The Personal Properties and Securities Act 2009 (PPSA) has been a central talking point in the Agribusiness sector for some years now. This article considers the practical implications of the PPSA in the context of trading agricultural commodities.
The PPSA was received with a degree of scepticism and concern by traders. In any event many, or even most, trading contracts now enshrine provisions expressly contemplating the role that each party is expected to play in respect of the PPSA regime.
By way of summary:
- agricultural commodities are often delivered prior to payment being received, with control passing at the point of delivery
- title to the product, however, expressly remains with the seller until receipt of payment; a Retention of Title (ROT) clause.
- ROT falls within the definition of a "security interest" for the purposes of the PPSA and therefore must be registered in order to be "perfected"
- by registering and thereby perfecting the security interest in the goods on the Personal Property and Securities Register (PPSR) the seller retains a priority security in the goods in the event of insolvency or liquidation of the buyer.
Trading desks and brokers around Australia have debated strongly the ROT clause in such contracts. Many people were eager to incorporate the clause into their sale contracts but not in their purchase contracts. Which gives rise to a problem in an industry where paper contracts are traded regularly; how can you trade back to back terms if one of the contracts provides for ROT while the other does not, which is akin to short selling ("shorting") a stock.
The PPSA was not intended to make life difficult. The intention was to bring together into one register (the PPSR) multiple interests in personal property. Prior to the commencement of the PPSA, over 70 Commonwealth, State and Territory laws plus common law and rules of equity governed individuals interest in personal property.
The intention was to bring all questions of who had an interest in personal property and in what priority order, to a central database, and thus make those claimed interests "visible" to any third parties dealing in that property. Life prior to the PPSR was probably more complicated, however, unless a trade became contentious, it was not a daily consideration for many traders.
There are rules of priority of security interests which have been well documented and not repeated here, however, there are further aspects of ROT and PPSR that warrant further analysis in this context:
- The Extinguishment Rule
The PPSA incorporates the extinguishment rule for goods sold in an ordinary course of business, which allows commodities to be traded and not have a third party encumbered by the security interest of a prior party. For example, if Smith sells to Jones on ROT terms (and thus retains a security interest in the goods for the unpaid purchase price), and Jones then sells to Brown, Smith may have no right to possession of the commodity in Brown's control except in certain circumstances (such as, for example, where Brown has actual knowledge of Smith's security).
However, Smith may have an interest in the proceeds of the commodity (to the value of the unpaid purchase price), paid by Brown to Jones. However, if Jones' bank has a security interest over Jones' bank account, and the cash received from Brown is deposited in that bank account, the bank may have control of the account and hence could take priority over Smith's interest in that money.
- Paper Traded Contracts
Paper traded contracts, such as those commonly exchanged in respect of grains oilseeds and cotton may mean a buyer and a seller never actually take possession of the physical commodity – it will never be accounted for as inventory, only a purchase or sale contract manually brought to market value. However, unless it is a "circle contract" (where the only interest traded is actually the interest in cash), there will be a start and an end to the trading string whereby at least two entities will have possession of the inventory at two points in time.
The extinguishment rule outlined above continues to apply to such transactions.
- Warehoused Goods
In trading commodities, you must also be mindful of inventory in warehouse with bulk handlers. Some bulk handler agreements may request goods to be delivered free of PPSA security interests attached. Further, the bulk handler may incorporate a clause to place their interest, or lien, above any security interest over delivered grain for the purposes of warehouse storage fees and charges owing.
The exceptions and intricacies of the extinguishment rule and accounts financiers may also apply and should be considered.
These bulk handler agreements do exist, so be sure to read your storage and handling agreements carefully. It is important to place side by side sale and purchase, and storage and handling agreements.
Warehousing also brings us to the issue of comingled stock. Comingled stock does not remove ROT claims, however the PPSA limits priority to the value of the commodity on the day the commodity was comingled.
Counter-Party is Key
The above is a brief summary of the practical implications of trading agricultural commodities under the PPSA. Incorporating ROT into commodity contracts is neither a shackle to trade nor a magic bullet for sellers and absolutely the most important thing to remember is to know your counter-party. The PPSA does not replace quality due diligence.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.