Section 64 and Maintaining Access to Finance

What is a Section 64 letter?

Note: It is important to have an understanding of a supplier's right to 'proceeds' in order to properly appreciate the role of Section 64 of the PPSA.  You can get a quick briefing on proceeds here.

Section 64 letters are designed to fix the problem caused when a supplier’s claim to proceeds of on-sale conflicts with a financier trying to get ‘clean’ security for an accounts receivables package (also known as debtor financing).

If a financier is being asked to finance a business’s on-sale of goods it is reasonable for them to want to take security over the money the business will receive from that on-sale.  However, where the original supplier of those goods has a Retention of Title clause and has registered it correctly as a PMSI, they are entitled to the first ranking security right over monies received from the on-sale of their unpaid-for goods.

Unless a compromise is reached the buyer may have his access to finance curtailed and the supplier will possibly run a greater risk of late payment or even non-payment.

The compromise included in Section 64 of the PPSA, involves the financier giving the supplier 3 weeks’ notice of their intention to lodge a registration over their customer’s proceeds from sales.  The registration they lodge at that time will take precedence over the supplier’s – BUT ONLY FOR THE PROCEEDS ELEMENT – and, in return, the supplier’s security rights will transfer from the proceeds of on-sale to the proceeds from the financier’s finance package.

Sometimes the 3 week wait is too much for the financier and their customer and, as a result, the supplier will be urged to discharge their registration, allow the financier time to lodge their registration, then put their registration back in place.  This is NOT beneficial to the supplier and would mean that they would be sacrificing their right to proceeds without any commensurate right to a share in the finance to show for it.

When do I have an interest over 'Proceeds'?

What does ‘Proceeds’ mean?

The term 'proceeds', in this context, refers to money that comes to a buyer from the on-selling of goods supplied to the buyer by the original supplier of the goods.

If a supplier has a Retention of Title right and registers it as a PMSI (see here) they get the opportunity to have their security interest extend to any money their customer receives from on-selling the supplier's unpaid-for goods.

While in most cases (unless they involve a motor vehicle identified by its VIN number, for example) the supplier's right to recover their unpaid goods ends with their buyer's on-sale of those goods, the PPSA allows a supplier's PMSI security interest to 'automatically' transfer to the proceeds of on-sale of those goods as soon as their secured 'grip' over the original goods is lost.

While this can be a useful ‘added extra’, proceeds claims can be messy and, typically, will only be successful when the proceeds monies are received AFTER a liquidator has been appointed to the customer’s business.

I've yet to see rights over proceeds used in a defence against a liquidator's preference claim and, whilst I can envisage some scope for success, I can also imagine that such a defence would not be particularly well received by said liquidator.

PPSR - Ticking the Inventory Box

Should I designate my goods as ‘Inventory’ or not?

The correct answer depends upon how your customer will be dealing with the goods being supplied.

It is a common misunderstanding that whether the goods are 'inventory' or not depends upon how they are treated by the supplier.  I've heard suppliers, when asked why they didn't designate their goods as inventory, say, "Because they weren't inventory items, we had to make them specially".

Under the PPSA, an item of property can be inventory if sold to one business or non-inventory when sold to another - it all depends upon the use to which the buyer will put the property in question:

• If the goods are for on-sale, 

• for inclusion into an end-product that will be on-sold, or

• consumed as part of the customer’s business (eg, fuel for a transport company, or disinfectant for hospital), 

then they should be designated as ‘Inventory’.  Otherwise, the inventory designation should be left blank.  

While the official review of the PPSR recommended doing away with the 'inventory question' because of the confusion it causes, for the time being, it is still required as part of the registration process and, if you get it wrong, you will find it difficult to enforce your registration.

What is a PMSI?

What is a Purchase Money Security Interest?

A Purchase Money Security Interest (PMSI) is defined by the PPSA as occurring where ‘collateral secures its own purchase price’.

This happens when a supplier sells their goods subject to a Retention of Title right – it also happens when goods are sold out of a Consignment Stock arrangement or Leased.

The PMSI designation is important because it allows the supplier to enjoy a ‘super priority’ over the goods they are selling that will rank higher than any bank’s general security interest even when the bank’s interest was lodged earlier.

However, the security interest is ONLY over the supplier’s unpaid stock as long as it is in their customer’s possession.  

A PMSI security right MUST be identified on the supplier’s PPSR registration if it is to achieve its maximum potential effectiveness.

PMSI registrations over goods that will form part of the buyer's inventory (eg, for on-sale, or inclusion in a product for eventual on-sale) must be lodged before the goods are delivered to the buyer although the PPSA allows an additional 14 days' grace for any other goods.

Note: Suppliers should only 'tick the PMSI box' if they have been granted PMSI rights (eg, they have a Retention of Title over their goods) - ticking the box when a PMSI right has not been granted may invalidate an otherwise effective registration.

Is there a deadline for lodging a PPSR registration?

When should I lodge a registration?

Once a liquidator is appointed to a debtor, they are allowed to ignore any security interests registered during the 6 months leading up to their appointment if they hadn’t been lodged within 20 business days of the security agreement being formed. 

In a trade credit context, the security agreement is usually the completed credit application incorporating the supplier's Terms & Conditions (which, in turn, would be expected to include their Retention of Title right).

Thus, if a supplier fails to lodge their registration within 20 business days of receiving a credit limit application, they risk losing their security rights if a liquidator is appointed within the next 6 months.

Separately, the supplier needs to register their Retention of Title right before they deliver their goods to their customer in order to make sure they don't lose any Purchase Money Security Interest (PMSI) rights to which they might be entitled.  Although, where the goods represent a product that will be kept by the buyer for their own use, the PPSA allows an additional 14 days' grace.

When should a PPSR registration be lodged?

In general terms, the answer is ‘as soon as possible’ and, in this context, that means, as soon as the supplier has a reasonable belief that they may be doing business with the grantor in question and that such business will involve the granting of a security interest.

In order to avoid falling foul of the Corporations Act, the supplier’s registration should be lodged within 20 business days of their security agreement being formed. For trade credit suppliers, that security agreement will usually be represented by the signing of the initial credit application by which the supplier’s Terms & Conditions of trade are accepted (provided, of course, that those T&Cs contain the supplier’s security rights – usually in the form of a Retention of Title clause).

If the registration is not lodged within that 20 business day period, the supplier runs the risk that, if their customer falls insolvent in the next 6 months, a liquidator will be able to use section 588FL of the Corporations Act to, effectively, ignore the registration.

I’ve written at greater length on the implications of section 588FL HERE.

Obviously, if the supplier misses that 20 business days window, they should still go ahead and register on the PPSR as soon as possible, it just means that they’ll need to keep their fingers crossed that a liquidator doesn’t get appointed during the next 6 months – once 6 months have elapsed with no liquidator in sight, the supplier can relax.

If we put aside for one moment the Corporations Act provisions, the other key timing issue concerns the effectiveness of your Purchase Money Security Interest (PMSI) rights.

As we know, Retention of Title suppliers, those providing goods on a Consignment Stock basis, and long-term leasers of equipment automatically qualify for having the security arrangements that those trading practices represent designated as PMSIs, thus entitling them to a super-priority over any earlier (or later) registered general security interests.

However, in order to ensure their PMSI right is effective, the registration must be lodged within specific time frames:

Where the Collateral is Inventory	Before the grantor takes possession of the goods
Where the Collateral is not Inventory	Within 15 business days of the grantor taking possession of the goods

Any registration lodged outside of those time frames will still be valid, but it won’t benefit from the super-priority that the PMSI designation would otherwise afford.

If repeat supplies are involved, suppliers should remember that even though they may have registered too late for the first few deliveries, a registration will still be effective over later deliveries.

When does the Grantor take possession?

I recently had cause to read a helpful summary of a decision by the South Australian Supreme Court in the matter of Allied Distribution Finance Pty Ltd v Samwise Holdings Pty Ltd [2017] SASC 163.  While much of the background to the case is a little fiddly, I’ll give a short ‘broad strokes’ summary in order to help demonstrate why this might be a very useful decision for the hire industry.

For those wanting a more detailed look, I recommend the summary HERE  or, for those that want a real thrill, the full text of the judgment can be found HERE.

The case concerned Bill’s Motorcycles – a dealer, selling and servicing Kawasaki motorcycles.  Bill’s had been financing its floor stock with one financier but then struck an agreement with another (Allied Distribution Finance – ADF).  Bill’s stock of 40 motorcycles (secured by the original financier) was bought out by Kawasaki and, effectively, sold to ADF.  Bill’s maintained possession of the motorcycles and ADF lodged a PMSI registration on the PPSR to perfect its security interest over them.

When Bill’s went into administration a couple of months later, there was a dispute concerning those 40 motorcycles between Samwise, the holder of a General Security Interest (AllPAAP) over all Bill’s assets and ADF as a PMSI holder.

While a PMSI will usually take priority over an AllPAAP, in this case, Samwise argued that because Bill’s was already in possession of the motorcycles at the time ADF lodged their PMSI registration,  ADF had failed to meet the time-scale requirements of section 62 of the PPSA.

Section 62, effectively, states that, in order to achieve PMSI priority over inventory items, a registration must be lodged before the grantor obtains possession of the property.

Samwise argued that, as Bill’s had already been in possession of the motorcycles for some time before ADF lodged their registration, ADF was not entitled to PMSI priority.

In his judgment, Justice Blue determined that, in the overall context, the implication of section 62 should be taken to mean that the registration must be lodged before the grantor obtains the type of possession that would entitle them to grant a PMSI interest in the property.

Thus it is the grantor’s possession in the role of PMSI grantor that matters, rather than their mere physical possession of the property.

While this is unlikely to be of any assistance to trade credit suppliers forgetting to perfect their Retention of Title rights in time, it may have implications for the long-term hire industry.

Last year, the Government made changes to the manner in which hires and leases were caught up by the PPSA.  In short, the changes involved leases for less than 2 years no longer needing to be registered on the PPSR.  Where a lease was established for an indefinite period that may or may not extend beyond 2 years, the new legislation only required a registration to be put in place once that 2-year limit was breached.

When I posted about the new legislation, I wrote:

In order to be eligible for PMSI super priority where the collateral being used is designated as a non-inventory item, the perfecting registration must be lodged within 15 business days of the lessee taking possession of the property.

 However, where an indefinite lease is concerned and the lessor doesn’t lodge their registration until it becomes clear the lease may extend beyond the new 2 year qualifying period, that 15 business days period may long since have passed leaving the lessor’s claim to their equipment to fall behind those of other general security holders with registrations already in place.

Justice Blue’s decision in the Bill’s Motorcycles case suggests that, while a lessee may have been in physical possession of property for 729 days, it will only be at the 2 year mark they have possession in the capacity of a grantor of a PMSI right and it should, therefore, be at that 2 year point when the PPSA’s 15 business days countdown for a PMSI eligible registration should commence.

Whether this interpretation is sufficient to also satisfy the Corporations Act’s dreaded section 588FL is another matter! 

PPSR Registration vs Credit Insurance

I’m finding myself increasingly being asked to address questions along the lines of: 

If I have a PMSI registered on the PPSR do I really need to worry about credit insurance?; 

and, its alternative:

If I have credit insurance in place, do I really need to worry about registering my PMSI?

In return for payment of premium, credit insurance can provide trade credit suppliers with protection of around 90% of any loss suffered should their buyer go insolvent, or otherwise default on their payment obligations.

However, if you have sold your goods subject to a Retention of Title clause and your customer collapses before they can make payment, a timely $6.00 registration on the PPSR of that ROT will ensure the return of your goods (or their cash equivalent).  

If this is the case, do you really need to pay substantially more in credit insurance premiums for bad debt protection?

Unfortunately, registration of a ROT will NOT ensure the return of your goods (or their cash equivalent).  Registration might result in the return of goods, and registration certainly won’t hurt recovery prospects, but it isn’t a miracle cure.  Unpaid for goods may have been on-sold, consumed or ‘mislaid’ by the time a liquidator is appointed and what goods can be recovered may no longer be worth their original invoice value, either through use, damage, or merely by the passage of time.

Because the PPSA focuses on property being used as collateral in a security interest, its effectiveness is wholly dependent upon the continued presence of that particular property and the value of the property continuing to be sufficient to cover the value of the outstanding debt for which it acts as security.

Credit insurance, however, focuses on what is actually owed, what has been invoiced and what remains outstanding.  It doesn’t concern itself with any fluctuating value relating to the goods supplied nor with their continued presence post-delivery, only with what is owed under the invoices issued.

If someone goes bust owing you money, a credit insurance policy will, invariably, pay you the lion’s share of your loss, regardless of what happened to the goods you supplied.
Does this mean that credit insurance is the miracle cure and PPSR registration of ROT/PMSI rights is not necessary?

Well… 

While I’m an enthusiastic advocate for trade credit insurance, it is nonsense to suggest that other risk mitigation strategies should be ignored merely because there’s an insurance policy in place.  You wouldn’t start leaving your house unlocked when you left to go to the shops just because you have a home & contents insurance policy, nor would you be casual with your car’s security because it’s insured against theft.  

Not only do credit insurers require that the policyholder (the ‘supplier’ in our context) maintain a financial interest in the underlying transaction (the supplier will usually have to bear at least 10% of any loss), they also set their premium rates based (in large part) on the supplier’s past history of bad debts and the claims they’ve already had to pay.  

Just as a car insurer will take note of whether the insured vehicle is garaged overnight or parked on the street, so a credit insurer will look at the extent to which suppliers mitigate the potential for losses by including security rights in their trading terms and perfecting those rights by registration on the PPSR.

Who would a credit insurer be happier with as a policyholder? a supplier who suffers a loss but is able to recover half its value by exercising their PPSR registered security rights, or a supplier who is unable to offset any of their loss because they weren’t prepared to spend $6.00 on a PPSR registration?  

While both suppliers will get their claims paid, one will likely find their premium rates ‘adjusted’ far more than the other.

So while a credit insurance policy is more likely to keep your business afloat when beset by bad debts, a PPSR registration will likely help keep the cost of that insurance policy as low as possible.

Progress of the PPSR Review Report - UPDATE

I wrote to the Attorney-General's Department (AGD) in September 2016 asking what progress had been made during the 18 months following the tabling in Parliament of Bruce Whittaker's final report of the Review of the Personal Property Securities Act.  

My request for information and the AGD's response were the subject of a post of mine at the time - see here.

A year later, with no action evident from the AGD, I thought I'd try again.  As before, I reproduce below my request and the AGD's subsequent response.

My request (27/09/2017):

It's been 30 mths since Bruce Whittaker's Report of the Review of the Personal Property Securities Act was tabled in Parliament.

What progress has been made since that time in moving to implement its recommendations, both legislatively and operationally? 

 I'd also appreciate an indication as to the timetable for implementation. 

I am sure that the Gov’t is keen to ensure that all parties are given due consideration and that reform must be executed with care and diligence. I also appreciate that the response to the review must be progressed as a comprehensive package rather than on an ad hoc basis in order to achieve its aims to reduce complexity and burden without prejudicing the interests of any party.

However, 30 mths have now passed with only one of the Review’s 394 recommendations having any reflection in subsequent legislation.  Surely, by now, an efficient Gov’t administration will be in a position to provide information on implementation timeframes and intentions.

The AGD's response (31/10/2017):

Thank you for your email of 27 September 2017 regarding implementation of the Review of the Personal Property Securities Act 2009 (the Review).

Since the Review was tabled in Parliament on 18 March 2015, the Government has prioritised development and passage of the Personal Property Securities (PPS Leases) Act 2017 (the PPS Leases Act). The PPS Leases Act has reduced the regulatory burden imposed by the Personal Property Securities Act 2009 Act (the Act) on the hire and rental industry by increasing the term of a PPS lease from at least one year to at least two years, providing that an indefinite lease is not a PPS lease unless and until it has been in force for two years, and making other amendments.

The Government has given close consideration to the 394 recommendations made by the Review and conducted targeted consultations with stakeholders. The Government intends to release an Exposure Draft of a Bill to amend the Act and a prototype PPS Register, for public consultation. Stakeholders will have an opportunity to provide comment on the Bill and the Register before the Government takes further action to implement the recommendations of the Review.

The Government will make further announcements about the timing of public consultation on the Bill and Register.

I hope this information is of assistance.

Taking the AGD's response at face value, a new PPSR seems to be on the cards rather than merely some tweaks to the existing register!

By way of recap, some of the changes recommended in the review included removing the need to designate security interests as PMSIs or as the supply of items for inventory, as well as taking away the requirement to identify grantors that are trustees of trusts by their trust's ABN.

I'll probably write again next year to the AGD with a follow-up enquiry regarding progress on this matter, but, in the meantime, I'd be grateful if any stakeholders that have been on the receiving end of 'targeted consultations' could get in touch with me and, perhaps, shed some light on the manner in which the AGD's thinking has been progressed.

PPS Leases – Extended to 2 years

I wrote on this issue in March when the Government’s Bill to extend the qualifying period for PPS Leases to 2 years passed its first reading.  I was sceptical at the time as to how swiftly we could expect the Bill to be enacted and come into effect but clearly, those lobbying for the changes carry some serious clout because Royal Assent took place on 19^th May and the terms of the Act are now in force.

While, superficially, the Act has merely served to double the qualifying period for leases to get caught up by the PPSA, more tellingly, the Act also keeps indefinite leases out of the PPSA’s claws until such time as the lessee’s actual possession of the leased property passes the 2 year mark. 

This is, by far, the more meaningful change and it will almost certainly be welcomed by all the small hire operations that don’t expect to hire their goods out for much more than a few days or weeks yet fail to put an expiry period on the lease. 

However, the relief that no doubt comes from not having to worry about the administrative burden of the PPSA may be offset by the corresponding loss of protection that having their leasing arrangement treated as a security interest allowed. 

Loss of protection from Preference demands

Under the PPSA, property being leased is treated as collateral in a security interest that would allow the lessor to recover their property in the event the lessee failed to continue making payments under the lease.  Up until now, a lessor will have been able to use the presence of this ‘security interest’ (provided it was properly registered) as a defence against any claim from a liquidator that monies paid under the lease should be returned as preferential payments. Under this new Act, it is difficult to see how a lessor (for an indefinite lease that has yet to run for 2 years) would be able to use that defence.

Loss of PMSI ‘super priority’

In order to be eligible for PMSI super priority where the collateral being used is designated as a non-inventory item, the perfecting registration must be lodged within 15 business days of the lessee taking possession of the property.

However, where an indefinite lease is concerned and the lessor doesn’t lodge their registration until it becomes clear the lease may extend beyond the new 2 year qualifying period, that 15 business days period may long since have passed leaving the lessor’s claim to their equipment to fall behind those of other general security holders with registrations already in place.

I notice that the Hire and Rental Industry Association (HRIA) has, rather dangerously, advised its members that registration within the PPSA designated timescale won’t be necessary in order to get PMSI priority; unfortunately, its explanation as to why this might be isn’t especially convincing.

It would have been far better for the new Personal Property Securities Amendment (PPS Leases) Act to have also adjusted the PMSI designation timescales to accommodate these changes and remove any doubt.

Vesting under the Corporations Act

Regardless as to how the PPSA might be interpreted, the Corporations Act, at s588FL, clearly states that…

If a registration has been lodged during the 6 months leading up to the appointment of a liquidator, it must have been lodged within 20 business days of the security agreement coming into force in order to avoid the collateral in question being vested with the liquidator.

Basically, if a registration isn’t lodged within 20 business days of the leasing agreement being entered into, the lessor has to keep their fingers crossed that a liquidator doesn’t get appointed to the lessee during the 6 months following their eventual registration.

If anyone gets a little lost at this point, I have a visual here that should help.

The PPSR, in explaining the implications of the new Act, suggests registering at 22 or 23 months into the leasing period, but this clearly won’t help lessors avoid falling foul of s588FL.

Fortunately, the HRIA recognises the danger that those at the PPSR clearly don’t and recommend that registrations be lodged before 18 months have passed if it looks as though the lease might go on for longer than expected.  Where there is already an expectation that the lease could last longer than 2 years, they recommend registering at the outset.

This seems a sensible workaround but, with proper prior public consultation and better thought out legislation, there should be no need for ‘workarounds’!

Summary

Leases and bailments entered into after 20 May 2017 will be subject to the new definition of PPS Leases and such leases will not need to be registered on the PPSR unless they are to run for longer than 2 years.

Agreements entered into before 20 May 2017 will remain subject to the previous definition of a PPS Lease and should still be the subject of a PPSR registration if they are due to run for longer than a year, allow for extensions taking the agreement beyond a year, or are for an indefinite period.

Update: Please see my post on "When does a Grantor take possession?" for some fresh thinking on some of the issues/concerns raised in this post.

Top 5 Registration Errors

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

PPSR & ‘Complicated Scenarios’

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

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

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

‘When in doubt, lodge a registration’ or

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

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

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

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

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

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

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

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

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

Not sure which of 10 companies to register against?  

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

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

Is there a downside to multiple registrations in such circumstances?

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

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

Is that it? (Notice Filing System vs Transaction Filing System)

Once they get past the PPSR’s jargon of purchase money security interests, giving of notice identifiers, subordinated registrations etc, many of my trade credit clients have something of an ‘is that it?’ reaction. They’d been gearing themselves up to having to list part numbers and order references only to find that simply choosing the collateral class category of ‘Other Goods’ was pretty much all that was required. Understandably, there’s an element of anti-climax and concern that they should be doing more when it comes to describing the goods/collateral involved.

The answer to their concerns, to my way of thinking, rests very much in the nature of the register that the PPSR was set up to be. 

Prior to the PPSR, company security interests were registered on the ASIC Register of Company Charges.  The ASIC register acted as a Transaction filing system, whereby the document that acted as the security interest was filed in its entirety – a 30 to 40 page Registered Charge document signed by both parties being the most common.

Although the PPSR replaced ASIC’s register, the PPSR has been established as a Notice filing system whereby the secured party is merely required to announce that it has a security interest (or is likely to have a security interest).  The actual security interest – usually represented for trade credit suppliers by a Retention of Title clause in their terms and conditions – would need to be kept separately and brought out at any time evidence is required that the security interest asserted by the registration on the PPSR actually existed.

The registration on the PPSR, therefore, does not define the security interest or the collateral to which it applies, but instead merely needs to describe it in a manner that would provide an indication as to its nature for interested third parties.  Where the ASIC register stored 40 page documents, the PPSR stores the equivalent of an electronic post-it note.

Thus, when a supplier lodges a registration perfecting their Retention of Title security interest, they are putting others on notice that they have an interest, the precise details of which may be separately available from them in response to any third party enquiry – such as might be required from an insolvency practitioner should the customer fall over.

When a liquidator (or similar) is appointed to a company, they will conduct a search of the PPSR to see who is asserting they have a security interest.  They will then write to each of these asking for the evidence that such an interest exists and is consistent with the general description provided by their lodgement on the PPSR.  It is at this point that suppliers will need to detail the specific items of collateral to which their security interest applies and provide evidence of the relevant acceptance by the customer of their security rights.

Specific serial numbers are only required to be provided as part of a PPSR registration when that registration concerns motor vehicles, watercraft, aircraft and certain other weird and wonderful types of collateral such as Intellectual property patents and plant breeders’ rights.

Inserting serial numbers in Collateral description fields of ‘Other Goods’ registrations may be of some assistance to a liquidator in identifying specific stock – although promptly providing that information separately upon request would be just as helpful – but can create a rod for suppliers’ backs in as much as any typo or omission would render the effectiveness of that registration subject to challenge.  It would also take the supplier down the path of having to either lodge multiple registrations every time a fresh delivery was made or constantly amending existing registrations – an administrative burden I’m sure they could do without.

If a security interest is in the form of an accepted Retention of Title clause then an ‘Other Goods’ registration, describing the collateral as that supplied by the secured party and the interest as a Purchase Money Security Interest (PMSI) should be sufficient, if registered in a timely fashion, to secure a supplier’s rights to those goods until such time as they have been fully paid for and assure the supplier of a higher ranking interest over those goods than any other creditor in the event the customer falls insolvent.

Simplifying the Registration Process - Review Recommendations

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

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

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

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

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

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

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

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

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

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

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

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

Cross-Collateralisation of PMSIs

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

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

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

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

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

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

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

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

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

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

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

Retention of Title Clauses - Where Less is More

At least once a week I’m asked to review a set of Terms & Conditions for ‘compliance’ with the PPSA.

I’ve always been a little amused by this idea given that much of the manner of the PPSA’s introduction was based on reflecting how creditors had, in practice, been securitising the payment obligations of their debtors rather than dictating how this should be done going forward.

Generally, in view of the nature of my client base, I’d need to do little more than check to make sure there was a half decent Retention of Title (ROT) clause present and, if they hadn’t already been added, suggest a few waivers of some of the obligations that the PPSA might otherwise require of creditors.

However, this morning I came across an ROT clause where PPSA compliance clearly was an issue.

The clause in question read as follows:

The Supplier and the Buyer agree that ownership of the Goods shall not pass until:

(a)   The Buyer has paid the Supplier all amounts owing to the Supplier; and

(b)   The Buyer has met all of its other obligations to the Supplier.

Aside from a touch of redundancy with (a) being pretty much covered off by (b), my main concern was over the wording at (a).

The PPSA gives suppliers the opportunity to take a Purchase Money Security Interest (PMSI) ‘super priority’ where their interest is over collateral that secures its own purchase price. The alternative to collateral securing its own purchase price would be for the identified collateral to be taken as security for a broader description of amounts owing – such a broader description would not necessarily qualify for the PPSA’s super priority treatment.

Unfortunately, the wording used at (a) above states that the Supplier is treating the goods they are selling as collateral against “all amounts” they may be owed and therefore offers up a ‘broader’ description of what is being secured than would arguably qualify for PMSI super priority.  I am acutely familiar with circumstances where insolvency practitioners have successfully argued this specific issue!

Given that there is remarkably little difference between (a) and (b), I suggested that (a) be rephrased along the following lines:

The Supplier and the Buyer agree that ownership of the Goods shall not pass until:

(a)   The Buyer has paid the Supplier the full purchase price for those Goods; and

(b)   The Buyer has met all of its other obligations to the Supplier.

While it might be a natural reaction on the part of suppliers to attempt to make their security interests as all-embracing as possible, when it comes to the PPSA and its PMSI super priority, it could be said that ‘less is more’.  Or, at least, that a narrower, more focused interest is likely to be more effective.

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.