Government's Response to the PPSR Review

Bruce Whittaker completed his formal review of the PPSR in March 2015 and his report, containing 394 recommendations, was put to Parliament at that time.  I first wrote to the Attorney Generals' Department in September 2016 asking what progress had been made in assessing the review's recommendations and have begun making something of an annual habit of it ever since.

The request for information and the formal response from the AGD after 18 months consideration can be found HERE, and the response after 30 months can be found HERE.  Some 44 months on from the PPSR Review's release I've received the following response to my latest enquiry requesting an update on the progress of its consideration:

Thank you for your email about the Government’s response to the Review of the Personal Property Securities Act. I am sorry for the delay in responding to you.

Regarding timelines, while the department has made considerable progress on the response to the Review, we are currently consulting with a range of industries and stakeholders regarding a number of the more complex recommendations in the Review.  Following the conclusion of this consultation, the Government intends to release its response to the Review. This is to provide stakeholders with notice of the Government’s position on the review as soon as possible. Following this, the department will undertake broader consultation on the corresponding exposure draft legislation. We are not in a position to provide a release date at this time, but will keep you updated.

With all due respect to the AGD, this doesn't represent any advance on their update last year in which they advised:

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.

If anything, the latest response seems to represent something of a step backwards.

At this stage, it might be worth pointing out that it 'only' took around 2 years from the passing of the 2009 Act to commencement of the Register in the first place (not that anyone considered that to be particularly quick) and we are now approaching 4 years from the presentation of the Review's findings without the Government having even released a response for consultation let alone an implementation strategy.

With so many finding the registration of their security interests on the PPSR an overly complicated exercise fraught with the possibility of error, it is disappointing that there is such delay in implementing recommendations designed to simplify the process and remove many of the Act's pitfalls.

Spike in PPSR Registrations due to Expire

Earlier this week, AFSA released their PPSR statistics for the 2018 June quarter.

While there’s not much that’s particularly surprising in the statistics (which you can find here) there is a new addition to the format, in that AFSA has now provided information regarding the number of registrations due to expire in the next 18 months.

I’ve drawn up a quick chart based on the figures, in as much as they relate to ‘Other Goods’ registrations (the type of registration most appropriate to the majority of trade credit suppliers):

While the picture from March 2019 onwards looks as we might have expected, this is preceded by a huge spike in expiries in January 2019, surrounded by high levels of expiring registrations from October to February.

While the last two days of January 2012 saw the start of the Register (and the previous three months a few waves of advanced registrations and migrations from other registers) I’m surprised that the registration activity that took place at those times didn’t concern itself, almost exclusively, with transitional registrations with an indefinite expiry.  As someone very closely involved with thousands of bulk registrations in those early weeks of the register, virtually all were lodged as indefinite transitional registrations.

However, clearly there were a great many registrations being lodged for only 7 years and these are now coming up for renewal.

I'll shortly be following up this post with a step by step guide to renewing registrations on the PPSR.

Accidental Discharges from the PPSR

Even with the best will in the world, every now and again a mistake will get made, and, in addition to the plethora of opportunities for making mistakes in lodging a registration on the PPSR, it is also quite easy to mistakenly discharge one of your registrations.  Unfortunately, unlike the program I’m using to write this post, the PPSR doesn’t have a convenient ‘undo’ button and although the PPSR does allow for such errors to be corrected, the word ‘convenient’ really does not apply.

The PPSR’s primary concern in such matters is not with assigning blame or getting you to eat humble pie over making your mistake in the first place, but to ensure that no-one could be misled should they reinstate the registration that had been discharged in error.

This means that your very first action upon realising that the registration shouldn’t have been discharged should be to lodge a replacement registration.  

The longer your registration is ‘missing’ the more opportunity there is for a third party to be potentially misled into thinking there was less security in place than there would have been had your registration not been discharged in the first place.

Unfortunately, the Corporations Act and the PPSA’s own PMSI designation requirements mean that, in some cases, a replacement registration won’t suffice on its own – the original registration needs to be reinstated.

In order to convince the PPSR to restore your discharged registration you will need to obtain a “Request to remove, restore or correct data” form from the PPSR.  They haven’t made this the easiest of forms to find but, at time of writing, it was available from a link at the bottom of the page here.  

For restoring a registration, there are essentially only three sections of the form that need to be completed:

• Firstly, you need to identify yourself (applicant details) in the same manner as you were identified when you first set up your Secured Party Group.

• Secondly, you need to enter the unique number of the registration to be restored and ‘tick the box’ making it clear that you want the registration to be restored rather than removed or corrected.

• Thirdly, after skipping a couple of sections relating to having a registration removed, you need to enter some free-form text to explain the circumstances surrounding the mistaken discharge.  Remember, the PPSR is not interested in assigning blame and it is usually sufficient just to enter something to the effect that removal of the registration was simply down to human error.

After that, the form just needs to be signed and submitted to forms@ppsr.gov.au.

Once the PPSR has had the opportunity to consider the form you’ve submitted, they will look to ensure that no-one is likely to be significantly misled by restoring the registration in question.

To this end they will check their search records to see if anyone had conducted a search during the period the registration was ‘missing’ and not replaced by you with another.  If there were no searches and your replacement registration was submitted sufficiently promptly, all will be good, otherwise you may need to write to the potentially misled parties to clarify the position.

You may also be asked to obtain the Grantor’s approval to restore the registration.

I’ve not had the opportunity to test an instance where the Grantor in question has refused to confirm that they have no objection to the restoration of the registration but would assume that confirmation that the circumstances that led to the original registration were still in place should be sufficient.

That should then be it!

The original registration should be restored to the register in a manner virtually indistinguishable (as far as legislative requirements are concerned) from it ever having been removed in the first place.

The PPSR has its own guidance notes on the process here for those who want to make doubly sure.

Registering against Trusts

It’s been well over 4 years since I last dedicated a post here to the issue of trusts, so, while the earlier article still holds up well, it’s probably about time I revisited the subject and freshened up what we know.

Firstly, I’ll preface what follows with Recommendation 110 from the Official Review of the Personal Property Securities Act completed just over 2 years ago and, as far as I can tell, no closer to having the vast majority of its 394 recommendations adopted.

Recommendation 110: That the Regulations be amended so that a registration to perfect a security interest over trust assets should be made against the relevant details for the trustee, rather than the ABN or other identifying details for the trust.

Why did the Official Review make this recommendation?

Well, let’s look at what the rules for registration look like when a Trust is involved.

Unfortunately, those rules won’t be found in the Personal Property Securities Act itself, but in the Personal Property Securities Regulations 2010,  wherein you will be treated to some of the most convoluted ‘guidance’ I’ve come across in relation to the PPSA.

 

To save you the agony, I’ve summarised the key guidance:

• If the Trustee is a corporate body and has an ARSN (Australian Registered Scheme Number – pretty unlikely for trade credit transactions) then the registration should be lodged against the 9 digit ARSN.
• If the Trustee is any other kind of body (or individual) and the relevant Trust has an ABN, the registration should be lodged against the Trust’s ABN (this is probably the most likely scenario).
• If the Trustee is a corporate body but its Trust does not have an ABN (unlikely) then the registration should be lodged against the Trustee’s ACN.
• If the Trustee is an individual but the Trust does not have an ABN, then registrations should be against the individual’s details – usually, full name and date of birth.

The first problem that springs to mind lies with simply knowing whether the company that is interested in becoming your customer is acting as a Trustee or not.  Your potential customer may simply omit mentioning that they are acting on behalf of a Trust.  How is the poor supplier to know?

While the supplier may discover that there is a Trust, not knowing whether the potential customer is acting in their capacity as Trustee or purchasing in their own right will either leave the supplier open to opting for the wrong type of registration or going to the trouble and expense of lodging two registrations ‘just to be safe’.

Where does the supplier stand if goods are supplied to a company with a Trust that doesn’t have an ABN (and thus registered against the ACN of the company) only to find out later that an ABN has since been obtained for the Trust? 

Interestingly, the same rules that apply to identifying Grantors also apply to identifying Secured Parties when setting up their Secured Party Groups on the Register.  However, while failing to identify the Grantor in absolute accordance with the PPSA’s rules may lead to the registration being deemed ineffective, the situation is not as dire when it comes to identifying Secured Parties. 

As found in Future Revelation Ltd v Medica Radiology & Nuclear Medicine Pty Ltd[2013] NSWSC 1741, the determining factor will be whether the registration would be revealed during a properly conducted search – while it would not be found in the case of a wrongly identified Grantor, an incorrectly identified Secured Party’s registration would still show up in Grantor based search results.

In summary, where Trusts are involved, the PPSA’s registration rules are horrible, ill-conceived and confusing but… we’re stuck with them for the foreseeable future and, as far as companies are concerned, I advocate a belt & braces approach of lodging registrations against both the Trust ABN and the Trustee’s ACN.

Clive Palmer vs the PPSA

I’ve just read an 'excited' article by The Australian, entitled “Clive Palmer firms jump queue of creditors for Queensland Nickel” which you can read here (although you may get caught out by The Australian’s paywall).

The meat of the article concerns the ‘last minute’ registration on the PPSR of security interests against Queensland Nickel by companies in which Clive Palmer has an interest.

“Four days before Clive Palmer’s Queensland Nickel Industries collapsed into voluntary administration, two of his companies staked a claim on all of the refinery’s assets in an apparent attempt to squeeze out redundant workers and other creditors.”

The article goes on to say that,

“Legal experts said the manoeuvre could disadvantage sacked workers, already furious at being denied access to their redundancy entitlements.”

Apparently, The Australian and its ‘legal experts’ are not especially familiar with the workings of the PPSA or the Corporations Act once insolvency practitioners become involved.

Firstly, any creditor who had lodged a security interest on the PPSR prior to Palmer’s recent registrations will benefit from greater priority under the PPSA (at least a dozen of which were registered under the facilities that I personally oversee).

But, perhaps more importantly, in the context of The Australian’s article, are the implications of the Corporations Act for security interests registered within 6 months of a company failure.

While I’ve previously explored this at some length in my post ‘The PPSA vs The Corporations Act’, the short version is that 588FL of the Corporations Act provides a very clear deadline by which a registration needs to be lodged in order to be effective against a liquidator.

If a registration was not lodged within 20 business days of the security interest coming into force or was lodged during the 6 months leading up to the liquidator’s appointment, then “The PPSA security interest vests in the company” and the creditor’s security rights are effectively lost.

So, while opportunistic, last minute registrations may make for a relatively entertaining news story, they don’t make for very effective security.

Transitional or Non-Transitional - the short & shiny version

When the PPSR was introduced on 30/01/2012 the legislation effectively stated that any new security/credit agreements you entered into after that date would only be fully effective if they were promptly registered on the PPSR and that their effective date would be deemed to be the date of that registration.

However, where you already had an existing security/credit agreement in place before that 30/01/2012 start date, the PPSA’s transitional rules would deem any security interests arising from that agreement to have been rendered fully effective (without the need for registration) for a period of up to 2 years.  To be effective for more than 2 years, registration would be required.  

During that 2 year period these pre-existing security agreements would be deemed to have an effective start date of just before the PPSR’s 30/01/2012 commencement date.  Any of these transitional agreements that were registered on the PPSR during the 2 year period between 30/01/2012 and 31/01/2014 would also be allowed to ‘count’ their effective date back to before the start of the PPSR rather than the date of the registration itself.

Now that the 2 year window for keeping the pre-30/01/2012 ‘count-back’ has closed, all registrations being lodged on the PPSR have an effective date aligned to the date of registration.

The only real difference now between designating a registration as a transitional as opposed to a non-transitional security interest is that the PPSR does not levy a charge ($8.00) for registering transitional security interests.

UPDATE: The PPSR now charges exactly the same for lodging a Transitional registration as it does for a non-transitional registration.

Over the past 2 years or so we have seen many instances of insolvency practitioners attempting to invalidate or otherwise discredit security interests on the basis that they had been designated as transitional rather than non-transitional.  I have never come across an instance where the reverse has been the case.

• If the agreement signed between you and your customer is dated after 30/01/2012 then you should register as non-transitional.
• If your applicable terms and conditions have been amended since 30/01/2012 you should register as non-transitional.
• If you can’t find a copy of your agreement with your customer then you should look to get a fresh one signed and register as non-transitional.
• If your signed agreement doesn't incorporate your security agreement and your retention of title clause only appears on your invoice then you should register as non-transitional.
• If you're in doubt register as non-transitional.

More information (and my personal contribution to the war on insomnia) can be found at:

http://ppsr-blog.blogspot.com.au/2014/03/the-end-of-transitional-period-what-did.html

http://ppsr-blog.blogspot.com.au/2014/03/a-long-standing-credit-agreement-is-not.html

http://ppsr-blog.blogspot.com.au/2013/07/the-dangers-of-amended-terms-conditions.html

http://ppsr-blog.blogspot.com.au/2013/07/transitional-rules-revisited.html

http://ppsr-blog.blogspot.com.au/2012/10/registering-transitional-security.html

http://ppsr-blog.blogspot.com.au/2012/05/challenges-to-ppsas-transitional-rules.html

PPSR Registrations Against Sole Traders

While the PPSR allows you to describe your registration as being in respect of a security interest arising from either a Commercial or Consumer transaction, when it comes to registering that interest against an individual this differentiation appears to have no real effect.

Registrations against a sole trader entering into a security agreement on behalf of their business still have to be lodged against the individual as opposed to the business.

Any registrations against an individual must identify the individual by their full name (such as would appear on their drivers licence) and date of birth.  

The fact that the sole trader has a valid ABN (Australian Business Number) which featured prominently on their application for credit is neither here nor there and the PPSR provides no facility for entering this number as part of the registration.  

But what if the sole trader is acting as the trustee of a Trust?  The PPSA allows for the registration of security interests against Trusts using the Trust ABN - doesn't this allow a creditor to avoid having to use the sole trader's name and date of birth?

Unfortunately, the answer is far from clear.  

The Personal Property Securities Regulations 2010 provides the following definition for an individual:

individual:

                (a)    includes a sole trader who has an ABN for the enterprise for which the security interest is granted or held; and

               (b)    does not include an individual who is a partner in a partnership or a trustee of a trust if the partnership or trust has an ABN for the enterprise for which the security interest is granted or held.

Well, what's unclear about that? (b) seems to be saying quite clearly that if the sole trader is using a Trust ABN then they don't have to be treated as an individual for the purposes of registration.  

Agreed, but if we look further at the Regulations they go on to state that the prescribed details for lodging a registration against a trustee are:

               (a)    for a trustee that is an individual — the details mentioned in the item of the table in clause 1.2                        that:

                          (i)    applies to the trustee; and

                         (ii)    has the lowest item number;

The table in clause 1.2 referred to here takes us back to the instructions stating that the details needing to be provided are the full name and date of birth of the individual as found on their drivers licence!

Now, while I would suggest that the intention of the Act is probably to allow for sole traders who are acting as trustees for Trusts that have ABNs to have registrations lodged against the Trust (as an organisation) and be identified by that Trust's ABN, the relevant wording is so convoluted and unclear that, in the absence of legal precedent, a case could be made either way.

A long-standing credit agreement is not enough to determine Transitional status

The 7^th March 2014 saw a little bit of clarity being brought to one of the PPSA’s notorious grey areas.  

The clarity came in the form of a judgment in the Supreme Court of Victoria and the grey area concerned the applicability of the PPSA’s transitional rules to Retention of Title clauses enshrined in long-standing Terms & Conditions.

The case concerned the May 2013 collapse of the cleaning company, Swan Services Pty Ltd and a claim by one of its creditors, Central Cleaning Supplies (Aust) Pty Ltd, that they should be able to rely on their Retention of Title clause to recover unpaid for equipment.

 

The liquidators argued that, since the introduction of the Personal Property Securities Act (PPSA), any goods subject to an ‘unperfected’ security interest would vest with them and, as Central Cleaning Supplies had not perfected their Retention of Title security interest on the Personal Property Securities Register (PPSR), the equipment they had supplied would be subject to the liquidators’ control.

Central Cleaning Supplies countered with reference to the PPSA’s Transitional Arrangements – a means by which security interests arising from long-standing agreements could be effectively ‘grandfathered’ into being ‘perfected’, without need for formal registration, for up to 2 years.  While the 2 year Transitional Period has now ended it was certainly applicable at the time Central Cleaning Services was challenging the liquidators for return of their equipment.

The case was put before Justice Ferguson to find the correct interpretation.

In her deliberations it was determined that, although Swan Services had entered into a credit agreement with Central Cleaning Services before the PPSA came into effect, the security represented by Central Cleaning Services’ Retention of Title clause was not actually incorporated into either the credit agreement or the standard terms & conditions embraced by that credit agreement.  Rather, the Retention of Title clause appeared in a Conditions of Sale document that formed part of individual invoices issued as and when deliveries were made.

Therefore, the initial credit agreement did not act as an overarching agreement out of which individual security interests were created (as would be necessary for the transitional arrangements to apply) but instead each invoice was held to create its own security agreement and security interest.  In order to perfect its Retention of Title clause, Central Cleaning Services could not, therefore rely on the PPSA’s transitional arrangements and should have registered their security on the PPSR as a non-transitional interest.

While it might often be convenient to refer to the date of a credit application in order to decide if subsequent dealings create transitional or non-transitional interests suppliers must not lose sight of the fact that it is the acceptance date of the actual document that imposes the security condition that will be the determining factor.

Where there is any doubt I would strongly recommend a non-transitional registration.

Central Cleaning Supplies (Aust) Pty Limited v Elkerton and Young as liquidators of Swan Services Pty Limited (in Liquidation) [2014] VSC 61

PPSR End of Year Statistics

The Insolvency and Trustee Service Australia (ITSA) has recently released their statistics for activity on the PPSR for the quarter ending 30th June 2013.

Probably not surprisingly, out of over 1.5 million searches conducted (the busiest quarter of the 2012/13 year), the vast majority (61.4%) were searches of motor vehicle serial numbers with the balance pretty much taken up by searches for registrations against organisations (32.2%). 

543,620 registrations were lodged on the Register during the quarter with an overwhelming majority (87.8%) being non-transitional registrations.

Interestingly, at 354,937, the number of discharges was equivalent to almost two thirds of the number of new registrations lodged giving 188,683 in net new registrations.  However, with the total number of registrations as at the end of June (7,366,053) showing only a 111,721 increase over the equivalent figure reported for the end of the previous quarter, this leaves us with a discrepancy of just under 77,000.

ITSA provides no explanation for the loss of 77,000 registrations during the quarter.  Conceivably they have all expired naturally (although that does seem a particularly high figure this early in the life of the PPSR given that the register virtually encourages registrations for up to at least 7 years) or perhaps someone will find that they have slipped down the back of a cupboard somewhere.

Motor vehicles are the most common collateral class listed on registrations on the PPSR. As at 30 June 2013, there were 3,998,373 current registrations on the PPSR of this class.  ALLPAPs (with and without exceptions) came in second with just under half that number and then ‘Other Goods’ registrations at 1.23 million.

The full set of statistics released by ITSA can be found at the following link:

https://www.itsa.gov.au/about-itsa/ppsr/ppsr-statistics/ppsr-quarterly-statistics/june-2013-ppsr-quarterly-statistics/june-2013-ppsr-quarterly-statistics-report

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.

When Transitional Arrangements Don’t Apply

The PPSA and its transitional provisions got another run through the courts in the case of The Receivers of Maiden Civil (P&E) Pty Ltd & Others v Queensland Excavation Services Pty Ltd & Others NSWSC 852 in which a decision was handed down last week.

In many ways the case is not especially noteworthy (other than by virtue of involving the PPSA) and is mainly being cited as confirming what was pretty much accepted anyway:

That the supplier of unpaid for goods will lose them to the liquidator of the company to which they had been supplied unless the supplier holds a perfected security interest over them.  (Section 267 of the PPSA refers).

This will apply whether the goods have been supplied under a contract of sale, leasing arrangement, consignment stock agreement etc.

In the case of Maiden Civil v QES the supply was under a long term leasing arrangement.

Leasing arrangements are deemed by the PPSA to automatically qualify for security interest status by their very nature (sections 12 and 13 of the PPSA refer).

What was particularly interesting to me; however, was why the court determined that the lessor’s security interest had not been perfected by the PPSA’s transitional rules.  The leasing arrangement had been put in place long before the start date of the PPSR and there was nothing about the lease that exempted it from the purview of the PPSA so why no transitional protection?

The answer appears to lie in section 322(3) of the PPSA. 

322(1) covers when the perfection of a transitional security interest begins, 322(2) covers when that perfection ends and 322(3) covers exceptions as follows:

(3)               Subsections (1) and (2) do not apply to a transitional security interest in collateral if the interest is of a class prescribed by regulations made for the purposes of this subsection.

Unfortunately, this didn’t make things much clearer to me until I opened up the Personal Property Securities Regulations 2010.  This is a formal legislative instrument that, among other things, provides a definition of Motor Vehicle and Watercraft and provides some rules relating to access to the PPS Register.

It also, at regulation 9.2, clarifies what is meant at 322(3) of the PPSA, by stating:

         (1)   For subsection 322 (3) of the Act, a transitional security interest is prescribed if, before the registration commencement time it was:

               (a)    registrable on a transitional register, under legislation that conferred priority on security interests that are registered; and

               (b)    not registered.

What this means in practice is that, because at the time of entering into the Leasing arrangement there was already a perfectly good pre-PPSR register in place for registering such interests (in this instance the NT Register of Interests in Motor Vehicles and Other Goods) that was not used, the PPSA’s transitional rules will not apply.

Basically, if you didn’t have your act sufficiently together to register your security interests on the appropriate register before the PPSR was introduced then you can’t rely on the PPSA’s transitional rules to save you when things go wrong!

There’s an excellent overview of the full circumstances of the Maiden Civil case to be found at http://www.herbertsmithfreehills.com/insights/legal-briefings/key-ppsa-decision-nswsc-confirms-vesting-of-unperfected for anyone interested in reading further.

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 - Parting with Possession & Bailments

It is funny to think that it wasn’t so very long ago that PPSA experts were trying their hardest to expand everyone’s thinking when it came to security interests – it wasn’t just charges, liens and guarantees, it was also Retentions of Title and Leases.  Well, perhaps the message has been getting home because we’re now seeing requests for advice regarding the registration of collateral whenever it may spend time out of its owner’s possession.

Scenario

LUMBERJACKS have legal title of recently felled trees, they then transfer possession (but not ownership) of those trees to PLANKERS who saw the trees into usable planks of wood and then transfer possession of the wood back to LUMBERJACKS.

LUMBERJACKS have a contractual obligation to make payment to PLANKERS for their value added services.

While it is likely, depending upon the Terms & Conditions agreed to by both parties, that PLANKERS may have a valid security interest in the wood to protect themselves against the possibility that LUMBERJACKS default on their obligation to make payment for PLANKERS’ value added services the question arises as to whether LUMBERJACKS have a PPSA security interest in the wood to protect themselves from the possibility of the wood, while in the possession of PLANKERS, being swept up by a receiver/liquidator appointed to PLANKERS.

In addressing this issue it is useful to set the context by reminding ourselves that the PPSA was established, in large part, to ensure an equitable treatment of security interests.  An applicable security interest under the PPSA is one that uses personal property to secure a payment obligation.

While, for example, a Retention of Title clause included in a supply agreement technically constitutes a statement of ownership, because its effect is to secure a payment obligation it is treated as a security interest and is brought under the auspices of the PPSA.  Similar inclusions have been made for leasing arrangements where a lessor has the right to recover goods in the possession of a lessee in the event of default of the lessee’s payment obligations.

However, in the scenario defined above there is no payment obligation on the part of PLANKERS to LUMBERJACKS and, whilst the goods may be in the possession of PLANKERS their recovery by LUMBERJACKS would be conducted purely on the grounds of ownership rather than as collateral under a security interest and therefore outside the bounds of the PPSA.

A more typical day to day example might be to think of having to lodge a PPSA registration every time you park your car in a car park against the possibility that the car park owners go bust while you are doing your shopping and the liquidators sweep up your car in the process.

Similarly, because the wood in question cannot be deemed a security interest under the terms of the PPSA, any receiver/liquidator appointed to PLANKERS would be unable to use the PPSA to harvest that collateral for the benefit of other creditors.  LUMBERJACKS should thus be able to rely on common law to repossess their own property just as they would have been able to do in a pre-PPSA environment.

Having stated the above, there is provision under the PPSA for a security interest to be created in the case of Bailments. 

A Bailment is formed by delivery of personal property without transfer of title by a bailor to a bailee for a particular purpose giving rise to a duty of care.  Upon completion of the particular purpose the bailee is obliged to return the bailed property (or deal with it as directed).

It could be argued that the arrangement between LUMBERJACKS and PLANKERS constitutes just such an arrangement.

Bailments are included in the PPSA under Section 13 of the act wherein it describes the meaning of a PPS Lease.  I’ve included the relevant section at the end of this article for reference.

In summary, PPS Leases are covered under the PPSA so long as the lease (or bailment) exceeds a defined length of time or, if for a shorter time, can be optionally extended to exceed that defined length of time.

In the case of serial numbered goods (motor vehicles, watercraft, aircraft etc) that defined length of time is 90 days and in all other cases (such as coil steel) is 12 months.

Where the lease or bailment is for a shorter period of time the PPSA does not apply.

Thus, it would appear that in the event of LUMBERJACKS common law rights being 

challenged in this regard there is the additional fall-back position of the PPSA’s applicability being ruled out by the length of the LUMBERJACKS/PLANKERS bailment (presuming PLANKERS take significantly less than 12 months to add their value).

Extract from the Personal Property Securities Act 2009, Chapter 1, Part 1.3, Division 3.

13 Meaning of PPS lease

             (1)  A PPS lease means a lease or bailment of goods:

                     (a)  for a term of more than one year; or

                     (b)  for an indefinite term (even if the lease or bailment is determinable by any party within a year of entering into the lease or bailment); or

                     (c)  for a term of up to one year that is automatically renewable, or that is renewable at the option of one of the parties, for one or more terms if the total of all the terms might exceed one year; or

                     (d)  for a term of up to one year, in a case in which the lessee or bailee, with the consent of the lessor or bailor, retains uninterrupted (or substantially uninterrupted) possession of the leased or bailed property for a period of more than one year after the day the lessee or bailee first acquired possession of the property (but not until the lessee’s or bailee’s possession extends for more than one year); or

                     (e)  for goods that may or must be described by serial number in accordance with the regulations, if the lease or bailment is:

                              (i)  for a term of 90 days or more; or

                             (ii)  for a term of less than 90 days, but is automatically renewable, or is renewable at the option of one of the parties, for one or more terms if the total of all the terms might be 90 days or more; or

                            (iii)  for a term of less than 90 days, in a case in which the lessee or bailee, with the consent of the lessor or bailor, retains uninterrupted (or substantially uninterrupted) possession of the leased or bailed property for a period of 90 days or more after the day the lessee or bailee first acquired possession of the property, (but not until the lessee’s or bailee’s possession extends for 90 days or more).

             (2)  However, a PPS lease does not include:

                     (a)  a lease by a lessor who is not regularly engaged in the business of leasing goods; or

                     (b)  a bailment by a bailor who is not regularly engaged in the business of bailing goods; or

                     (c)  a lease of consumer property as part of a lease of land where the use of the property is incidental to the use and enjoyment of the land; or

                     (d)  a lease or bailment of personal property prescribed by the regulations for the purposes of this definition, regardless of the length of the term of the lease or bailment.

Bailments for value only

             (3)  This section only applies to a bailment for which the bailee provides value.

P

PPS Leases

Earlier this week I was asked to explain to one of our clients the position the PPSA takes on Leasing and Hiring arrangements. In particular the client wanted clarification on the duration of leasing arrangements and gave, as an example, the situation where “some customers hire our machines for 2 months but then decide to just keep them for 5 months”.

Firstly, I should probably explain that leasing and hiring arrangements fall into a similar category to Retention of Title arrangements in that they do not technically involve the creation of a security interest but rather clarify an ownership position and the rights of the hirer/supplier to recover their property in the event of any breach of contract on the part of the lessee/buyer. With the PPSA's emphasis on substance over form the rights of a leasing company to recover their property is treated as a security interest and is now covered under that Act.

PPS Leases are defined under Section 13 of the PPSA (the wording for which I’ve included at the end of this article should anyone enjoy reading that sort of thing).

Briefly, for goods that are required under the Act to be described by serial number (primarily motor vehicles, watercraft, aircraft etc) registration is appropriate where the lease is for 90 days or more or where the lease is for a shorter period but allows for being renewed or extended to such an extent that the total lease period extends beyond 90 days.

For goods that are not required to be described by serial number the cut-off requirement for registrations extends to periods of 12 months (or shorter periods that allow for extensions/renewals which would take the overall period beyond 12 months). 

Hirers (and other suppliers) should be aware that when the Act refers to serial numbered goods it is referring to specific types of goods.  Most goods have serial numbers stamped on them somewhere if you look hard enough; however, only those stamped on motor vehicles, watercraft, aircraft etc count as far as the Act is concerned.

It should also be noted that while most of us think we have a pretty good handle on what constitutes a ‘motor vehicle’ the PPSA extends the ‘normal’ interpretation to include, for example, “a piece of machinery or equipment that is equipped with wheels and designed to be attached to, or towed by, a motor vehicle” (see below for the PPSA Regulations Act's definition).

If we use our client’s example scenario, “some customers hire our machines for 2 months but then decide to just keep them for 5 months” – if the goods in question are required to be registered by serial number and the lessee is entitled under the lease agreement to extend the lease in that fashion then our client would be advised to register their security interest in the goods on the PPSA Register and should do so at the outset.  My advice in these and other situations is that it is better to have a registration you don’t need than to need a registration you don’t have.

PPS Leases are able to be registered as Purchase Money Security Interests (PMSIs) which give the lessor a greater priority in their security than holders of general security interests.  For this to be effective the registration must be lodged within 15 business days of the lessee taking possession of the goods or, where the goods will be used as inventory, before the lessee takes possession of the goods.

As I threatened at the outset, the PPSA’s definition of PPS Leases is as follows:

(1)   A PPS lease means a lease or bailment of goods:

                     (a)  for a term of more than one year; or

                     (b)  for an indefinite term (even if the lease or bailment is determinable by any party within a year of entering into the lease or bailment); or

                     (c)  for a term of up to one year that is automatically renewable, or that is renewable at the option of one of the parties, for one or more terms if the total of all the terms might exceed one year; or

                     (d)  for a term of up to one year, in a case in which the lessee or bailee, with the consent of the lessor or bailor, retains uninterrupted (or substantially uninterrupted) possession of the leased or bailed property for a period of more than one year after the day the lessee or bailee first acquired possession of the property (but not until the lessee’s or bailee’s possession extends for more than one year); or

                     (e)  for goods that may or must be described by serial number in accordance with the regulations, if the lease or bailment is:

                              (i)  for a term of 90 days or more; or

                             (ii)  for a term of less than 90 days, but is automatically renewable, or is renewable at the option of one of the parties, for one or more terms if the total of all the terms might be 90 days or more; or

                            (iii)  for a term of less than 90 days, in a case in which the lessee or bailee, with the consent of the lessor or bailor, retains uninterrupted (or substantially uninterrupted) possession of the leased or bailed property for a period of 90 days or more after the day the lessee or bailee first acquired possession of the property, (but not until the lessee’s or bailee’s possession extends for 90 days or more).

             (2)  However, a PPS lease does not include:

                     (a)  a lease by a lessor who is not regularly engaged in the business of leasing goods; or

                     (b)  a bailment by a bailor who is not regularly engaged in the business of bailing goods; or

                     (c)  a lease of consumer property as part of a lease of land where the use of the property is incidental to the use and enjoyment of the land; or

                     (d)  a lease or bailment of personal property prescribed by the regulations for the purposes of this definition, regardless of the length of the term of the lease or bailment.

The PPSA Regulations (a separate act to the PPSA itself) holds the following definition of Motor Vehicle:

Meaning of motor vehicle

         (1)   For the definition of motor vehicle in section 10 of the Act, personal property described in sub regulation (2) or (3) is a motor vehicle.

         (2)   The personal property:

                (a)    is built to be propelled, wholly on land, by a motor that forms part of the property; and

               (b)    either:

                          (i)    is capable of a speed of at least 10 km/h; or

                         (ii)    has 1 or more motors that have a total power greater than 200 W; and

                (c)    has any of the following:

                          (i)    a vehicle identification number;

                         (ii)    a chassis number;

                        (iii)    the manufacturer’s number; and

               (d)    does not run on rails, tram lines or other fixed path.

         (3)   The personal property:

                (a)    is capable, when being towed by, or attached to, a motor vehicle, of travelling at a speed greater than 10 km/h; and

               (b)    is a piece of machinery or equipment that is equipped with wheels and designed to be attached to, or towed by, a motor vehicle; and

                (c)    has any of the following:

                          (i)    a vehicle identification number;

                         (ii)    a chassis number;

                        (iii)    the manufacturer’s number.