Australia: Proposed cross-collateralisation of PMSIs would improve protection in insolvency for goods suppliers

Last Updated: 19 August 2015
Article by David Kreltszheim

Most Read Contributor in Australia, August 2016

Key Points:

The cross-collateralisation benefits available to a seller pre-Personal Property Securities Act might soon be available again.

The PPSA Review has recommended that a seller of inventory (such as goods supplied for resale or for use in a manufacturing process) should be able to claim "purchase money security interest" (PMSI) status for its security interest over all the goods it supplies that are still held by the buyer, not just the goods for which the seller has not been paid. But this right will only be available where it is not possible to distinguish between goods supplied by the seller that have, and have not, been paid for.

If adopted, this will create opportunities for suppliers and a corresponding depletion in recoveries by insolvency practitioners. It will also require insolvency practitioners to modify their day 1 stocktake practices.

What is "cross-collateralisation" and why is it useful to suppliers?

Before the Personal Property Securities Act 2009 (Cth) (PPSA) started to operate on 30 January 2012, a seller of goods could retain title to goods supplied by it until:

  • those goods had been paid for;
  • all other goods supplied by the seller to the buyer had been paid for; and
  • potentially, other debts owed by the buyer to the seller had been paid (for example delivery or service charges).

Because the seller could retain title to particular goods to, in effect, "secure" more than just the purchase price of those particular goods, the seller had the benefit of "cross-collateralisation" under what are known as "all moneys" retention of title clauses.

One consequence is that where a seller supplied goods in separate deliveries (we'll call them A, B and C) and the buyer only paid for deliveries A and B, the seller could generally repossess goods from deliveries A and B to cover the purchase price owing for delivery C. This was a very useful remedy for sellers in the event of the insolvency of the buyer, particularly where they supplied goods that were not separately identifiable on an invoice-by-invoice basis.

Suppliers' pre-PPSA priority over secured creditors

Before the PPSA started to operate, a seller who retained title to goods as security for payment was generally not considered to hold a security interest. As a result, a seller who supplied goods on a retention of title basis could recover those goods (as owner) upon the buyer's default without having to compete with the secured creditors of an insolvent buyer. Therefore, the seller in effect had priority over secured creditors of the buyer when it came to the goods to which the seller had retained title.

Present position under the PPSA: "super priority"

In general, a seller will who holds a PMSI over particular goods supplied to a buyer will have "super priority" over the rights of most other creditors who also have security over those goods. Those creditors might include, for example, a bank which has earlier obtained a general security interest from the buyer covering all of the personal property over which the buyer is capable of granting security, including the goods supplied by the seller.

  • A seller will hold a PMSI over particular goods supplied by it to a buyer on a retention of title basis if:
  • the buyer has rights to those goods (for example permission from the seller to hold those goods for the purposes of on-sale to third parties);
  • the seller gives value for its PMSI ? for example by supplying those goods to the buyer, or where no value is provided by the seller, the buyer does an act by which the security interest arises (like granting the security interest by deed); and
  • the seller registers its PMSI as a PMSI on the PPS register:
    • before the buyer obtains possession of the goods, in the case of inventory (for example goods purchased by the buyer for on-sale); or
    • within 15 business days after the buyer obtains possession of the goods where the goods are not inventory (for example manufacturing equipment used in the buyer's factory).

A seller who holds a PMSI over particular goods to which a seller retains title has PMSI status for its security over those goods only to the extent that the seller's security secures all or part of the purchase price of those particular goods. For example, a seller would have PMSI status for a retention of title claim in respect of the goods in delivery C to secure the purchase price for delivery C only, not the purchase price for deliveries A of B.

This would generally mean that the seller would only be able to exercise PMSI rights to repossess goods in the insolvent buyer's possession if the seller can demonstrate that those particular goods came from particular deliveries that had not been paid for.

As a result, the cross-collateralisation benefits available to a seller pre-PPSA are not available under the PPSA.

What would a change to PMSI status mean for suppliers?

  • Do the goods you sell constitute "inventory" under the PPSA (for example, do you supply them for on-sale by the buyer or does the buyer use the goods in a manufacturing process)?
  • Do you sell goods that can be identified as being supplied by you (and not by another supplier) but cannot be linked to being supplied under a specific invoice (for example, the goods don't bear any identification numbers, barcodes or radio frequency identification (RFID) tags that enable them to be linked to a specific invoice)?

If you answered "yes" to both these questions, any PMSI that you have over particular goods will operate as a PMSI not only for the purchase price of those particular goods but also for the purchase price of other goods of the same type supplied by you to an insolvent buyer, if the Government accepts the recommendation in the Final Report. This change, if implemented, would present an opportunity for you to improve your position in the insolvency of any of your buyers.

If you answered "no" to either of these questions, then, even if the recommendation is implemented, there will be no change in your position and you won't be able to cross-collateralise your PMSI. Any PMSI that you hold over particular goods to which you have retained title as seller will have PMSI status only to the extent that your security secures all or part of the purchase price of those particular goods.

Regardless of whether or not you will be able to cross-collateralise your PMSI, you will need to review the retention of title and PPSA clause in your supply agreement or terms of trade for adequacy when the precise amendments to the PPSA to implement the recommendations of the Final Report are known.

If you are seeking to cross-collateralise your PMSI, clear drafting will be needed to confirm this.

What does a change to PMSI status mean for insolvency practitioners?

One outcome of the recommendations of the Final Report, if implemented, will be a depletion in the insolvent entity's property which is available for distribution to other creditors of the grantor and the corresponding enhancement of inventory suppliers' (cross-collateralised) PMSIs).

Further, from a practical perspective, once the specific amendments to the PPSA to implement the recommendations of the Final Report are known, insolvency practitioners will most likely need to revise their procedures for conducting stocktakes upon appointment and assessing suppliers' retention of title claims (given the need to determine whether stock is, or is not, of a type which would permit a supplier to cross-collateralise their PMSIs).

Watch this space

The recommendation on cross-collateralisation of PMSIs is only one of a number of recommendations in the Final Report that will affect the registration, enforcement and priority of PMSIs. Many of the recommendations are interdependent.

The Government has not yet responded to the Final Report. The Final Report itself suggests that the Government should adopt the recommendations, as far as possible, as a package.

Suppliers and insolvency practitioners alike will need to examine the Government's response to the Final Report (when it does come) in detail to identify opportunities and to implement the relevant changes in practice which follow from the recommended PPSA amendments. The timing of the amendment to the PPSA is likely to become clearer in the coming months.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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