Statements:



However, when I challenged them on this they admitted they didn’t, in fact, have any such template and quietly removed any reference to it.

Important:  If any individual’s date of birth is visible on your Verification Statement then that date of birth should be masked/hidden/obscured/redacted or otherwise rendered unreadable before it is forwarded to anyone other than the specific individual in question.  Failure to do this may cause you to fall foul of the Privacy Act 1988.


When should we provide notification?

Well, the Act is relatively vague on the matter and states that the notification must be given to the Grantor “as soon as reasonably practicable after the time of the registration event”.

[Remember:  The registration event can mean the initial registration itself, an amendment to an existing registration or a discharge of a registration].

So, how should we interpret “as soon as reasonably practicable”?

Perhaps, more pertinently, how would the Australian courts interpret the term?

In 2001 the Australian High Court observed that the words ‘reasonably practicable’:

are ordinary words bearing their ordinary meaning. And the question whether a measure is or is not reasonably practicable is one which requires no more than the making of a value judgment in the light of all the facts. (Slivak v Lurgi (Australia) Pty Ltd 2001)

This is probably good news for those suspecting some legal trickery but less helpful to those of us looking for a little more certainty.  In a nutshell, we don’t know whether something was done as soon as was reasonably practicable without first examining all the relevant circumstances.

If you have just lodged a registration before shutting up shop for the evening then I daresay it would be reasonable to expect the notification to be sent to the Grantor the following morning.  If the following morning happens to be a non-working day (a weekend or public holiday) then it would probably still be reasonable if the notification was sent on the next working day. 

Would it be reasonable to delay sending the notification for up to a week or so?  I’d suggest that the onus would then be on the secured party to demonstrate that it was not practicable to send the notification any earlier.

But, before we get too wrapped up in this, let’s consider the implications should we fail to send our section 157 stipulated notification.


What if we don’t send a notification?

While the PPSA allows for fines to be levied for a number of breaches of the Act, failure to fulfil section 157 obligations is not one of those breaches.

However, the PPSA does warn that the Grantor may have available to them an action for damages against the Secured Party under section 271 of the Act.

Section 271, basically, states that, if the Secured Party has failed to perform a stipulated obligation towards the Grantor, they (the Grantor) “have a right to recover damages for any loss or damage that was reasonably foreseeable as likely to result from the failure”.

So the Grantor would have to demonstrate to a court’s satisfaction that, as a direct result of not being made aware of the existence of a PPSA registration lodged against them, they suffered a financial loss that should have been reasonably foreseeable by the secured party.

Now, while it may not be impossible to imagine a scenario whereby such a loss could have arisen it certainly does test what might be considered ‘reasonably foreseeable’.

If we add to this, a situation where the Secured Party merely advised the Grantor of the existence of their registration without sending them a copy of the Verification Statement, then it becomes even less likely that the Grantor would be able to demonstrate a financial loss arising from not knowing the precise details of a registration, the existence of which they were aware.

I don’t want to give any encouragement to those looking for an excuse to ignore their notification obligations but I won’t be disappointed if I am able to provide some small comfort to some poor beleaguered credit manager who wakes up in the middle of the night in a cold sweat having just realised that they’d failed to forward a copy of a verification statement.

Important: Where the Grantor is an individual, the PPSA has warned that failure to provide the required section 157 notice may constitute “an act or practice involving interference with the privacy of the individual for the purposes of section 13 of the Privacy Act 1988”.


The Privacy Act provides for a civil penalty of 2000 units for a serious and/or repeated or widespread breach of section 13.  A penalty unit is, at time of writing, equivalent to $170.00.