PPSR & Preference Claims

I hadn’t realised until recently how long it’s been since I’d posted on the subject of (Unfair) Preference Claims.

However, there have been some developments since that time, including a particularly interesting legal judgement recently, and an update is appropriate.

For a refresh on the basics, you can find my earlier post here.

In this post, I’m going to be looking at:

• The standing of a Retention of Title clause when it comes to determining whether a payment was secured or not; and
• The Corporations Act’s problem with Transitional security interests.

New light was potentially shed on the options for mounting a defence against a liquidators’ preference claim in Justice Edelman’s ruling in Hussain v CSR Building Products Limited regarding the payments made by FPJ Group Pty Ltd.

The ruling runs to some 248 numbered paragraphs and covers many aspects of the standard preference claim defence available to suppliers – running account, good faith and the test for insolvency – but what concerns us here is the Judge’s conclusions regarding the role an unregistered Retention of Title clause played in determining whether the supplier, CSR, received payments in respect of an “unsecured debt”.

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’.

It will be interesting to see to what extent this view is allowed to stand unchallenged because it certainly seems to run counter to a line liquidators have been taking with the, apparent, support of section 51 of the Corporations Act.

Section 51 is one of the relatively recent additions to the Corporations Act brought in to harmonise with the introduction of the PPSA. It’s a very short section and states:

“ In this Act:"PPSA security interest " (short for Personal Property Securities Act security interest) means a security interest within the meaning of the Personal Property Securities Act 2009 and to which that Act applies, other than a transitional security interest within the meaning of that Act.”

Effectively, the Corporations Act is acknowledging that the holder of a security interest that is recognised as such under the PPSA will be deemed to be a secured creditor.  But it also goes on to say ‘except for transitional security interests’.

While this aspect of the Corporations Act does not impact upon a creditor’s status when pursuing outstandings upon the appointment of a liquidator, it has been used to impact upon a supplier’s rights to retain alleged preferential payments.

When a supplier seeks to defend themselves against a liquidator’s preference claim by asserting they were a secured creditor, the liquidator will, invariably, reject the defence on the basis that their PPSR registration was lodged as ‘Transitional’.

This has given rise to a widespread call from intermediaries, brokers, and other assorted advisors, that suppliers should lodge fresh non-transitional registrations to secure their interests.

While this may not hurt (and may improve a supplier’s chances of a successful outcome) there is an element of confusing the wrapping for the gift. 

The Corporations Act does not exclude security interests registered as transitional; it excludes security interests that are transitional.  Registering an interest as non-transitional does not suddenly make that underlying interest non-transitional just as attempting to perfect a non-transitional security interest with a transitional registration will not meet with success.

So, while transitional registrations are to liquidators as red rags are to bulls, putting non-transitional registrations in place will certainly be a good idea, for liquidators who take the trouble to look closely, they may not be sufficient.

However, for those liquidators, there is always the ruling of Justice Edelman to fall back on!

Is that it? (Notice Filing System vs Transaction Filing System)

Once they get past the PPSR’s jargon of purchase money security interests, giving of notice identifiers, subordinated registrations etc, many of my trade credit clients have something of an ‘is that it?’ reaction. They’d been gearing themselves up to having to list part numbers and order references only to find that simply choosing the collateral class category of ‘Other Goods’ was pretty much all that was required. Understandably, there’s an element of anti-climax and concern that they should be doing more when it comes to describing the goods/collateral involved.

The answer to their concerns, to my way of thinking, rests very much in the nature of the register that the PPSR was set up to be. 

Prior to the PPSR, company security interests were registered on the ASIC Register of Company Charges.  The ASIC register acted as a Transaction filing system, whereby the document that acted as the security interest was filed in its entirety – a 30 to 40 page Registered Charge document signed by both parties being the most common.

Although the PPSR replaced ASIC’s register, the PPSR has been established as a Notice filing system whereby the secured party is merely required to announce that it has a security interest (or is likely to have a security interest).  The actual security interest – usually represented for trade credit suppliers by a Retention of Title clause in their terms and conditions – would need to be kept separately and brought out at any time evidence is required that the security interest asserted by the registration on the PPSR actually existed.

The registration on the PPSR, therefore, does not define the security interest or the collateral to which it applies, but instead merely needs to describe it in a manner that would provide an indication as to its nature for interested third parties.  Where the ASIC register stored 40 page documents, the PPSR stores the equivalent of an electronic post-it note.

Thus, when a supplier lodges a registration perfecting their Retention of Title security interest, they are putting others on notice that they have an interest, the precise details of which may be separately available from them in response to any third party enquiry – such as might be required from an insolvency practitioner should the customer fall over.

When a liquidator (or similar) is appointed to a company, they will conduct a search of the PPSR to see who is asserting they have a security interest.  They will then write to each of these asking for the evidence that such an interest exists and is consistent with the general description provided by their lodgement on the PPSR.  It is at this point that suppliers will need to detail the specific items of collateral to which their security interest applies and provide evidence of the relevant acceptance by the customer of their security rights.

Specific serial numbers are only required to be provided as part of a PPSR registration when that registration concerns motor vehicles, watercraft, aircraft and certain other weird and wonderful types of collateral such as Intellectual property patents and plant breeders’ rights.

Inserting serial numbers in Collateral description fields of ‘Other Goods’ registrations may be of some assistance to a liquidator in identifying specific stock – although promptly providing that information separately upon request would be just as helpful – but can create a rod for suppliers’ backs in as much as any typo or omission would render the effectiveness of that registration subject to challenge.  It would also take the supplier down the path of having to either lodge multiple registrations every time a fresh delivery was made or constantly amending existing registrations – an administrative burden I’m sure they could do without.

If a security interest is in the form of an accepted Retention of Title clause then an ‘Other Goods’ registration, describing the collateral as that supplied by the secured party and the interest as a Purchase Money Security Interest (PMSI) should be sufficient, if registered in a timely fashion, to secure a supplier’s rights to those goods until such time as they have been fully paid for and assure the supplier of a higher ranking interest over those goods than any other creditor in the event the customer falls insolvent.

How much is your security worth?

There has been much talk regarding the opportunities presented by a PPSR registration to mount a defence against a preference claim from a liquidator.

While I’ve already written on this here, something that I had not previously considered a contentious issue seems to have become one.

First a quick recap…

A trade credit supplier, with a PPSR registration perfecting a retention of title over unpaid-for goods, will be deemed to be a secured creditor to the value of those unpaid-for goods that remain in the possession of the buyer. 

Thus, if I supply $10,000 worth of widgets to my buyer today, my security will be worth $10,000 (presumably a figure equivalent to what I am owed).  However, by next week when my buyer has on-sold $2,000 of those widgets, my available security will only be worth $8,000, regardless as to how much I am actually still owed.  If, by the time I eventually get paid the $10,000 my buyer owes me, he only has, say, $1,000 worth of my stock in his possession then a liquidator, pursuing a preferential payment claim, might argue that, at the time I received the $10,000 payment, I received 90% of that payment as an unsecured creditor. 

Under the Corporations Act, unsecured creditors in receipt of payments made during the 6 months prior to the relevant date of insolvency may be obliged to return that money to the liquidator.  The value of my security at the time I received my payment is therefore of paramount importance.

However, while calculating the value of security at the time a payment was made may not always be easy, I thought it was nevertheless relatively uncontentious that the appropriate time to assess the value of the security was, indeed at the time the alleged preferential payment was made.

Last year, a South Australian District Court, in the case of Matthews v The Tap Inn P/L, was asked to rule upon whether the value of a security should be assessed at the time the security interest was created or at the time winding up commenced.  No obvious consideration appears to have been directed at whether such an assessment should take place at the time disputed payments were actually made!

In July 2015 Justice Chivell handed down his ruling that the appropriate time for determining the value of a security was at the winding up stage – largely on the basis that this would bring about a semblance of parity with the plight of other creditors.

While this may have been good news for liquidators it created a ludicrous scenario for trade credit suppliers and we all looked with some trepidation to the inevitable appeal.

Well, the result of the appeal is now available and some semblance of sanity has been restored.

The appeal court, while overturning Justice Chivell’s ruling, nevertheless did so without actually saying that His Honour was incorrect but rather it determined that, with other facts in the case being disputed by the parties, it was inappropriate for the judge to have ruled on what would therefore have amounted to a hypothetical question. Ruling on hypotheticals is, apparently, a bit of a 'no no'.

So, we are effectively back to where we started before the original court decision, with no legal precedent established as to when an appropriate point in time might be to calculate the value of a security interest supporting an alleged preferential payment.  The only difference being, I suppose, is that liquidators have now had the opportunity to read up on an argument that was sufficient to sway a judge in South Australia – and that argument has yet to be effectively countered.

I’d be surprised if this is the last we hear on this issue.