What lessons can be learnt from the first year of operation of the Personal Property Securities Act 2009 (Cth) ("PPSA"), and how can businesses protect their assets in the future?

Previously suppliers could rely on retention of title provision in supply contracts to reclaim unpaid stock if a purchaser became insolvent. As we know the PPSA changed that position.

Under the PPSA, retention of title clauses are no longer sufficient to retain title in supplied goods. The owner of the goods must register its Security Interest on the Personal Property Security Register ("PPSR").

If the Grantor (holder of the goods) becomes insolvent then pursuant to Section 267 of the PPSA, a new Security Interest in favour of the Grantor is created by default over any assets not subject to a prior Security Interest registered on the PPSR.

The practical effect of Section 267 is that a supplier who does not register a Security Interest on the PPSR will, in the event of the Grantor's insolvency, become merely an unsecured creditor for the value of the assets and will rank behind secured creditors for the purpose of any distribution.

HOW HAS THE PPSA WORKED - ONE YEAR ON?

Wow Audio Visual Superstores Pty Ltd trading as Wow Sight and Sound

In March 2012, the receivers of Wow Sight and Sound declared they would only recognise retention of title interests over unpaid stock if registered on the PPSR.

Approximately $25 to $30 million worth of stock received but not paid for was sold by the receivers at a discount. The proceeds of sale were first used to pay the secured (and registered) bank loans of Wow Sight and Sound.

The unpaid suppliers (who had not registered their Security Interest) were entitled only to share in the remaining funds as unsecured creditors.

Super Butcher

Super Butcher, a large independent meat retailer, was placed into voluntary administration in April 2012. At the time Super Butcher owed creditors $8 million.

Super Butcher owed $600,000 to one pork supplier and more than $1 million to AusWide Wholesalers for unpaid stock. The goods were supplied under retention of title terms, but neither the pork supplier nor AusWide Wholesalers had registered a Security Interest on the PPSR.

The failure to register the Security Interest resulted in a loss of their priority, ranking them as unsecured creditors. The effect on each of those businesses of failure to register their interest on the PPSR was significant.

Carson, in the matter of Hastie Group Limited (No 3) [2012] FCA 719

The Administrators of the Hastie Group found they had 3,684 items of unclaimed equipment incurring weekly storage costs of $61,134.26, and 995 insufficiently detailed Security Interests registered on the PPSR.

Attempts had been made to locate potential claimants, including by email to all creditors with a PPSR interest recorded against the Hastie Group. Only 20% of potential claimants responded, and many responses were inadequate.

On 5 July 2012, Yates J gave directions that the Administrators may sell equipment potentially owned by third parties and possibly subject to PPSA registration, and to distribute the proceeds in the ordinary course after three months.

This decision was based on the "genuine and substantial difficulties" of identifying potential claimants for specific items of equipment subject to a Security Interest brought about by insufficient detail on the PPSR, and the lack of response when creditors were contacted on the registered email addresses.

LESSONS FOR BUSINESS

When registering a Security Interest on the PPSR:

  • Ensure a sufficiently detailed description to clearly identify the asset;
  • Register an email address that will be monitored; and
  • Implement processes to bring any communications regarding the asset to the attention of an officer able to quickly to respond.

In circumstances where high stock turnover makes PPSR registration impractical, suppliers must monitor the solvency of debtors, and not allow an individual debtor to incur too much debt or accumulate too much unpaid stock.

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.