PPSR Toolbox for ‘out of the ordinary’ situations

Considerable focus has been placed on the legal aspects of the government’s Personal Property Securities Register or PPSR, but what about the practicalities of working with register itself – especially for non ‘business as usual’ transactions.

Businesses have become familiar with placing registrations day to day but what about the ‘out of the ordinary’ situations that require interaction with the register – how do secured parties deal with those?

Our Founder and CEO Lynne Walton outlines a few not so commonly faced situations to help us navigate our way through some of the practicalities of managing PPSR whilst maintaining enforceable security.

Suppliers or financiers with suitable Terms and Conditions of Trade that register correctly on the PPSR become ‘secured’ creditors.  This means they have a much better chance of being paid than a creditor that hasn’t register and is ‘unsecured’.  Financiers, of course, see the merit and register routinely but many suppliers fail to see the value in paying the $6 government fee to become a secured creditor for 7 years.  Perhaps they find the registration process too difficult, maybe they haven’t been able to effectively enforce their rights in the past or they may feel they don’t need protection having become accustomed to the very low level of insolvencies in recent years.  Whatever the reason, now may be the time to rethink this strategy.

For those that do register, below are some situations that secured parties find themselves in where the best way to interact with the register and still maintain the required security may not be obvious.

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1. Your business (ABC Pty Ltd) has acquired the customers of another business (DEF Pty Ltd) that has never registered on PPSR

This situation is fairly straightforward to deal with depending upon the amount of customers to be brought on board.  To register effectively on PPSR there must be a security agreement.   Section 20 of the PPSA (paraphrased) states that ‘the security agreement must be in writing and signed by the grantor or adopted or accepted by the grantor in a way that shows they intend to be bound by the terms’.

It would seem, therefore, that terms and conditions can be sent to the new customers with a letter providing acquisition details such as the entity and dates, new payment details and enclosing the new terms and conditions of trade.  To comply with S20 the letter might say that the action of ordering goods after a specific date signifies that the customer accepts the terms and conditions of trade enclosed.

As far as registration is concerned, a few customers can be processed manually via the governments PPSR site provided there is guidance in relation to responding to PPSR generated questions, and accurate use of the customer entity identifier (e.g. ABN for trusts and partnerships, ACN for companies, first name, surname and date of birth for individuals and sole traders – this list is not exhaustive) strictly in line with PPSA grantor identification guidelines.  For larger volumes, it makes sense to upload these in bulk.  There are several providers with this capability but secured parties should ensure they are using approved profiles and cleansing the upload before processing so the correct identifier for each entity type is selected.

For businesses that sell goods on retention of title terms, PPSA protection should apply to all subsequent supplies following registration.  For hire businesses, additional considerations may be required.

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2. Your business (ABC Pty Ltd) has acquired the customers of another business (DEF Pty Ltd) that has existing registrations on PPSR.

It goes without saying that your registration must be perfectly constructed to be enforceable so the first step is to gain access to the existing registrations on PPSR.  You can do this by downloading them directly from PPSR using DEF’s secured party group number (SPG number) and access code.  If the registrations are incorrect, there is probably little value in correcting them by PPSR amendment (which usually costs the same as re-doing them) but this depends upon the type of supply (hire or sale) and whether the errors identified are fatal.  Once you are satisfied that the registrations are correct, PPSR is allows you to transfer registrations to the new secured party.  Before you do this, however, you should consider the exposures at each stage.

Stage 1 – Immediately upon acquisition all supplies will have been made by DEF Pty Ltd so this entity needs to be the secured party on PPSR – the old DEF SPG.

Stage 2 – as ABC Pty Ltd begins to supply new stock to customers there will be debts due to both DEF Pty Ltd and ABC Pty Ltd by the same customer – a joint ABC and DEF dual entity SPG.

Stage 3 – DEF Pty Ltd’s debts will all be collected and ABC Pty Ltd becomes the only secured party on PPSR – the new ABC SPG.

This is the safest way to move from one supplier to another whilst maintaining PPSR protection.  A note of caution – this does not suit all circumstances and depends upon the business sale transaction and security agreements.  You should check with your legal advisors that your circumstances suit this process before proceeding.

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3. Your business receives a S64 notice

When a seller of goods on retention of title terms registers on PPSR they become a secured creditor with the highest possible priority (a Purchase Money Security Interest or PMSI) to both the goods they have supplied that have not been paid for but also to any debts created from the sale of their goods.  To expand on this concept a bit more see the diagram below.

Tree Co Pty Ltd supplies wood to Table Co Pty Ltd.  Table Co makes a table and sells it to  Wholesaler Pty Ltd on credit.  Under PPSA Tree Co has security over the book debt due by Wholesalers to Table Co.  If Table Co goes bust owing Tree Co, the debt due from Wholesaler must be paid to Tree Co once collected.  This is how PPSA security of proceeds works.

Now let’s add debt factoring or debtor financing into the mix.  Debtor Finance Co Pty Ltd is a debt factoring company who funds Table Co’s debts.  But, as we know, Wood Co already has security over the book debts.  What happens here?  Debtor Finance Co is providing ‘new value’ into the transaction and so they will take priority over Wood Co but only for the book debt element and provided they do a number of things first (explained below) to obtain the PPSA priority.

Wood Co still has security over the wood and the table but as soon as the invoice is raised and a book debt is created Debtor Finance Co takes priority provided they 1) register properly on PPSR using the collateral classes Accounts and General Intangible, serve a Notice under section 64 of the PPSA on Wood Co and wait 15 days before advancing funds.

Wood Co’s security position has deteriorated following receipt of the Section 64 notice and the expiry of the 15 days so it is very important for suppliers to take notice when they receive these.  There is very little they can do to prevent their security reducing aside from minimising credit exposure to Table Co, seeking payment up front or asking for a guarantee or additional security.

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4. Your business receives a S178 or S275 notice

The PPSR is a ‘notice board of security interests’ administered by the government that anyone can search to see if an asset is encumbered or a business is financed or any parties that have a financial security interest in either.  Since it is merely a notice board, all aspects of a particular security may not be clear and therefore mechanisms to enable ‘interested parties’ to request more information are needed.  ‘Interested parties’ are defined within the PPSA but would include the party or entity the registration has been placed against i.e. the grantor.  Secured parties often register against grantors who are unclear why.  PPSA enables them to request details. A S275 notice, allows an interested party (usually a grantor) to formally request a reason for the registration and a copy of the security agreement evidencing that right and a S178 notice is a formal demand placed on the secured party to remove or amend the registration. Secured parties have a limited time frame to respond to these notices.  If they fail to do so, the grantor has the right to escalate the demand for action to the Registrar.

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Disclaimer: Access Intell is not a law firm and does not dispense legal advice. This article is general in nature and should not be relied upon in all circumstances. Access Intell recommends that suitably qualified legal advisors be engaged before readers take or refrain from taking any action in relation to its contents.