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.

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 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! 

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.

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!

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.

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.

Registering a Retention of Title Clause on the PPSR

Since the introduction of the Personal Property Securities Act (PPSA) your Retention of Title (RoT) clause is treated as a security interest.  Under the PPSA, any security interest over non-real estate property will be ineffective unless that security interest is perfected.   To all intents and purposes the only way to perfect a security interest is by registration on the Personal Property Securities Register (PPSR).

When do I need to register?

The PPSA provides for early registration in anticipation of a security interest being created; provided your anticipation is reasonable.  It could be considered reasonable, for example, to lodge a registration once a customer’s credit application had been approved but somewhat less reasonable to lodge a registration against someone on the grounds that they weren’t completely dismissive when you cold-called them last week!

Another consideration in determining how early to register is the fact that, where an administrator or liquidator has to determine the priority between two competing security interests, if all else is equal, they will give priority to the security interest  that was registered first and not to the security interest that was created first.

If you are supplying goods to be used as part of your customer’s inventory (eg, for on-sale, incorporation into an end product or consumed as part of a production process) then you should make sure your registration is lodged before your customer takes delivery of your product.  If you miss this deadline then your security interest will be ineffective against that delivery but, if repeat trade is involved, will be effective over subsequent deliveries.

Where the goods in question are non-inventory items you have a little bit more of a cushion, of up to 15 days, from when your customer takes possession of the goods.

How do I register?

I’ll cover setting yourself up as a Secured Party on the PPSR and identifying your Grantor correctly elsewhere on this blog so, for this article, I’ll just focus on that element of registration that relates specifically to describing your security interest.

I’ll look specifically at lodging a registration on the PPSR itself as, although there are third party providers who have more streamlined registration facilities (such as NCI), the guidance is readily transferable.

In answer to “What is the collateral type?” you should be selecting “Commercial” wherever you are trading with a business which has an ABN.  If you are selling timber to a home handyman who is building a pergola for himself in his back yard then that would almost certainly be classified as a Consumer purchase.

I’ve already written quite a bit on this blog about the differences between Transitional and Not-Transitional as well as the on-going arguments concerning the two – for now, let’s proceed on the basis that we are registering a security interest on a new customer and select Not-Transitional.

(Skipping the entry of your Secured Party Group number)

We’re now asked to describe our Collateral.

Collateral means the ‘thing’ that’s being used as security.  When you take out a mortgage your bank takes a security interest over your home – your house is being used as the Collateral for your mortgage.  If you don’t repay your mortgage the bank gets to collect their collateral.  Similarly, when you are selling your goods subject to a Retention of Title clause, your security interest is your ability to get your goods back if they are not paid for – your collateral is the goods you supplied.

While at first glance there seems to be quite a wide range of choices when it comes to describing your collateral, a second glance quickly reveals that there isn’t much of a choice at all!

Unless the goods you are supplying are motor vehicles, watercraft, aircraft or ‘agriculture’ the appropriate collateral class for RoT trading will be ‘Other Goods’.  Whether it be hose pipes or hair spray, footballs or fusion reactors, to the PPSR they are simply ‘Other Goods’.

Having selected ‘Other Goods’ click on the Use collateral class button:

And find yourself with the opportunity to enter a description of the goods you’re supplying.

While this is not a mandatory field, it is sensible to add some description here if for no other reason than to help third parties understand more about the nature of your security interest.  However, if you are too specific you risk leaving loopholes for others to exploit as well as making a rod for your own back should you later supply a product that wasn’t included on your original description. 

As a general rule I recommend something simple along the lines of “Collateral supplied by the secured party”.

Next you have to describe the duration of your registration:

At this point you’ll probably need to be reminded of the way in which the PPSR charges for registrations.

For a registration of up to 7 years the PPSR charges $8.00

For a registration of between 7 and 25 years it charges $40.00 and,

For an indefinite registration it charges $140.00.

Most of the companies I advise choose to register for 7 years.  A registration can always be extended later, if necessary.

We now come to, potentially, the most dangerous part of your registration; the bit that will either help you achieve a super-priority for your RoT or, possibly, invalidate it altogether.  And yet the PPSR presents these to us, almost as an afterthought, as if it is not something that should trouble us at all.

Purchase Money Security Interest 

Otherwise known as a PMSI (pronounced ‘pimsy’), this is the box that needs to be ticked in order to give your humble RoT a super-priority over virtually all other claims.  A PMSI is a security interest over collateral that secures its own purchase price.  That is probably not expressed in a familiar manner but it is, effectively, the very definition of what a Retention of Title clause is all about.  If you don’t tick the PMSI box then you will not get your super-priority rights.

Inventory

I’m sure the PPSR thinks it’s being helpful by suggesting we look up part 9.5 of the Personal Property Securities Act 2009 if we want to know the definition of inventory but I can tell you right now that you’re more likely to come away from the experience with a headache than any sort of enlightenment!

Unless you are engaged in something particularly fancy then you should be OK with the definition I gave for inventory earlier on in this piece, ie, goods that are for on-sale, incorporation into an end product or consumed as part of a production process.   If you are selling goods that will be treated as inventory items by your customer and do not tick this box then you risk invalidating the whole of your registration.

Control

It is difficult to think of scenarios where you might be selling goods subject to a Retention of Title yet still retain control of those goods – it’s the sort of area that is more likely to crop up with banks holding a security interest over the bank accounts held with them.  I’ve not yet had occasion to recommend any RoT supplier tick the ‘subject to control’ box.

Subordinate

It is a little strange that on a register all about trying to achieve priority you have a box that allows you to concede priority to another registration.  Again, I’m struggling to think of a suitable scenario where this would be an issue for an RoT supplier and, as with issues of control, I’ve not had occasion to recommend any RoT supplier tick this box.

Proceeds

One box that should definitely be ticked by the RoT supplier is the Proceeds box.  When the PPSA was introduced it gave a ‘free’ extension to proceeds to all RoT suppliers.  If your goods have not been paid for but your customer has on-sold them then your priority security rights can extend to any monies arising directly or indirectly from that on-sale.   Tick this box!

You have an opportunity to put your own text into the proceeds description box but in most cases it makes more sense to leave it blank so the default wording “all present and after acquired property” can apply.

Once this is done, the collateral stage of the registration is complete and you move on to the final step of identifying your Grantor/Customer – something I have addressed in previous articles but will probably summarise again in a subsequent post.

As usual, if you have any queries or concerns, feel free to use the comments area below.

PPSA and Proof of Debt

When a trade creditor is required to complete a Proof of Debt form (Form 535) it is easy for them to believe that they are merely documenting, for administrative purposes, the particulars of the amount they are owed.  Indeed, there is not really any indication on the form itself to disabuse them of this notion.

However, an important function of Form 535 is to determine the relative voting rights of creditors. 

Section 5.6.24 of the Corporations Regulations 2001 states:

(1)  For the purposes of voting, a secured creditor must state in the creditor’s proof of debt or claim:

                     (a)  the particulars of his or her security; and

                     (b)  the date when it was given; and

                     (c)  the creditor’s estimate of the value of the security;

unless he or she surrenders the security.

In other words, any failure by the creditor to provide details of their security may be interpreted as a surrender of their rights to that security.

Under Corporations law, creditors are only allowed to vote at creditors’ meetings to the extent that they are unsecured. 

For example, a PMSI registered creditor with a retention of title over goods they have supplied may be owed a total of $20,000 but, following a stock check at the buyer’s premises, it is found that only $8,000 of that creditor’s goods can be identified.  Because the creditor’s security is limited to the availability of the goods they supplied, they are only a secured creditor for $8,000 of the amount owing and an unsecured creditor for the $12,000 balance.

Our PMSI holder can therefore vote with $12,000 of voting rights at creditors’ meetings while still retaining their secured creditor status over the $8,000 for which stock can be identified.

This is in line with the second part of 5.6.24 which states:

(2)  A creditor is entitled to vote only in respect of the balance, if any, due to him or her after deducting the value of his or her security as estimated by him or her in accordance with regulation 5.6.41.

(note: regulation 5.6.41 reflects the information required at part 2 of Form 535)

However, if there has been any vagueness or lack of accuracy or clarity in completing the details and values of any security being asserted at part 2 of Form 535, any votes cast by the creditor will be interpreted as an intention by them to be treated as an unsecured creditor for up to the full amount of their debt.

The third part of 5.6.24 refers:

(3)  If a secured creditor votes in respect of his or her whole debt or claim, the creditor must be taken to have surrendered his or her security unless the Court on application is satisfied that the omission to value the security has arisen from inadvertence.

Liquidators are frequently chasing creditors for completion and return of Proof of Debt forms before formal stock takes have been completed, encouraging ROT holders to be substantially less than specific on their Form 535.  Should that ROT holder then turn up to vote at a meeting of creditors – whether over the creation of a committee of inspection or to rubber stamp a liquidator’s remuneration – they may suddenly find themselves stripped of all their security rights.

There is legal precedent (Young v ACN 081 162 512 [2005] NSW Supreme Court) for a creditors’ vote on a matter as mundane as the adjournment of a meeting being deemed sufficient to strip an unpaid creditor of their secured creditor status.

It is quite sobering to imagine a supplier, upgrading their terms & conditions to ensure the effectiveness of their Retention of Title clause, registering that ROT on the PPSR in order to maximise its priority, maintaining detailed records of orders, deliveries and payments only to find that all their efforts to protect themselves have been undone by their participation in a vote to approve the adjournment of a creditors’ meeting.

Is there a lesson to all this? 

Simply that creditors should be aware of what they are actually doing when they complete a Form 535 Proof of Debt form and that, unless they have specifically identified the extent to which they are secured/unsecured on that form, any subsequent vote cast by them at a creditors’ meeting could result in them losing any security rights to which they had been entitled.

Transitional Rules Revisited

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

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

The Case

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

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

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

The Judgement

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

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

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

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

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

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

PPSA & Consignment Stock

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

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

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

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

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

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

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

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

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

PPSA & Real Estate (more fun!)

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

Scenario

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

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

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

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

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

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

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

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

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

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

Opinion

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

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

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

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

          8  Interests to which this Act does not apply

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

(j)         an interest in a fixture;

and

10  The Dictionary

                        In this Act:

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

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

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

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

32  Proceeds—attachment

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

            (a)        continues in the collateral, unless:

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

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

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

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

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

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

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

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

Conclusion

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

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

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

Disclaimer

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

Deed of Release

Addressee:                   [the entity seeking the release]

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

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

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

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

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

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

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

Executed by the Secured Party as a deed poll

EXECUTED AS A DEED by

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

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

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

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

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