PPSA Clauses in Terms & Conditions

Firstly, it needs to be said that you do not need specific PPSA clauses in your Terms & Conditions of trade in order to lodge a registration on the PPSR, only the presence of a security right.  For most trade credit suppliers, this security right will be a Retention of Title clause – if you have one of these in your T&Cs and those T&Cs have been accepted by your customer, you can go ahead and register that security right on the PPSR.

This often prompts the question, if all that is needed is a one-sentence Retention of Title clause, why have multiple paragraphs of PPSA related text been included in the T&Cs?

Although not an unreasonable question, this is a little like hearing that you only need to drink water to avoid dying of thirst, and then asking, why bother with beer, wine and coffee?

So, in what way do PPSA specific clauses help us survive our mundane existences and allow us a temporary respite from the ever-present agonies of life?  Or, to put it another way, how do PPSA specific clauses make things a little easier for us?

Their first purpose is one of transparency and understanding.  Clauses will often start off by saying something along the lines of:

“You hereby acknowledge that these Terms and Conditions of Trade constitute a Security Agreement which creates a Security Interest in favour of [the supplier]…”

It has only been since the introduction of the PPSA that Retention of Title rights have been properly deemed to represent a form of security and it is helpful to draw a customer’s attention to this, particularly when the supplier goes on to add that, as a security right, they intend registering it on the PPSR.

A lot of terms then go on to suggest that the buyer/customer should sign documents or pay costs facilitating the supplier’s PPSR registration.  I don’t know if I’ve led an unduly sheltered life, but I’ve not come across any instance where any action has been required of a trade credit buyer in this regard and certainly haven’t heard of any additional fees being passed on, but, apparently lawyers think suppliers will feel comforted by having that option.

While there might be a little more repetition, the next purpose of the PPSA specific clauses will be the ‘waivers’.

The PPSA places a surprisingly large number of obligations on the ‘secured party’ to keep their customers advised of any actions they take.  I have this idea that the drafters of the Act had a visual image of the supplier being a huge unfeeling multinational bureaucracy and their customer being a little old lady with cats. 

In its vanilla form, the Act requires the supplier to keep their customer advised of anything and everything relating to the security interest – letting them know of the registration (and any amendments to it), giving notice of any intention to recover unpaid-for goods, advising of plans to dispose of any recovered goods, sending statements detailing whatever payments they might have received from on-selling the recovered goods, sending statements for anything they’ve recovered that hasn’t been disposed of, and providing the customer with an opportunity to object (!).

Fortunately, most obligations of this nature can be contracted out of and including clauses in T&Cs is probably the most effective way for a supplier to dodge these administrative bullets.  Hence clauses along the following lines:

“The Purchaser and the Supplier agree that the following provisions of the PPSA do not apply to the enforcement by the Supplier of its security interest in the Goods: sections 95, 118, 121(4), 130, 132(3)(d), 132(4), 135, 142 and 143.”

While I won’t go into each potential waiver/exclusion in detail (and can’t guarantee that I’ve spotted them all), the following table should help as a quick guide to what aspects of the Act are addressed in each of the ‘avoidable’ or ‘enhanceable’ sections of the Act.

Section	Issue addressed	Comment
95	Secured party must give notice of removal of accession	http://ppsr-blog.blogspot.com/2014/06/ppsa-accessions.html
118	Enforcing security interests in accordance with land law decisions	A waiver of the Secured Party’s obligations to provide notice to the grantor.
121	Enforcement of security interests in liquid assets	A waiver of the Secured Party’s obligations to give notice to the grantor of their intention to enforce their security interest.
123	Secured party may seize collateral	There’s a requirement here for the Secured Party to give notice to the grantor of their intention to seize.
129/130	Notice of disposal of collateral	Waiver of the Secured Party’s obligations to advise the grantor of their plans to dispose of collateral in their possession if a default has occurred.
132	Secured party to give statement of account	Waiver of the Secured Party’s obligation to provide a statement regarding any collateral they have disposed of as a result of default.
135	Notice of retention of collateral	Waiver of the Secured Party’s obligation to notify the grantor that they will be retaining collateral in their possession.
137	Persons entitled to notice may object to proposal	Removing the grantor’s right to object to any intended disposal of recovered collateral.
142	Entitled persons may redeem collateral	Waiver of the grantor’s right to priority when it comes to redeeming recovered collateral from the Secured Party.
143	Entitled persons may reinstate security agreement	Withdrawal of the grantor’s rights to reinstate a ‘broken’ security agreement.
157	Verification statements—secured parties to give notice to grantors	Removal of the Secured Party’s obligations to send the grantor a copy of the PPSR Verification Statement every time a registration event occurs.  See also http://ppsr-blog.blogspot.com/2014/05/notifying-grantor-what-are-your.html
275	Secured party to provide certain information relating to a security interest	The ‘vanilla’ PPSA requires the Secured Party to divulge relevant information about their security interest to any interested 3rd party unless the Secured Party and grantor have agreed they will keep such matters confidential.

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.

The Dangers of Amended Terms & Conditions

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

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

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

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

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

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

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

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

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

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

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

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

If only it were that straightforward. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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