Inventory often represents a significant asset of a distressed retailer, but most of that inventory is usually subject to a retention of title clause. Determining the effectiveness and priority of these retention of title clauses under the PPSA, particularly during the current ‘transitional period’, can be a complex exercise.
Suppliers of inventory typically take security by way of a contractual clause stating that the retailer does not obtain title in the goods supplied until payment has been received. This is known as a ‘Romalpa’ or retention of title clause (RoT). More often than not, the RoT clause states that title in all goods supplied is retained until all outstanding amounts have been paid. This is referred to in the industry as an ‘all-monies’ RoT clause.
Prior to the introduction of the Personal Property Securities Act 1999 (Cth) (PPSA), a supplier’s ownership rights under an RoT clause were effective to give the RoT supplier recourse to the goods supplied in the event that the retailer failed to pay, even if the retailer was subject to an insolvency regime.
Since the PPSA came into force on 30 January 2012, the position of RoT inventory is more complex. In particular, such inventory is effectively treated as the property of the retailer, so that other secured parties (eg the holder of an all-assets charge) can take security over RoT property. The RoT supplier can still achieve its pre-PPSA priority position in respect of unpaid goods, but in order to do so, the RoT supplier will need to register its interest, and take steps to ensure it obtains the ‘super’ priority available to holders of a purchase money security interest (PMSI).
This article discusses:
- some instances in which suppliers may fail to achieve their expected priority, even though they hold a valid, registered RoT; and
- the position of RoT suppliers that have failed to register, but nonetheless claim priority under a pre-PPSA ‘transitional security agreement’.
PMSI issues arising in practice: registration requirements, and the demise of the ‘all monies’ RoT
RoT suppliers can achieve priority, and protection in the event of the insolvency of the purchaser, by registration on the Personal Property Securities Register (PPSR). However, under the PPSA, suppliers can only be confident of priority, in respect of goods that have not yet been paid for. Suppliers must also take care to ensure that they have complied with all relevant timeframes:
Registration must be made prior to delivery in order to achieve ‘super’ priority
The PPSA usually confers priority by reference to the time of registration.1 However, in order to retain the commercial utility of RoT and similar arrangements, an RoT supplier needs to achieve ‘super’ priority over other prior-registered secured parties, such as the holder of an all-assets charge.
In order to achieve super priority to inventory, registration must be completed before the goods are delivered.2 Super priority is only available in respect of PMSIs, which include ‘a security interest taken in collateral, to the extent that it secures all or part of its purchase price’.3
Suppliers will achieve super priority only in respect of unpaid goods
It is apparent therefore, that a security interest is only a PMSI to the extent that it secures unpaid amounts.4
Once goods have been paid for, they may well be caught by the residual security interest arising under an all-monies RoT, but this interest is no longer a PMSI, and does not enliven the super priority available to PMSI holders.
This means that RoT suppliers will not be able to have recourse to all previously supplied goods, even if their contract with the retailer includes an all-monies RoT clause. The RoT supplier will only achieve PMSI priority for goods which have been supplied, and which have not been paid for.
This is a material departure from the position under prior law, and may mean that although suppliers have security over all goods supplied, they will only have priority over a bank’s prior-registered all-assets charge to the extent of the RoT goods which have not been paid for. Of course, in the event that the insolvent retailer has not granted an all-assets security, or that all-assets security is registered later in time, a registered RoT supplier will have priority (subject to the registration issue discussed immediately below).
Suppliers seeking security over goods that have been paid for require an additional registration
The PPSA registration provisions require PMSIs to be noted as such on the PPSR, in order to achieve the available super priority. However, a registration is defective, and therefore ineffective in respect of a security interest, if it indicates that the security interest in the collateral is ‘a purchase money security interest (to any extent) [and] the security interest is not a purchase money security interest (to any extent) in the collateral’.5
We have found that, in practice, suppliers tend to register their interests as a PMSI, even where the security arises under an all-monies RoT (and therefore, is not a PMSI for goods which have already been paid for).
Where an all-monies RoT is registered as a PMSI:
- The registration is ineffective as to goods already paid for. RoT suppliers can lodge a separate registration for their non-PMSI interest, but we have not encountered many suppliers taking this approach in practice. This is likely to be because there would be limited practical benefit where there are other prior-registered secured parties, such as a bank holding an all-assets charge.
- More controversially, some practitioners argue that where an all-monies RoT is registered as a PMSI, then the registration is completely ineffective to perfect any security interest, because, at least to the extent of goods already paid for, it is clearly not a PMSI. Although that position is arguable, we consider that the better view is that the registration is invalidated only to the extent that the security interest is not a PMSI. This is because all-monies security interests are purchase money security interests to some extent. Moreover, this interpretation is consonant with the purpose of the PMSI registration regime, and fits comfortably with references to ‘mixed’ securities in the section defining PMSIs.6
Identifying inventory held under a transitional security agreement
Judging from recent experience, a surprisingly high number of RoT suppliers have simply failed to register their interests at all. Unless these suppliers hold a ‘transitional security interest’:
- their interest is subordinated to the interests of other parties that hold security over the goods, and that have registered on the PPSR, and
- even if there are no competing secured parties, the RoT interest vests in the company on liquidation or administration, which means that the goods become available to unsecured creditors.
Transitional security interests are the major exception to the rule that all RoT interests must be registered in order to be enforceable in an insolvency scenario (and to have priority against registered security interests). Transitional security interests are deemed to be perfected from immediately before the PPSA came into force.7
A transitional security interest is a security interest arising under a transitional security agreement, defined as ‘a security agreement that is in force immediately before’ 30 January 2012.8 So long as the agreement was in force before 30 January 2012, it does not matter whether the interest arose before or after that date.9
A typical example of a transitional security agreement applying to an RoT scenario is where the RoT supplier has required the purchaser to enter into a ‘credit application’, which document contains an RoT clause, was entered into prior to 30 January 2012, and states that it continues to govern the terms of supply.
More difficult questions arise where there is no ‘umbrella’ credit application governing future supplies. What, for example, would be the position where the parties had always done business on the basis of standard terms printed on the back of each invoice, or terms published on the supplier’s website? If the relevant terms have not changed since before 30 January 2012, the supplier may have an argument that the terms represent a transitional security agreement. Such arguments do not fit neatly within the statutory concept of a transitional security agreement, and are likely to require a careful contractual analysis, with close regard to the factual context of each case.
We note that we are aware that some practitioners argue that even pre-30 January 2012 ‘umbrella’ agreements do not satisfy the requirements for a valid transitional security interest, on the basis that each supply after 30 January 2012 is a ‘new’ agreement, and the RoT terms of the umbrella agreement are simply incorporated by reference into a new supply, and therefore do not satisfy the criteria for a transitional security agreement. Although we do not agree with that argument, it is not without some force.