Amendment Demands - Section 178

In an earlier article, I discussed the importance of Section 151 of the PPSA and the requirement that there be a reasonable belief that the security interest being registered on the PPSR either exists or is likely to exist.  Click here for that article. 

So while that article addressed a supplier’s right to lodge a registration, this article will consider the buyer’s rights when it comes to demanding that it be removed.

Section 178 of the PPSA is the most immediately relevant here and sets out two key criteria for a buyer to demand that a registration lodged against them be removed:

(a)          The obligation owed by a debtor to the secured party is not secured by collateral described in the registration; or

          (b)          The particular collateral in which the person has an interest does not secure any obligation owed by a debtor to the secured party.

These criteria are very similar to each other and, in exploring a variety of scenarios there is certainly some cross-over between the two.

Essentially, a buyer/debtor may demand that a registration be discharged if there is no collateral as described in the supplier’s registration or if there are no monies owed by them to the supplier that are secured by the described collateral.

Scenarios

Probably, the most common situation where such criteria would apply is where a supplier has supplied goods subject to a retention of title clause and was subsequently paid in full.  The supplier has either simply overlooked their obligation to remove their PPSA registration or legitimately believed there was a likelihood of repeat business in the near future.  While a supplier may have the right to lodge/maintain a registration in the reasonable expectation that trading might take place, a buyer has a superior right to demand the removal of such a registration.

Fortunately, a little less common, s178 criteria could also apply where a supplier has incorrectly described their collateral in their PPSA registration as constituting an item of inventory whereas the goods in question are clearly non-inventory items.  In such a scenario, even though there may be monies owed by the buyer to the supplier, it is not technically secured by the collateral as per the registration’s description.

We could also have a situation where the registration has been lodged correctly and there is money owed by the buyer to the supplier in respect of collateral delivered by the supplier but the collateral has been on-sold or otherwise ‘used up’ – there is therefore no collateral against which the supplier’s security interest can ‘bite’.  What about the supplier’s claim to proceeds?  Well a pre-condition for a proceeds claim is that the proceeds be directly or indirectly attributable to the sale of the supplier’s collateral and washing around in a busy bank account will tend to disguise any attribution quite effectively.  We may also have a supplier selling something like bleach or disinfectant that has been used up by the buyer generating no tangible proceeds.

So if there are no monies outstanding on the account or there is no collateral against which a supplier’s security interest can attach then the buyer is well within their rights to request that the supplier’s registration be discharged.

So how should the buyer go about getting the registration discharged?

In an ideal world the buyer would phone or email their supplier, gently point out that the registration against them appears to be serving no purpose and politely ask that it be removed at the supplier’s earliest convenience.  Unfortunately, what seems to be a lot more common are  strident demands, indignant protestations, and veiled threats of legal action and fines.

Under section 178 the buyer/grantor should address an amendment demand to the secured party’s address for service (found on their registration) outlining their reasons for the registration to be discharged or otherwise amended.

While section 178 provides no timescale for the discharge/amendment to take place, section 179 allows for escalation to the PPSR Registrar if the secured party has not responded appropriately within 5 business days.

Once the Registrar becomes involved they will issue the secured party with an amendment notice.  That amendment notice will reiterate the amendment demanded and invite a written response by the end of a further 5 business days.

Should the Registrar not receive any response from the secured party during this time-frame they will either amend or discharge the registration in line with the grantor’s amendment demand.

Where the secured party does respond in good time with an argument against discharging or amending the registration, the Registrar will make their decision based on the information provided by the secured party and ‘any other relevant information’.

Reference to the PPSR Registrar is, however, not the grantor’s only recourse should the secured party fail to respond satisfactorily to their initial amendment demand.  The grantor may choose, instead, to take the matter to court.

The PPSA is understandably silent on timescales once the matter has entered the court system but, as with similar legal processes, both grantor and secured party will have the opportunity to argue their positions before the court and should a decision be rendered in favour of the grantor then it will take the form of an instruction to the PPSR Registrar to effect the requested amendment/discharge.

So what about the threats of fines?

That part of the PPSA that concerns itself with Amendment Demands (part 5.6) is quite silent on the matter of penalties although there may be some application of section 151 that can be brought into play where the grantor suggests that there was no justification for the original registration in the first place.  While I’m not aware of any penalties having been applied for frivolous or unjustified registrations, section 151 certainly provides for civil penalties of up to 250 penalty points (equivalent to $42,500 at time of writing).

So far I’ve seen a lot more bluff & bluster and overly aggressive demands than I have civil and politely composed requests – possibly because the polite requests get acted upon straightaway whereas the aggressive ones tend to get referred to people like me for their advice – but the rules and timescales for action are clearly laid out and are unaffected by the tone chosen by the grantor.

When Should a PPSA Registration be Discharged?

Section 151 of the PPSA allows for registration of a security interest where the Secured Party has a reasonable belief that the collateral identified in the registration will become the subject of a valid security interest in their favour.

Because of the requirement under the Act for security interests taken in inventory to be registered in advance of the debtor/grantor taking possession there will inevitably be circumstances where a registration is in place but not yet applying to specific collateral held by the debtor/grantor.

This is particularly the case in circumstances involving on-going supply, or the reasonable expectation of on-going supply.

If a supplier is approached to open a credit account for a new customer then, provided that credit account includes a provision for a security interest (such as a Retention of Title clause), the opening of that account should be deemed to create a sufficiently reasonable belief in the likelihood of a security interest attaching to collateral thus satisfying the requirements of Section 151.

Similarly, unless it has been specifically stated that the sole purpose of that new credit account is to accommodate a one-off purchase, it would not be unreasonable for that supplier to anticipate a measure of continued/repeat business once the initial purchase under the account has been completed.

However, where there are no longer any reasonable grounds for anticipating on-going business/orders (and there are no monies outstanding on the account) then the registration should be discharged within 5 business days from the point at which there stopped being reasonable grounds for anticipating on-going business.

A clear and unambiguous point at which it could be determined that ‘reasonable grounds’ ceased to exist would be the date the Secured Party received confirmation from the debtor/grantor that no further purchasing was anticipated, possibly accompanied by a request to discharge the registration.  At such point the Secured Party would have 5 business days to discharge the registration.

Unfortunately, real life often does not present us with ‘clear and unambiguous’ events and it is quite likely that many suppliers will have open credit accounts on their books that have been inactive for some time.  At what point does it no longer become reasonable to sustain a belief in the likelihood of further trade (and thus the imminent attachment of their security interest)?  Disappointingly, the PPSA provides no guidance in this and legal precedents have yet to be set so we may well be entering ‘how long is a piece of string’ territory.

However, before suppliers relax too much they should note that part 4 of Section 151 places the burden of proof firmly on the shoulders of the Secured Party (supplier) in establishing the reasonableness of maintaining a registration in the absence of any current trading!

While this shifting of the burden of proof to require the ‘accused’ to prove their ‘innocence’ may come as a rude awakening to those whose legal expertise comes from watching episodes of ‘Law & Order’, those who have to deal regularly with liquidators or the Taxman will simply see this as par for the course.

Although I appreciate that it is much more easily said than done, suppliers’ primary defence against claims of unreasonable registrations will be tight and efficient credit control procedures, regular monitoring of accounts and good communication with customers. 

At a bare minimum credit departments should make sure they have “Discharge PPSR Registration” as a priority item on their check-list whenever an account is closed.

The relevant portions of Section 151 referred to above are reproduced below:

151  Registration—belief about security interest

Requirements for collateral to secure obligation etc.

             (1)  A person must not apply to register a financing statement, or a financing change statement, that describes collateral, unless the person believes on reasonable grounds that the person described in the statement as the secured party is, or will become, a secured party in relation to the collateral (otherwise than by virtue of the registration itself).

Civil penalty:

                     (a)  for an individual—50 penalty units;

                     (b)  for a body corporate—250 penalty units.

             (2)  If a financing statement, or a financing change statement, that describes collateral has been registered on the application of a person, the person must, within the period covered by subsection (3), apply to register a financing change statement to amend the registration to end its effect with respect to the collateral, if:

                     (a)  the person described in the statement as the secured party has never, since the statement was registered, been a secured party in relation to the collateral (other than by virtue of the registration itself); and

                     (b)  there are no reasonable grounds (or there are no longer any reasonable grounds) for the belief mentioned in subsection (1).

Civil penalty:

                     (a)  for an individual—50 penalty units;

                     (b)  for a body corporate—250 penalty units.

             (3)  The period covered by this subsection is as soon as practicable, or 5 business days, whichever is earlier, after:

                     (a)  if there never have been, since the statement was registered, reasonable grounds for the belief mentioned in subsection (1)—the day of the registration time, or the amendment time, for the financing statement or financing change statement; or

                     (b)  if there are no longer any reasonable grounds for that belief—the day when there stopped being reasonable grounds for the belief.

             (4)  A person who wishes to establish that there were reasonable grounds for the belief mentioned in subsection (1) (at any particular time) bears an evidential burden in relation to the matter.