A Warning to Trade Suppliers - Protect your title in goods
Prior to the introduction of the Personal Properties Securities Act 2010 (Cth) (‘PPSA’) and the regime is put in place taking effect on January 30, 2012, if a company was placed into administration, liquidation or receivership, or an individual bankrupted, suppliers of goods to the company or individual, as the case may be, had significant rights if the terms of supply included effective retention of title clause (also known as a “Romalpa clause”).
In the case of such external control over the company or individual, a properly drafted clause would provide an effective means to retake possession – including from the power of the external controller - of the goods supplied.
Those goods may have been routinely supplied to the company or individual in anticipation of production, or plant and equipment supplied under a lease (for example, vehicles or earthmoving equipment) which if necessary could be recovered by court order if the external controller refused to render them up.
It was not necessary for sale agreements including such retention of title clause to be registered. However, the previous regimes in each state and territory provided incomplete and often inconsistent means for registration or otherwise securing of particular interests, with widely differing consequences.
However, the PPSA has critically altered the position.
The PPSA System
This provides for a single registration system and a comprehensive set of priority rules – similar to that applying to land under the Torrens system – based upon the time of registration – or “priority time”. It is a uniform national system concerning all transactions for securing of the purchase price due to a supplier or amount lent by a financier for acquisition of goods.
In the example above, the supplier (such as the equipment lessor or supplier of goods) must now formally register its interest in the regime to that set up under the PPSA. It is only entitled to reclaim goods, equipment or other assets falling under the PPSA if its interest in them has been “perfected” by registration on the Personal Property Securities Register (‘Register’). In the case of a Romalpa clause providing for the supplier’s retention of title in an asset subject to payment of its price in full, section 12(2)(d) of the PPSA applies where the transaction, in substance, secures payment or performance of an obligation as ‘a conditional sale agreement (including an agreement to sell subject to retention of title).’
A Buyer of Personal Property for Value Acquires Title Free of Unperfected Security Interests1
The priority of interest in personal property depends upon whether, and when, the owner of the assets
has perfected its interest in them by one of three means:-
registering a financing statement identifying its “security interest” on the Register;
taking possession of the collateral; or
assuming control over the collateral.
A secured party has ‘control’ if it is able to transfer the collateral to a third party without the grantor’s consent or cooperation. For example, once its interest in funds deposited in an account managed by it is perfected (by deposit of funds into an account administered and under its control) a bank has priority over any other perfected security interest in that account, regardless of when that was perfected.
If an administrator or other external controller such as a liquidator or receiver is appointed to a company or a bankruptcy trustee to a personal estate and a goods’ supplier’s interest (e.g., as equipment financier) has not been registered (or “perfected”), as against the external manager, the supplier cannot recover the goods and the security interest vests in the external controller. The goods supplied will simply form part of the purchasing company’s/individual’s assets to be dealt with in satisfaction of all creditors’ claims in accordance with their priority of interests.
The interests of the supplier (being an unregistered interest holder) are defeated as against another financier whose interest has been perfected and entered on the Register.
‘Collateral’
This is the personal property2 to which a security interest attaches. The
‘Attachment’ of a Security Interest
Section 19 of the PPSA sets out the requirements for attaching a security interest to property.
1. Unless the secured party has possession of the collateral or has perfected its security interest by control, there must be a valid security agreement ‘evidenced by writing’3, identifying the parties, indicating the intention to create a security interest, describing the collateral and securing payment or performance of an obligation;
2. The secured party must give value – e.g., a loan or other advance in favour of the grantor;
3. The grantor must have rights in or be entitled to the collateral.
‘Perfection’
Section 20 requires that a security interest is perfected only when –
• It is attached to the collateral;
• It is evidenced in writing signed by the grantor or adopted or accepted by the grantor by conduct
reasonably proving the intention to accept the written proof;
• That document describes the collateral or provides a statement that the security interest is either a) in all of the grantor’s present and after-acquired property; or b) in such other specific item of property as is specified.
What interests are protected under the PPSA?
The key concept of “security interest” describes interest in personal property created by a transaction that substantially secures payment for or performance of an obligation.
A security interest means an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property): PPSA section 12.
The PPSA has extended the concept of security interest beyond those traditionally acknowledged under, for example, company charges and property mortgages.
A security interest may be held in personal property whether tangible or intangible (such as rights held by a person). It, therefore, does not include land, fixtures to land, water rights and certain licenses. It includes goods or stock held in inventory, intellectual property rights, shares, debts and contractual rights.
It can include, for example -
Interests created under leases of personal property;
Hire purchase agreements;
Retention of title arrangements (for stock/supplies, etc.) as discussed above.
Certain interests are deemed to be security interests even though they do not secure a payment or performance of an obligation. For example, you may often find in a lease of commercial real estate a clause whereby the landlord and tenant agree that the landlord’s interest and rights under the lease are a security interest and registrable in the Register, notwithstanding that the rights in question pertain to land, given that they are personal rights in favour of the landlord.
As such they may be offered by the landlord as security granted to a third party (such as a bank or other lender) to secure the landlord’s performance of its obligations to that third party.
Taking this into account, we believe that wherever possible you should register your security interest in goods and equipment supplied to third party, or rights and interests under mortgages or other charges or other personal property, in order to perfect and protect them. If you do not do so then you may lose your title in those rights to another creditor who has registered or otherwise perfected its security interest over the third party’s property - which could include all of the assets of a company in liquidation or a bankrupt individual.
This can of course have critical importance for a supplier of assets which fall within the ambit of the PPSA. Make an appointment for us to review your security interests now.
PPSA section 4Goods; motor vehicles; planes; boats, intellectual property, shares and other financial assets; and private commercial licences. 2. The entire agreement does not have to be evidenced in writing; a note or memorandum is sufficient.Includes a note, memorandum or electronic form readily accessible so as to be useable for subsequent reference.