We are 4 years down the road since the Personal Properties Securities Act brought about changes to rights associated with retention of title and treatment of unfair preference payments. Suppliers have benefitted from the changes in some respects but have gone backwards in other respects. Polczynski Lawyers looks at the pros and cons of the PPSA for suppliers.
The Personal Property Securities Act 2009 (Cth) (the Act) started in January 2012 and was intended to simplify commercial and securities law by providing a consistent regime to deal with priority disputes, in part by establishing a national centralised register of securities.
The Act has certainly achieved one objective – there is one consistent regime to deal with priority disputes and there is a national centralised register of securities. Its second objective, to simplify the position is, at best, a work in progress.
One key area that has been affected by the introduction of the Act are those contracts including a "retention of title" (ROT) clause. An ROT protects a supplier supplying goods on credit or consignment in the event that the debtor runs into financial difficulties eg insolvency. It does so by maintaining an interest in the goods supplied until such time as payment of the purchase price.
ROT's are classed in one of two categories:
1. All monies – which reserves title in all goods supplied until payment of all outstanding accounts has been made; and
2. Simple – which reserves title in goods only until payment for those particular goods has been made.
Prior to the Act suppliers need only ensure that their terms and conditions were “in play” to be able to rely upon the ROT in the event of the debtor’s insolvency.
The introduction of the Act has changed that though. Suppliers now need to “perfect” their “security interest” by entering a registration on the Personal Properties Securities Register (PPSR).
Perfection is a concept introduced by the Act and is the “process by which the holder of a security interest obtains the optimal level of protection offered by the Act”.
The most common form of perfection for suppliers will be to register a “financing statement” on the PPSR. A failure to register, or an incorrect registration, will result in a supplier losing its priority and effectively becoming unsecured, because the suppliers security interest will then “vest” in the customer and at that point the goods will be available to the customers’ suppliers as a whole.
1 .a supplier who has correctly registered (perfected) an interest in unpaid goods will be entitled to a "super priority" as compared to other general security agreements (GSA's) – this is referred to as a Purchase Money Security Interest or PMSI for short; and
2. the PMSI will only give the supplier protection in relation to goods that have not been paid for – and the burden of proving that the specific goods which the supplier is seeking to have returned have not been paid for, rests with the supplier.
This can present a major problem as it requires the supplier to identify and allocate specific stock to specific outstanding invoices. This can create issues in circumstances where the stock is not readily identified or has been mixed with other similar product. If the stock relating to the outstanding invoices cannot be readily identified to outstanding invoices then the PMSI is of no effect and the supplier’s priority (whether a super priority or not) is lost.
In addition once goods have been paid for, they are no longer protected by the PMSI, even though they may well be caught by the residual security interest arising under the all-monies type clause. Such a residual security interest is not a PMSI and suppliers are not able to have recourse to all previously supplied goods – whether paid for or not in satisfaction of their debt.
This is a material departure from the previous position, and means that although suppliers have within their contractual terms apparent security over all goods supplied, that security does not convert into an effective priority, in particular where a GSA has been registered.
It follows from the above that the only effective priority an all monies ROT has is limited to the extent that a supplier can identify specific goods that relate to specific invoices that remain unpaid.
In our experience identification may present significant issues to suppliers of goods. It is a particular problem where you have multiple suppliers supplying identical goods, which have serial numbers but which have not been tracked, by either the suppliers or once supplied, the purchaser. The insolvency practitioner appointed to the purchaser will argue that the lack of identification by serial number results in an invalid PMSI. The suppliers view will be that means that other methods of identification need to be employed.
To avoid this issue suppliers should ensure that as far as possible they track their goods by way of serial number, in being able to identify the goods by type and serial number the supplier protects his position and passes the problem to the insolvency practitioner.
But the PPSA has not been all bad news for suppliers – there is some good news.
One consequence in favour of suppliers under the PPSA is in relation to the area of unfair preferences and their recovery by liquidators.
Section 588FA of the Corporations Act 2001 provides that:
"a transaction is an unfair preference if it results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction was set aside and the creditor were to prove for the debt in a winding up of the company."
Before the PPSA, a supplier who had received payment from a customer, in the six months prior to a liquidator being appointed, could only rely upon the statutory defences of good faith or continuing business relationship to avoid having to repay the sums claimed.
However, because the definition of “security interest” extends to an ROT, a supplier is now viewed as a “secured creditor” to the extent of its ROT claim.This classification takes it out of the statutory definition of an unfair preference, as the payments do not relate to an “unsecured” debt.
Practically this means that the liquidator will need to reduce any potential preference claim against the supplier by reference to the value of the goods supplied to the company that remain covered by the ROT claim and the burden of satisfying this lies with the liquidator.
A recent case determined whether an ROT supplier may hold a secured debt, consistent with the Corporations Act 2001 (CA) introduced as part of the PPSA. This was the decision of Justice Edelman in Hussain v CSR Building Products Ltd, in the matter of FPJ Group Pty Ltd  FCA 392.
The definitions of “PPSA security interest” and “security interest” in sections 51 and 51A of the CA were analysed and noted the CA was intended to be consistent with the PPSA. The ROT clause conferred a security interest which meant the payments could not be unfair preferences because they were payments for secured debts.
The liquidators tried to argue that to the extent payments exceeded the value of the ROT supplies retained at the date of the winding up, the payments could be unfair preferences.
However this argument was rejected because the liquidators did not have the records to show the value of the product supplied by CSR at the time of each payment and so the analysis could not be completed.
Suppliers should be aware that situations can be complicated by a number of matters including where stock was supplied prior to the PPSA (which does not support a valid security interest) or where the ROT stock has to be valued and the date of valuation is important.
The ROT see-saw continues
As can be seen from the above issues the PPSA has a wide reaching and complicating effect on ROT, for both suppliers in enforcing ROT claims but also for liquidators in enforcing unfair preference claims.
In one sense suppliers have certainly benefitted from the point of view that they are considered to be secured creditors. However this improved position has been tempered by the limitations and burdens placed upon them when seeking to enforce a PMSI.
What you gain on the swings you often lose on the roundabouts.
*To find out more get in touch with Richard Lyne firstname.lastname@example.org or Stephen Polczynski email@example.com or call 02 9234 1500.
Polczynski Lawyers has vast experience in considering security interests, unfair preferences, swings and roundabouts. Whatever your position we can guide you through the process and help you to achieve a commercial outcome.