Business Owners: Three Practical PPSR Considerations
By Jack Newton, Lawyer, MST Lawyers and Alicia Hill, Principal, MST Lawyers
If your business supplies goods on credit (in that the customer will have possession of the goods for a period of time without having paid in full for those goods) your goods are at risk until you receive payment in full. That risk has increased as a result of the Personal Property Securities Register (PPSR) which has created a new system to resolve questions pertaining to the ownership of goods.
Along with a new regime comes a whole new world of vocabulary. A supplier becomes a “secured party”. A customer becomes the “grantor”. A charge becomes a “security interest”, and there is now a “purchase money security interest” or PMSI (pronounced “pim-see“).
In theory, the PPSR is simple – it is one public register where suppliers register their interest in goods held by their customers. The register provides them with certain protections from certain risks. In practice, it has become a complicated, misunderstood and confusing system which has resulted in many businesses losing their rights to their goods.
The simple rule of the PPSR is that an unregistered security interest will if your customer becomes insolvent or enters into any kind of administration or liquidation, vest in the customer (in practice the liquidator as controller of the customer). In other words, the supplier will lose its interest in, and rights to, any goods in the possession of the customer.
Below are three practical considerations to help avoid the pitfalls that can arise from the PPSR.
Consideration 1: Who is your customer?
Several recent cases have identified a problem facing many cases – businesses do not quite know who their customer is. Is the customer an individual, a company, a trust, a partnership, or something else?
The identity of the customer is critical – the supplier needs to have a contract with the correct legal entity. Some basic rules to follow are:
- Where the customer is an individual, you will need the person’s date of birth to The supplier should obtain a copy of the customer’s driver’s licence or other photo ID to verify the customer’s name and date of birth (and their ID generally);
- Where the customer is a company but not trustee of a trust, the supplier must register its security interest against the ACN of the customer;
- Where the customer is a company or individual that is trustee of a trust, and the trust does not have an ABN, the supplier must register its security interest against the both the name and the ACN of the customer or the individual personally, as noted in paragraph (a) above (as applicable);
- Where the customer is a company or individual that is a trustee of a trust, and the trust has an ABN, the supplier must register its security interest against the ABN of the trust.
In the matter of OneSteel Manufacturing Pty Limited (administrators appointed)  NSWSC 21, Alleasing Pty Ltd supplied goods to OneSteel to the value of approximately $20-25million. Alleasing had registered its security interest against OneSteel’s ABN (even though Alleasing was not trading as a trust – it was a company).
When OneSteel appointed administrators in April 2017, the administrators wrote to Alleasing to advise that the PPSR registration was defective because it did not use OneSteel’s ACN. This question was eventually decided by Justice Brereton of the New South Wales Court in January this year where His Honour agreed with the administrators, and Alleasing lost any rights it had to the goods.
As the OneSteel case demonstrates, there are some further issues to consider:
- If you are not aware that a customer company acts as trustee of a trust, you will register against the customer’s ACN only, which means the registration will be ineffective. You can reduce this risk by:
- requiring the customer to state, in its application to the supplier or the relevant agreement with the supplier, whether it acts as trustee of a trust;
- requiring the customer to provide its ACN and ABN in its application to the supplier or the relevant agreement with the supplier (and then checking on www.abr.business.gov.au as to whether that ABN is attached to a trust or a company);
- regularly checking that any documents issued by the customer to the supplier (for example, payment confirmations/remittance) list the same ABN of the customer that was provided to the supplier when the customer first become a customer of the supplier; and
- confirming the above information (to the extent possible) at www.abr.business.gov.au.
- If you incorrectly think that a customer company does act as trustee for a trust (and you have an ABN for that trust), you will register against the ABN of the trust, which means the registration may be ineffective.
- If a customer company acts as trustee for more than one trust, and you register against the ABN of the incorrect trust, the registration may be ineffective.
Completing the registration correctly, will significantly reduce the risk that the PPSR will become a problem down the track.
Consideration 2: What do your documents say?
One essential requirement of the PPSR is that there be a “security agreement” in place between the supplier and the customer.
In short, the PPSR requires:
- an agreement or act by which a security interest is created; or
- writing evidencing such an agreement or act.
Ideally this takes the form of standard terms and conditions that are signed by every customer. Those terms and conditions should include a specific PPSR clause that creates the security interest and governs the relationship between the supplier and customer in their capacity as secured party and grantor.
Other practical considerations for your documents include:
- the terms and conditions should include a description of the goods that are being rented or sold – this is because the PPSR registration will be invalid if the description is not included in the security agreement; and
- the parties can agree that some of the requirements of the PPSR may not need to be complied with by the supplier. For this to be effective, proper documentation and the agreement of both parties is required.
It is important for suppliers to have written terms and conditions that are signed by every customer to ensure that issues (such as payment, shipping/delivery, prices, warranties and returns and limitation of liability) are favourable to the supplier.
Consideration 3: What happens if you get it wrong?
Both the Corporations Act and the PPSA permit, in some circumstances, a supplier to apply to a court for an extension in the number of business days for a security interests to be registered. If the registration is not completed in time or is completed incorrectly, it is possible to apply to a court for an order granting more than that.
Given the relative infancy of the PPSR in Australia, there have not been many applications of this kind. However, based on the published court judgments about these applications, the following matters need to be considered in any application to the court:
- in order to obtain the extension, the court is required to take account of:
- whether the need to extend the period arises as a result of an accident, inadvertence or some other sufficient cause;
- whether extending the period would prejudice the position of any other secured parties or other creditors; and
- whether any person has acted, or not acted, in reliance on the period having ended.
The supplier will need to put direct evidence (usually from a director or manager) as to the supplier’s inadvertence in respect of the PPSR. If this article is the first you are hearing of the PPSR and alarm bells are ringing, then it is important to take steps now so that you do not lose the ability to rely on your “inadvertence”.
The supplier will also need to put direct evidence as to the solvency of the grantor. If this correction application is left too late (and the customer is already facing solvency questions), the supplier may have difficulty convincing a court to extend time. In one case last year, the supplier filed evidence that established that the payment history of the customers revealed that the customers did not owe any outstanding arrears under any relevant agreement – this made it easy for the court to agree that the extension would not prejudice other creditors.
This is relevant because if the grantor is late in paying, it suggests that an insolvency event may occur and extension of time in respect of the supplier’s registration may prejudice the position of other creditors.
The specific circumstances will need to be assessed at the time – but it is important to know that there is an option available if the registrations are deficient in some way.
If you would like more information about the topics raised in this article, please email Alicia Hill (Disputes Resolution and Mediation) or Jack Newton (Corporate and Commercial) or call on +61 3 8540 0200.