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!

When should a PPSR registration be lodged?

In general terms, the answer is ‘as soon as possible’ and, in this context, that means, as soon as the supplier has a reasonable belief that they may be doing business with the grantor in question and that such business will involve the granting of a security interest.

In order to avoid falling foul of the Corporations Act, the supplier’s registration should be lodged within 20 business days of their security agreement being formed. For trade credit suppliers, that security agreement will usually be represented by the signing of the initial credit application by which the supplier’s Terms & Conditions of trade are accepted (provided, of course, that those T&Cs contain the supplier’s security rights – usually in the form of a Retention of Title clause).

If the registration is not lodged within that 20 business day period, the supplier runs the risk that, if their customer falls insolvent in the next 6 months, a liquidator will be able to use section 588FL of the Corporations Act to, effectively, ignore the registration.

I’ve written at greater length on the implications of section 588FL HERE.

Obviously, if the supplier misses that 20 business days window, they should still go ahead and register on the PPSR as soon as possible, it just means that they’ll need to keep their fingers crossed that a liquidator doesn’t get appointed during the next 6 months – once 6 months have elapsed with no liquidator in sight, the supplier can relax.

If we put aside for one moment the Corporations Act provisions, the other key timing issue concerns the effectiveness of your Purchase Money Security Interest (PMSI) rights.

As we know, Retention of Title suppliers, those providing goods on a Consignment Stock basis, and long-term leasers of equipment automatically qualify for having the security arrangements that those trading practices represent designated as PMSIs, thus entitling them to a super-priority over any earlier (or later) registered general security interests.

However, in order to ensure their PMSI right is effective, the registration must be lodged within specific time frames:

Where the Collateral is Inventory	Before the grantor takes possession of the goods
Where the Collateral is not Inventory	Within 15 business days of the grantor taking possession of the goods

Any registration lodged outside of those time frames will still be valid, but it won’t benefit from the super-priority that the PMSI designation would otherwise afford.

If repeat supplies are involved, suppliers should remember that even though they may have registered too late for the first few deliveries, a registration will still be effective over later deliveries.

Protecting Your Gear On Site

February saw the collapse of WA based builder Cooper & Oxley accompanied by scenes of subcontractors climbing over fences and evading security guards in order to attempt to recover tools and equipment that they had left on project sites.  You can find an example here.

Since then, there has been an understandable increase in advice being offered to subcontractors as to how they might be able to protect themselves.  What has been less understandable, however, is the oft-repeated suggestion that a registration on the PPSR might act as some sort of golden ticket allowing a subcontractor to recover any of their gear they might have had stored on site.

If you are selling goods subject to a right to recover those goods if you’re not paid for them, then a registration on the PPSR is essential if you want to be able to exercise that right against a liquidator or administrator etc.  Similarly, if you are engaged in a long-term hire of goods (and by long, I mean at least 2 years) then, again, registration is essential to protect those goods from falling into the hands of an Insolvency Practitioner. 

However, such leasing arrangements and conditional sale agreements are specifically deemed to create security interests under the PPSA; simply storing your tools on a building site overnight is not.

When a company goes into liquidation, the liquidator is entitled to treat any property that is used as collateral in a security interest as having vested in the insolvent company and thus available to be liquidated for the benefit of creditors.  The only real exception to this is where that collateral/security interest has been registered on the PPSR.

 

Because a subcontractor’s tools are not the subject of a sale (conditional or otherwise) to the insolvent company and are not being leased to them, the liquidator has no right to treat them as if they were the property of the main contractor. If they're not collateral in a security interest, there's no danger of them vesting in the insolvent company.

If that is the case, why do we read about subcontractors and tradies being locked out of sites, unable to recover their tools?

One of the first jobs a liquidator needs to do, on arrival, is to take stock and evaluate what assets the company might hold.  They can’t do this effectively (or fairly) if there is a steady stream of people marching onto the site and walking off with whatever property they can lay their hands on – some of it may well be their own but some of it may be the company’s and some may actually belong to other subcontractors.

In this sense, the liquidator is a little like the coroner arriving at the site of a freshly discovered body in popular American TV shows.  Their first job is to protect the integrity of the crime scene and then, gradually, determine to what extent the items found in and around that scene were relevant to the body and the means by which it came to be dead.  If you happen to have lost your car keys in that area, it will be understandable if you have to wait a while before you can get them back!

And so it is with a liquidator, they’ll need to ensure they can identify what goods belonged to the company and what belonged to subcontractors and then they’ll need to ensure that the right gear is made available to the right subcontractor.  To do this properly will, unfortunately, take time.  

From subcontractors I’ve spoken to, while the delay in getting their gear back is extremely frustrating, they do eventually get their stuff back and, if they don’t, it’s invariably because it had been taken by another subcontractor trying to grab what they could, presumably, in an attempt to offset money owed to them by the company.

Not only is a registration on the PPSR not necessary and will do nothing for the rights of the subcontractor in recovering their tools, it may even create confusion, leading to further delays in the subcontractor being reunited with their gear.

There’s been a suggestion that, while it won’t be perfecting a security interest, a PPSR registration might nevertheless serve as some sort of ownership document ‘proving’ that certain tools belong to the particular subcontractor.

Given that a PPSR registration can be lodged by anyone, for anything against anybody so long as they have a credit card with an available balance of at least $6.80 and that there’s no checking or verification that its details bear any relationship to reality, there is absolutely no way that a liquidator is going to accept a PPSR registration along these lines at face value.

Liquidators spend large amounts of their time picking holes in, and generally finding fault in, PPSR registrations and will not be convinced by a registration that, effectively, says that “a box of spanners and a hammer with a red handle” are owned by a particular tradie.  Even being able to identify tools by serial numbers won’t be treated as any evidence of ownership.

If proving ownership is the issue, it will be far more effective simply to have your name inscribed/labelled on the tool than to have it registered on the PPSR.

In short, while suppliers selling goods on Retention of Title terms, and hire companies, hiring goods on a long-term basis would be foolish not to register their interests on the PPSR, it would be foolish for subcontractors and tradies, looking to protect their tools, to think that a PPSR registration would be of any help.