The Personal Property Securities Act 2009 (Cth) (PPSA) commenced on 30 January 2012, and in doing so, provided a national statutory framework for the process of taking security over personal property.
Amongst other things, the PPSA has changed the way we think about retention of title (ROT). Under the common law, retention of title arrangements in, for example, supply contracts, were not seen to create security interests. The PPSA now disregards a supplier’s title in the relevant property and treats its interest as a security interest. By virtue of section 267 of the PPSA, unless a security interest in property that is supplied subject to an ROT clause is registered on the central Personal Property Securities Register (PPSR), that security interest will vest in the purchaser (the grantor) upon an insolvency event.
Accordingly, in the past 18 months, ROT under the PPSA has become a key issue many of our clients have had to grapple with. Based on a handful of cases decided by reference to the new regime and our own experiences, we set out some practical tips for navigating ROT issues in the PPSA world.
Register your security interest in time
A security interest should be registered at the earliest possible time. This might even be prior to a security agreement being signed or a security interest “attaching” for the purposes of the PPSA.
Purchase money security interests (PMSIs) must be registered within the required time in order to ensure their “super-priority” status. For inventory, the PMSI must be registered before it is supplied to the purchaser. For non-inventory, the PMSI must be registered within 15 business days of the commencement of the security agreement.
Under section 588FL of the PPSA, other security interests must be registered within 20 days of the date of the security agreement or at least 6 months before the “critical time” of an insolvency event to prevent the security interest vesting in an insolvent purchaser. Although the court has a discretion to extend the time limit if the failure to register was “accidental or due to inadvertence,” as Barclays Bank found out last year, this requires an expensive court application for a mistake that could easily have been avoided.
Get your security agreement right
A security agreement must be in writing, signed by the grantor and adequately describe the collateral supplied. It is also important that the parties are clear on what the relevant security agreement is.
In the case of Crossmark Asia v Retail Adventures, Crossmark argued the relevant security agreements were its pro forma invoices, that contained various terms and conditions, whereas Retail Adventures submitted those agreements were varied when it sent unsigned purchase orders to Crossmark. The court preferred Crossmark’s position, on the basis that the parties had negotiated and signed formal written agreements in each case, and that an objective bystander would not think that the parties intended to vary those agreements ad hoc.
Despite this, parties should carefully read the terms of the underlying agreements, purchase orders and invoices, because in some cases a master agreement may not satisfactorily capture security interests under separate purchase orders. This is especially relevant where an ineffective master agreement was entered into prior to 30 January 2012, as subsequent purchase orders may not have the protection of the PPSA’s transitional provisions and therefore registration on the PPSR is vital for perfection of the security interest.
Pay attention to detail when registering on the PPSR
It is important your PPSR registrations accurately describe the parties, the collateral and the type of security interest.
Last year, the administrators of the Hastie Group were forced to make an application to the court for guidance in circumstances where there were 995 registrations on the PPSR against the Hastie Group’s name, but due to the “level of generality” of many of the registrations and despite taking a number of steps to contact and locate the relevant creditors, the administrators were unable to identify the ownership of 3,684 items of plant and equipment in the group’s possession (being 77% of the value of the Hastie Group).
The court granted the administrators the right to treat the unclaimed items as property of the Hastie Group, sell it at auction and apply the proceeds to cover their costs of realisation. However, this was an imperfect result not only for the unidentifiable creditors, but for the administrators. This is because the Corporations Act 2001 (Cth) placed strict obligations on them to act objectively and reasonably and make all genuine attempts necessary to identity creditors and assess their claims, which detracted from the administrators’ other duties and diminished the pool of available funds.
Accordingly, any description of collateral should match the description in the security agreement and be specific enough to distinguish it from other personal property in the grantor’s possession. It is also important to correctly identify the grantor and this should match up with the entity that has entered into the security agreement. Suppliers should also be aware that if they provide the collateral to a party who is not the listed grantor, they risk losing their security interest.
Beware all moneys clauses
The PMSI is a new creation under the PPSA, and as above, is given super-priority over other security interests, even if it comes later in time. However, a PMSI only extends to the purchase price of the goods it covers. This effectively weakens the effect of an all moneys clause, as once the relevant goods have been paid for, the supplier’s PMSI over those goods just becomes an ordinary security interest. In those situations, suppliers should try to lodge a separate registration for their non-PMSI interest.
The upshot of all of this is that is important to be vigilant. Suppliers should put policies and controls in place to ensure their security interests are properly created, protected and registered and on the other side of the coin, insolvency practitioners should interrogate the relevant security documents and PPSR to determine whether an ROT claim has legs under the new regime.