Consignment of goods by suppliers (i.e. allowing the customer to sell the goods and then pay the supplier) is inherently risky. If you are owed money by a customer that has gone into liquidation or bankruptcy then you may not only not be able to recover the debt but also can lose the right to take back goods even if your terms and conditions allow for you to retain ownership until you have been paid.
For many years, suppliers relied upon clauses known as “Romalpa clauses” or “retention of title” clauses. The wording of the clause is technically important if it is to succeed and just as important is to be able to show that the relevant terms and conditions do indeed form part of the contract between customer and supplier. These clauses remain important but now need to be coupled with registration.
In 2012 the Personal Property Securities Register (“the PPSR”) commenced operation and replaced a wide array of more limited State and Federal security registers. It covers almost all forms of property (other than land and a narrow range of assets including fixtures and water rights). While this has generally increased the ease and decreased the cost for businesses when dealing with security interests in personal property, there are very real risks to suppliers if they do not engage with the PPSR and register their interests accurately and promptly.
“Substance over form” means that there is significant latitude in the application of the PPSR but in general a well draft clause always helps and a poorly drafted clause leads to doubt, stress and additional risks.
There are different forms of securities that can be registered that fall under the general phrase “security interest”. For most suppliers, they will either claim the benefit of retention of title clause (known as a “PMSI” from Purchase Money Security Interest) or a broader charge over all assets of the customer (known as “All PAAP” from All Present and After Acquired Property).
If a creditor holds a written charge, a contract with a retention of title or other security interest but does not register the security interest under the PPSR then it is “unperfected” and will usually fail when it is needed most. Fortunately, registration of security interests is relatively cheap and relatively easy and is normally able to be addressed “inhouse” by suppliers.
Problems can arise where the goods have been incorporated with other goods. These are dealt with by specific provisions but as a general rule, a well-drafted clause is critical.
Where a customer being a company goes into administration, the supplier cannot exercise its rights immediately without the consent of the administrator or leave of a Court. The supplier should however immediately contact the Administrators to ensure the Administrators are aware of the security interest and the intention to enforce rights under that security interest.
Not all rights, however, need to be registered. A lien (a right to retain possession until payment and which can arise under contract or by operation of law) may not need to be registered. Liens may however need to comply with State or Territory legislation to be effective that can include provision of notice such as before the goods are sold.
If a company goes into receivership (perhaps because another creditor has exercised the rights to appoint receiver) or into liquidation then the items that are the subject of the charge are applied first to meeting the debts owing to the secured creditor before any payments are made to unsecured creditors.
It is very common for many creditors to have perfected (i.e. registered) security interests over a company in liquidation. There are detailed rules for working out who gets paid and in what order (known as their priority). Generally, a narrow form of security interest such as PMSI prevails over a broader interest such as an All PAAP and within each class of security interest, the first to “perfect” has the advantage.
Importantly, registration will prevent a sale of the asset as part of a sale of the business of the customer. The supplier needs to be contacted well before the settlement date and (once paid in full) asked to discharge (end) the security interest. The supplier might be willing to allow for their security to be released from funds at settlement and then to provide a PPS Release and Undertaking to Amend Registration. As a matter of prudence, the customer may also seek a formal deed of release of the security interest and any guarantees.
This article is a brief summary of a complex area that is very much contingent of the precise facts. It is therefore not a substitute for detailed legal advice. While the key concepts have application in other jurisdictions, the relevant Law is that of Victoria as at May 2023.
Photo: Lisa Fotios 2023
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