Amendment Demands - updated process/forms

 I published a guide to issuing amendment/discharge demands in May 2017 - you can read that article HERE.  

The PPSR has now issued a sample amendment guide themselves (available HERE) as well as a guide to its dispute process (available HERE).

They have also launched a new amendment statement form "to help simplify the strict legal process required when disputing a PPSR registration"  

The new form is a little more user friendly and can be found HERE.

In short, if one of your suppliers or financiers is maintaining a registration against you that you think is incorrect or should no longer apply to your business, you must first contact them to explain your reasoning and to request that they remove (or amend) their registration.  In many cases a relatively friendly approach by phone or email will be sufficiently effective, however, if that fails to achieve the desired result, a formal amendment request should be sent - as per the example in the PPSR's sample amendment guide.

You should then give your supplier/financier 5 business days to respond.  Failing receipt of a satisfactory response within that timescale, you can use the PPSR's new Amendment Statement form to formally request the removal or amendment of the contentious registration.

The PPSR's tips for the process can be downloaded from HERE.

PPSR & COVID-19

There is no shortage of articles being published concerning the impacts of the current Coronavirus pandemic but the following extract concerning PPSR registration from the law firm of Cooper Grace Ward serves as a timely reminder:

Are your security interests registered?

There is a heightened risk of insolvency occurring in respect of all businesses over the next six months. If you are lending money, trading on retention-of-title terms, leasing goods or taking security over personal property in any way, it has never been more important to ensure that you have correctly registered security interests on the Personal Property Securities Register.

There may be a small window to act. The Corporations Act provides that a security interest that is registered in respect of a corporation more than 20 days after the security interest is perfected will vest in the company on winding up or administration. Even less time may apply for certain security interests. An out-of-time security interest that is registered today will only be enforceable if the grantor-company survives the next six months.

We recommend that you act quickly to register any unregistered security interests.

You can still enforce security interests and guarantees

Notwithstanding the Federal Government’s amendments to insolvency laws, parties can still enforce security interests and personal guarantees.

Personal guarantees may be more difficult to enforce due to the effect that the pandemic is having on the courts around the country – though, theoretically, nothing is stopping the enforcement of a guarantee. Security interests under the Personal Property Securities Act 2009 (Cth) (PPSA), on the other hand, do not require a judgement before a secured party can take enforcement action. The PPSA provides secured parties with powers of seizure and disposal. Of course there would be significant reputation risk around enforcement of securities under the current environment that would need to be carefully considered.

The full article can be found here.

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.

When do I have an interest over 'Proceeds'?

What does ‘Proceeds’ mean?

The term 'proceeds', in this context, refers to money that comes to a buyer from the on-selling of goods supplied to the buyer by the original supplier of the goods.

If a supplier has a Retention of Title right and registers it as a PMSI (see here) they get the opportunity to have their security interest extend to any money their customer receives from on-selling the supplier's unpaid-for goods.

While in most cases (unless they involve a motor vehicle identified by its VIN number, for example) the supplier's right to recover their unpaid goods ends with their buyer's on-sale of those goods, the PPSA allows a supplier's PMSI security interest to 'automatically' transfer to the proceeds of on-sale of those goods as soon as their secured 'grip' over the original goods is lost.

While this can be a useful ‘added extra’, proceeds claims can be messy and, typically, will only be successful when the proceeds monies are received AFTER a liquidator has been appointed to the customer’s business.

I've yet to see rights over proceeds used in a defence against a liquidator's preference claim and, whilst I can envisage some scope for success, I can also imagine that such a defence would not be particularly well received by said liquidator.

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.

Should I register against the ACN or the Trust ABN?

My buyer has an ACN but also has a Trust ABN – should I register against the company or against the trust?

We would recommend both. 

One registration can be lodged against two different ‘grantors’, so there shouldn't be any additional expense.  However, at the very least, a registration should be lodged against the Trust ABN.

The below chart is a handy reference to identifying a grantor:

Grantor Type	Grantor Details Required
Sole Trader	Full Name (as per driver’s licence) and date of birth
Sole Trader acting as Trustee	Trust ABN (if the Trust does not have an ABN, as per ‘normal’ Sole Trader)
Partnership	ABN
Partnership acting as Trustee	Trust ABN (if the Trust does not have an ABN, as per ‘normal’ Partnership)
Partnership without an ABN	Full name and DOB of each partner (or ACN’s of each if a corporate partnership)
Company with an ACN and no Trust involved	ACN
Company with an ACN acting as Trustee	Trust ABN (if the Trust does not have an ABN, as per ‘normal’ Company)
Corporate entity without an ACN	Full name of the business as per articles of association
Government Entity	ABN
Trust	Trust ABN (if no ABN, use rules per the trustee)

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.

Is a PPSR registration still necessary to defend against Preference claims?

In June 2016, I posted an article discussing, among other things, Justice Edelman’s ruling in Hussain v CSR Building products Limited concerning alleged preference payments made by FPJ Group Pty Ltd. 

The Corporations Act allows liquidators to claim back payments made by the insolvent company during the 6 months prior to their appointment – provided that those payments were in respect of an unsecured debt.

In Hussein v CSR,  Justice Edelman found that there were sufficient references in the Corporations Act to a Retention of Title right being, in substance, a form of security that, while in the circumstances CSR may not satisfy the definition of a ‘secured creditor’, their Retention of Title right was sufficient to render the debt they were owed ‘not unsecured’.  This, against the background of CSR not having registered their ROT on the PPSR!

This was a pretty controversial decision at the time but, two years later, we’ve finally got ourselves another judgment effectively reinforcing the idea that a Retention of Title right (whether registered on the PPSR or not) represents sufficient security to ensure that payments made against that security right are not treated as unsecured for the purposes of the Corporations Act.

Trenfield v HAG Import Corporation (Australia) Pty Ltd [2018] QDC 107 wasn’t an entire success for the supplier, however, because even though their ROT was sufficient to make payments eligible for consideration as being ‘not unsecured’, the question as to how much value in payments those ROT rights actually supported needed to be addressed. 

If a supplier sends goods worth $10,000 and invoices accordingly, at ‘day 1’ the supplier (assuming an ROT) will be secured for the full amount owed, however, if, by the time payment falls due $8,000 of those goods have been on-sold, then the supplier will only be a secured creditor for $2,000 of the money owed and an unsecured creditor for the balance. (Note: there's an earlier post looking at the 'value' of security here.)

Using this approach, the Court found that $473,291 of the $696,298.72 of payments received were paid in relation to an unsecured debt and thus were recoverable by the liquidators as the fruits of an unfair preference.

With both legal precedents involving ROTs that were not perfected under the PPSA’s rules, there is a lifeline for suppliers who either haven’t registered on the PPSR or lodged too late or with serious errors – at least as far as defending against preference claims is concerned. 

When it comes to attempting to recover unpaid for goods or their equivalent value from administrators and liquidators, suppliers had best make sure they have a valid PPSR registration in place (lodged in good time) because claiming that their ROT makes them ‘not unsecured’ will not cut it!

Dangers for the Unwary when Trading with an Administrator

While this post might be of passing interest to those wanting to refresh their knowledge regarding the Corporations Act’s intersection with the PPSA, it’s main import is for those who may be invited to trade with a company under administration.

I wrote on the subject of late registrations being vulnerable to vesting by insolvency practitioners in The PPSA vs The Corporations Act, but a new spin on the issue has arisen following a judgement in Re Ten Network Holdings Ltd (Administrators Appointed)(Receivers & Managers Appointed) [2017] FCA 1144 that highlights a further problem with this aspect of the Corporations Act.

By way of a very brief recap, if you fail to register your security interest within 20 business days of your security agreement being entered into AND your buyer goes into external administration within the following 6 months, Section 588FL of the Corporations Act allows the insolvency practitioner to ignore your security interest.

However, 588FL also provides for vesting of a supplier’s security interest where it arises (and is subject to a registration) AFTER the appointment of an insolvency practitioner.

While it might be understandable for clearly late registrations to be ignored, what about those situations where a supplier is invited to supply goods to the buyer after it has been placed into administration?

Not all companies that go into administration end up being liquidated, many, given some temporary relief by the appointment of an administrator, are able to trade out of their problems, perhaps subject to a Deed of Company Arrangement (DOCA).  However, under the provisions of s588FL any supplier entering into an agreement to supply won’t be able to lodge an effective PPSR registration to perfect their Retention of Title (ROT) rights because such rights (and registration) arose after the appointment of the insolvency practitioner.  Thus, if the company turns out to be unable to trade out of its problems, and the administrator becomes a liquidator, the supplier’s ROT rights will end up being vested with the insolvent estate.

Not exactly a ‘fair’ outcome for the supplier.

However, all is not lost as the Corporations Act (section 588FM) allows the Courts to extend the date beyond the ‘critical date’ for a valid PPSR registration provided it would be “just and equitable” to do so.

The recent Ten Network judgement suggests that the Courts will be prepared to grant such an extension provided they can be reassured that to do so would be in the best interests of both the other creditors and the company in administration. 

It has also been suggested that the timing of the application for the order will be relevant, in that the time to apply for the extension (and lodge the registration) should be a great deal closer to the commencement of trading than to any eventual liquidation.

New PPSA Amendment passes its first reading

The first day of the new season saw the Government introduce the Personal Property Securities Amendment (PPS Leases) Bill 2017.

As the element in parentheses indicates, the Bill concerns an amendment to the manner in which the PPSA deals with leasing arrangements.

At present the PPSA only applies to leases that run for longer than one year, are for a shorter period but allow for extensions that would take them beyond one year, or are for an indefinite period.

The new Bill basically takes that one year qualifying period and extends it to two years.

But before anyone suggests holding off on lodging that backlog of registrations you’ve got piling up, the Bill (if enacted) isn’t intended to apply retrospectively and it’s anybody’s guess as to when it will actually come into effect given that the last amendment of this nature took 15 months to pass and another 3 months to get Royal Assent!

Clearly a lot of lobbying has been taking place behind the scenes because, at least from my point of view, this Bill is something of a surprise – there was certainly no recommendation in the official review of the PPSR to extend the PPS Lease period.

However, the Bill does incorporate an element of one of the Review’s recommendations where indefinite leases are concerned.  If passed, indefinite leases will only require registration once the goods being leased have actually been in the possession of the Grantor for the two year period. 

While this will obviously be a substantial relaxation of the rules for businesses that essentially deal in short term hires but don’t explicitly identify a maximum end date, it will be interesting to see how this ties in to the Corporations Act - s588FL of which pretty much requires registration within 20 business days of the leasing agreement being signed to avoid risking losing hired goods to any liquidator appointed within 6 months of the actual registration date.

UPDATE: This Bill was formally passed on Thursday 11th May and will come into effect as soon as it has Royal Assent.