The Personal Property Securities Act 2009 (Cth) (PPSA), which is expected to commence operation in early 2012, will introduce fundamental changes to the way in which the law recognises and deals with security interests over personal property, and in doing so, the way in which businesses who sell goods on a retention of title or consignment basis protect their interests.

What is the PPSA?

The PPSA establishes how security affecting personal property is taken, prioritised, transferred, enforced and terminated in Australia. The Act also establishes an online national register for the registration of security interests in personal property (PPSR).

The PPSA and the PPSR replace a large number of existing State, Territory and Commonwealth laws and registers.

The PPSA will apply to “security interests” over “personal property”, which are defined under the PPSA as follows:

  • “security interest” is generally a transaction that creates an interest in relation to personal property to secure payment or the performance of some other obligation, and 
  • “personal property” includes most forms of all tangible and intangible property other land and some statutory licences.

How are retention of title and consignment arrangements affected by the PPSA?

Under the PPSA, arrangements that involve selling goods on a retention of title or consignment basis will be treated as any other security interest. This means that these types of arrangements will only be enforceable, and given priority, against competing third party security interests if they are “perfected” through registration on the PPSR.

Therefore, sellers who are unprepared for the changes risk losing out under PPSA.

What should businesses do to protect their interests?

Terms and Conditions

Under the PPSA, there needs to be a “security agreement” which generally will be the terms and conditions upon which the seller agrees to sell goods. To comply with the PPSA, this security agreement will need to address a number of issues.

Affected businesses need to review and, where appropriate, amend their terms and conditions to ensure they properly address the various requirements of the PPSA so that their retention of title and consignment arrangements are enforceable. For example, the security agreement needs to provide a suitable (i.e. not a generic or general) description of the goods.

Registration

In order to obtain priority (in the event that a customer enters liquidation, voluntary administration or bankruptcy) it will be necessary for sellers to register their security interest on the PPSR.

On its face this means that sellers would need to register every sale of goods on a retention of title or consignment basis. However, the PPSA recognises the administrative burden that this would impose and allows a single registration to be made to cover multiple security interests. Therefore, sellers can register one security interest for a customer which will cover all future sales to that customer.

Priority

The PPSA also provides a “super-priority” for security interests that are “purchase money security interests” or “PMSIs”. As a general rule, a security interest will be a PMSI when the party holding the security interest has provided the finance required by the other party to acquire the personal property. This “super-priority” means that a PMSI has priority over other security interests, which are not PMSIs, regardless of when such other security interests are acquired or registered.

Where a retention of title or consignment arrangement secures all or part of the purchase price it will be a PMSI and will therefore attract this super-priority. However, it is important to note that:

  • the process for registration of a PMSI is quite specific with very short periods of time available to register a PMSI, and
  • it will also be critical to ensure that registration of a PMSI does not lapse.

Once operational, the PPSR will be able to be accessed by visiting the following website: www.ppsr.gov.au.

Which arrangements should businesses register?

Before the commencement of the PPSA, businesses should consider their exposure and the relevant benefits and risks to determine if, and what, they register on the PPSR.

Some factors that may be relevant when deciding whether to register retention of title or consignment arrangements on the PPSR are as follows:

  • what due diligence has revealed about the solvency of the customer 
  • the likelihood that the customer will default under the terms of the sale agreement 
  • the value of the goods being sold 
  • the cost of registering the security interest over the goods (these are still to be determined) 
  • the cost of changing current business practices and training staff, and
  • the cost of enforcing the security interest over the goods.

What should you be doing to protect your interests?

If you’re selling goods on consignment or under conditional contracts that include ROT clauses you should:

  • ensure you understand the new priority rules, and 
  • update your Sale of Goods contracts to ensure they are compliant with the requirements and registration procedures of the Act.