If you supply goods under retention of title arrangements, you need to know about the Personal Property Securities Act 2009 (Cth) (PPSA). Registering your interest in goods supplied under retention of title arrangements on the Personal Property Securities Register (PPSR) is essential to protect suppliers in the event of purchaser insolvency.
Retention of title
Retention of title arrangements occur most commonly when goods are supplied on credit. Under these arrangements, the supplier retains ownership of the goods supplied until the purchaser pays the purchase price for the goods (generally paid after the purchaser on-sells the goods).
Under the PPSA, retention of title arrangements are “security interests”. The PPSA defines a security interest as any interest in personal property (but not real estate) granted under a transaction which, in substance, secures payment or performance of the grantor’s obligations.
In other words, the supplier retains ownership of the goods to protect the supplier’s right to be paid the purchase price for the goods by the purchaser. If the purchaser had paid up front, there would be no need for the supplier to retain ownership.
Security interests attach not only to the goods provided to the purchaser but also to the proceeds of the sale of those goods and any proceeds of the original proceeds. For example, if the supplier was a manufacturer who sold chairs to the purchaser and the purchaser then sold the chairs for cash or traded the chairs for other goods, the supplier’s security interest would attach to the cash or the other goods.
Purchase Money Security Interest (PMSI)
Security interests arising from retention of title arrangements for goods that are inventory are given special status under the PPSA, known as a purchase money security interest (PMSI) status.
As the name suggests, in the event of the purchaser’s insolvency PMSIs are given a higher level of priority over other regular security interests (but not all security interests created under PPSA), giving suppliers additional protection under the PPSA. PMSI status is a good incentive to register the supplier’s interest on the PPSR.
When to register
Suppliers of goods with retention of title arrangements must register their interest on the PPSR before supplying any goods to the purchaser.
Failure to register in time
Failure to register in time will result in the supplier’s security interest losing its PMSI status.
Nonetheless, it is still beneficial to register on the PPSR. In a priority competition between regular security interests registered on the PPSR, the general rule is priority is given in order of registration (so the first to register has first priority, second to register has second priority, etc.). So while the supplier may lose their PMSI status for registering late, they will still be better off registering sooner rather than later to take priority over subsequent creditors.
Failure to register at all
If the supplier fails to register at all on the PPSR and the purchaser goes into administration or liquidation, the supplier’s security interest in the goods will “vest” in the purchaser.
This means that the supplier will become an unsecured creditor of the purchaser in the winding up. The supplier will no longer be able to seize their goods or claim the proceeds of the sale of the goods. Without registration on the PPSR, the supplier’s legal ownership of the goods is of no relevance and will not assist the supplier.