The Personal Property Securities Act 1999 – pitfalls for creditors

Introduction

It is now almost ten years since the Personal Property Securities Act 1999 ("PPSA") was enacted. Despite this, in our insolvency work we still regularly come across suppliers who have not performed the necessary registrations, and as a result lose priority to other creditors. This is highly unfortunate, given that a PPSR registration is simple to do and costs only $3.07. A PPSR registration is a little like income protection insurance - not terribly exciting to think about now, but it can make all the difference if the unexpected happens. We encourage all our clients to check that they, and their own clients, are fully conversant with this vital area. In this short article we attempt to explain the main points of the PPSA and its implications for suppliers.

The PPSA - a brief summary

The PPSA came into force on 1 May 2002. It constituted a major reform of the law relating to security interests in "personal property". The new law was closely modelled on a similar act in the Canadian province of Saskatchewan.

Prior to the PPSA, such interests were registered at a variety of locations including the Companies Office. The previous law was regarded as inadequate and cumbersome. The PPSA set out to provide a single online location where suppliers could find out at minimal cost what existing security interests there were against their customers' assets.

The PPSA affects lending, leasing and other types of credit-providing activities. Personal property is given a wide definition. With few exceptions it covers any property someone can own, notable exceptions being land (interests over which are still registered at the Land Registry), and ships over 24 metres in length.

The Personal Property Securities Register ("PPSR")

The PPSA introduced a registration system for what are termed "security interests" in personal property. This is run through an online registry called the PPSR, which anyone can search for just $1.02. Registration is not compulsory. However, failure to register means a creditor may lose priority to another creditor who does register, and is therefore inadvisable. A supplier generally only has to register once in respect of each customer (not every time goods are supplied), and then renew the registration every five years. There are strict time limits for registration - generally on or before delivery in the case of inventory, and within 10 working days for other assets.

"Security interest" is a broad term. Some of the most important examples of a security interest are:-

  • A General Security Agreement - previously known as a debenture
  • A retention of title clause
  • A lease of goods/equipment of more than one year
  • A lease of goods/equipment for an indefinite term
  • An agreement to provide goods on consignment

Where things tend to go wrong

Where problems arise for many suppliers is when a bank or other lender has been granted a General Security Agreement ("GSA"). This is because most GSAs refer to "all present and after acquired personal property" and therefore potentially cover all company assets.

Because a supplier of stock or equipment has provided new value for its security, it normally ranks ahead of the GSA holder's general security in respect of those goods (this is known as 'super-priority'). However, this is only true if the supplier registers its interest on the PPSR. If not, it is likely to lose priority in those goods to the GSA holder (and also potentially the preferential creditors) in the event of its customer's insolvency. In most cases this means a supplier with a retention of title clause or a lessor of goods who has not registered walks away with nothing.

This is despite the fact that the retention of title clause may be perfectly valid in itself. This is because the PPSA only concerns itself with priority between security interests, not legal ownership. This subtle distinction is not often understood and tends to result in some understandably very disgruntled creditors.

Even where there is no GSA, a supplier of stock with no PPSR registration is still at risk of losing priority to the preferential creditors.

What are the key areas of risk for suppliers and lessors?

For most normal trading businesses, the main risk areas tend to be:-

Retention of title/"Romalpa" clauses

These should be agreed in writing rather than just stated on the back of invoices. However, even with a full set of signed terms and conditions, a retention of title ("ROT") clause is likely to be worthless in an insolvency if a PPSR registration has not been made. We have been involved in numerous cases where we have had to tell suppliers that their unregistered ROT clauses had no practical use and they could not recover any stock.

Consignment stock

The same principle applies to stock supplied on a consignment or "sale or return" basis. Even though legal title may not have passed to the customer, the consignment is a security interest and therefore has to be registered to rank ahead of a GSA holder or preferential creditors. Again, an unregistered supplier is likely to be unable to recover stock supplied in the event of its customer's insolvency.

Leased goods

Where a lease is for a term greater than one year (or for an indefinite term), the lessor must register its interest in the goods on the PPSR. If it fails to do so, the lessor may lose priority over those goods to a GSA holder. A lease agreement may be held to be of an indefinite term if it does not contain a clearly stated term, or end date. This is where many lessors run into problems.

General Security Agreements

GSA holders need to be aware that the old priority rules no longer apply. Previously, the first GSA to be executed ranked first, unless specific accommodation had been given to a subsequent GSA holder. The date of a GSA's execution is now irrelevant when assessing priorities. What matters now is the date of registration on the PPSR. The first GSA to be registered ranks first.

Conclusion

This is only a brief summary of this complex legal area. However, two very important points are clear. Suppliers/lessors of goods must ensure that their terms and conditions are properly worded to reflect the current law. They must also ensure that they have a valid PPSR registration to protect those legal rights. We recommend that all businesses selling goods on credit (or leasing goods) carefully review both their terms of trade and their PPSR registration procedures. We are happy to answer further questions, and can also recommend appropriate commercial lawyers with expertise in this field.

Note 1 -PPSR fees increased on 1 August 2012 to $3 for a search and $20 to register or renew a financing statement.

Note 2: This article was written by Jonathan Barrett who has subsequently left the firm.

DISCLAIMER
This article is intended to provide general information and should not be construed as advice of any kind. Parties who require clarification on issues raised in this article should take their own advice.

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