A possible short-term consequence of the Commonwealth
government's new Personal Property Securities Act (PPSA) will
be to cause small business suppliers relying on retention-of-title
(ROT) clauses as security for payment to lose out to big banks in
any contest for money left over by a customer in financial
distress. This is potentially the effect of the new law which
commenced on 30th January 2012.
A seller of goods under an ROT clause remains the owner of the
goods. However, under the PPSA, ownership of the goods becomes
largely irrelevant. The PPSA will treat the arrangement as if it
were the same as a secured loan. This means that under the PPSA the
purchaser will be regarded as an owner of goods who has granted
security over them back to the seller.
What should suppliers who rely on ROT clauses do? Firstly they
should review their sale documents and procedures to comply with
the PPSA. For all new customers and sales relationships inaugurated
after 30 January the ROT clause should be checked firstly for
general enforceability. Secondly the clause needs to be amended to
permit the seller to register it on the PPS Register as a security
Thirdly, sellers need to realise two things: (1) under the PPSA
they can no longer enforce their ROT clauses by reclaiming their
goods from a late or non-paying customer; and (2) the PPSA even
permits an ROT purchaser to grant security over, lease or on-sell
the seller's goods to a third party in the normal course. So,
sellers may need to have their sales contracts amended to exclude
the PPSA's prescribed enforcement rules, and also limit the
so-called extinguishment rules which otherwise give a purchaser
this kind of latitude.
As regards registering the ROT supply contract, a single
registration at the outset of the relationship should be
sufficient, so long as the goods are largely homogenous and their
description in the PPS Register's "financing
statement" is broad enough. For relationships already in place
as at 30January the ROT contracts remain valid without registration
for a temporary period of two years. However, suppliers should be
moving to have existing contracts registered during this period, if
only for the fact that sales proceeds outstanding beyond the two
years will not be properly protected.
Once an ROT clause is on the PPS Register it is given a
"super priority" over other "normal " security
interests, such as the former fixed and floating charges often
taken by the customer's bank. This is an incentive for ROT
suppliers to get their contracts - both new and existing
– onto the PPS Register at the earliest opportunity.
Another incentive is that a registered ROT clause allows the
supplier to retain ownership of goods even if they are co-mingled
with, or attached to, other goods. This has been an uncertain area
under the existing law.
As perhaps to be expected, there is a sting in the tail with ROT
registrations. It concerns their timing. If the goods supplied
comprise inventory, the relevant supply contract needs to be
registered prior to the next succeeding delivery (if the goods are
not inventory, within fifteen business days of delivery). If a
delivery of inventory precedes PPS registration it will not attract
super priority, and the supplier risks conceding prior security
over the goods to another of the customer's creditors, such as
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
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