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.