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.