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The Personal Property Securities Act 1999 (PPSA) has been in force since May 2002. However, many suppliers are still failing to get their terms of trade and PPSA processes right, which is costing them money.
The importance of the PPSA becomes all too clear to a supplier when a customer becomes insolvent with 2 or 3 months of invoices outstanding. It is at this stage that we receive panicked phone calls asking how to recover the debt and/or the goods that are still in the customer's warehouse. Unfortunately, at this stage it may be too late to fix any defect with your terms of trade or PPSA registrations. All we can do is review your terms of trade and PPSA registrations relative to those of other creditors. If you have got it right, you have a good chance of getting your goods back (if they are still held by the customer) or the proceeds of sale of those goods if they have been sold. If you have got it wrong, you could have lost the right to repossess your goods even if you can see them on your customer's shop floor and you, like all of the other unsecured creditors, will be last in the queue to be repaid any outstanding debt. We have seen simple mistakes and omissions costs suppliers hundreds of thousands of dollars.
Prior to the PPSA, suppliers relied on retention of title clauses in terms of trade which basically stated that if the customer did not pay for the goods the title in those goods did not pass and the supplier could repossess them. There was no need to register your interest on a public register like the Personal Property Security Register (PPSR).
Under the PPSA, a written agreement is required (with limited exceptions). This often takes the form of a retention of title or security interest clause in your terms of trade. The clause must adequately describe the goods being given as security. This must be done by reference to the item or kind of goods, to enable them to be easily identified. The description should be wide enough to encompass all goods supplied presently and in the future, and the proceeds of sale of those goods. In order to "perfect" that security interest, you must register it on the PPSR.
Registering And Protecting Your Security Interest
If you don't register your security interest on the PPSR, or if you register it incorrectly, the clause in your terms of trade may not protect you in a priority battle against other creditors. You will lose your priority to other creditors who have registered properly in respect of the same goods. These creditors often includes banks, finance companies (who frequently take security over all property which a debtor holds), and/or the shareholders of the customer.
To register on the PPSR, full details of both the secured party (ie. the supplier) and the debtor (ie. customer) are required. An adequate description of the goods being registered must also be given (reflecting the description provided within your terms of trade).
There are some important points to note when you are registering a financing statement. It must be registered against the correct party. If the correct party is not named, or if it is spelt incorrectly, this could be a seriously misleading defect invalidating your registration – meaning you may lose priority.
Once you have successfully registered your security interest on the PPSR, your priority is determined by reference to any other interests registered over the same goods and when those interests were registered. Under the PPSA the general rule is that the first interest registered gets priority. However, there is an exception for Purchase Money Security Interests (PMSI), which are a specific type of security interest that provide a super-priority to suppliers. A PMSI is a security interest in goods which secures the purchaser's obligation to pay the purchase price for those goods. Basically, so long as you register a PMSI within 10 working days of the customer taking possession of your goods, your PMSI will take priority over non-PMSI's (even those that were registered beforehand). Note however, that if you are wishing to register a PMSI over inventory you must register your interest on the PPSR before the customer takes possession of your goods.
Examples
The Court of Appeal recently heard a case where the validity of a security interest was challenged on the grounds that the description of the collateral registered on the PPSR was broader than that actually created under the supplier's terms of trade. The supplier's terms of trade referred to "all personal property supplied by the Company to the Buyer from time to time, together with the proceeds of such goods and includes: frozen, chilled and dry foodstuffs, packaging and paper products, plastic utensils, all goods and/or services which are described on any invoice, delivery docket or order form, all inventory". The Court of Appeal acknowledged that describing the collateral as "all present and after-acquired property" on the PPSR was an over-broad description in the circumstances. However, the Court of Appeal confirmed that an over-broad description could not be a significant error invalidating the perfection of a security interest, nor did they find that the description was seriously misleading so as to affect the validity of the registration.
The Court of Appeal did however emphasise that best practice is for the description of the collateral in the financing statement registered on the PPSR to accurately reflect the description in the terms of trade, or other security agreement.
In a recent matter we were involved in, a supplier had a security interest clause in its terms of trade and even registered that interest on the PPSR. Unfortunately, the supplier's employee who made the registration registered the PMSI against the owner of the customer's business rather than the customer's business, which was a separate company. The company in question then became insolvent and the company's bank enforced it rights under the bank's general security agreement. As a result, even though the supplier could still see its (unpaid for) products on the customer's shop floor, the bank took priority to the products and was repaid in full whilst the supplier had to settle for a partial repayment only.
As part of that same matter, the insolvent customer's business was restructured and a new company was formed to operate the business. It was interesting to note that upon the formation of the new company many of those same suppliers who lost money as a result of the prior business failure did not register security interests against the new entity!
Take Action Now
We strongly advise putting in place a simple system to ensure your PPSA registrations are correct and up to date, otherwise you risk losing your priority in insolvency situations to other creditors who have such a system. Also, if it has been a while since you last had your terms of trade checked (or even since you have read them), we suggest you read them and have them checked if you have any doubts about their effectiveness.
This newsletter is produced by Simpson Grierson. It is intended to provide general information in summary form. The contents do not constitute legal advice and should not be relied on as such. Specialist legal advice should be sought in particular matters.
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