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.

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.

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.

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.

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.