Protection of Title in goods
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 it put in place taking effect on January 30, 2012, if a company was placed into administration, liquidation or receivership suppliers of goods had significant rights if the terms of supply included an effective retention of title clause (also known as a “Romalpa clause”).
In the case of liquidation and receivership, a properly drafted clause would provide an effective means to retake possession – including from the control of a liquidator or receiver - of the goods supplied.
Those goods may have been routinely supplied to the company in anticipation of production, or plant and equipment supplied under a lease (for example, vehicles) which if necessary could be recovered by court order if the liquidator or receiver refused to render them up.
It was not however 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 of particular interests, with widely differing consequences.
However, the PPSA has critically altered the position.
The PPSA 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 provides 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’).
If an administrator or other external manager such as a liquidator or receiver is appointed to a purchaser of a company and the owner’s interest has not been registered (or “perfected”), then the supplier cannot claim the goods and the security interest vests in the company’s external manager.
Where the purchaser is under external administration, particularly under the control of a liquidator or receiver, then the goods supplied will simply form part of the purchasing company’s assets to be dealt with in satisfaction of all creditors’ claims in accordance with their priority of interests.
The priority of interest in personal property depends upon whether the owner of the assets has perfected its interest in them by registering its “security interest”.
What interests are protected under the PPSA?
The key concept of “security interest” describes an interest in personal property created by a transaction that substantially secured payment for or performance of an obligation.
The PPSA has extended the concept of security interests beyond those traditionally acknowledged under, for example, company charges and property mortgages.
A security interest may be held in all property whether tangible or intangible (such as rights held by a person) other than land, fixtures to land, water rights and some 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;
- 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.
As such they may be offered by the landlord as security granted to a third party (such a bank or other lender) to secure the landlord’s performance of its obligations to that third party.
Taking this into account, you should register your security interest in goods and equipment supplied to third party in order to perfect your rights. If you do not do so then you may lose your title in those goods or equipment to another creditor who is registered or perfected its security interest over the third party’s property - which could include all of the assets of a company in liquidation.
This can of course have critical importance for a supplier of assets which fall within the ambit of the PPSA. Make an appointment to for a review of your security interests now.
Trumble Szanto Lawyers
Please note: This material is for general educational purposes and is not designed to be advice to any particular person in relation to their own affairs as it does not take into account the circumstances of you as an individual. We do not represent, warrant, undertake or guarantee that the use of guidance in this paper will lead to any particular outcome or result.