Transitional time bomb – when is it no longer safe to rely on a transitional registration?
- The decision of the Victorian Court of Appeal in Central Cleaning Supplies (Aust) Pty Ltd v Elkerton  VSCA 92 highlights one aspect of the importance of knowing whether a security interest is transitional or not. In the Central Cleaning case it was critical for the supplier secured party to show that its security interest was transitional as there was no registration and the supplier needed to rely on the transitional period (now expired) of two years from the start of PPSA.
- The facts of the case were as follows:
- Central Cleaning Supplies (Aust) Pty Ltd (Central Cleaning) supplied cleaning equipment and products to Swan Services Pty Ltd (Swan Services). In September 2009, the financial controller of Swan Services signed a credit application. The credit application included a statement that the supply of goods was governed by Central Cleaning's 'Standard Terms and Conditions'.
- Central Cleaning proceeded to supply Swan Services with cleaning equipment and products from time to time. Printed at the bottom of each relevant invoice was a retention of title 'condition of sale' which stated that the goods the subject of the particular invoice remained the property of Central Cleaning until the whole of the purchase price had been paid by Swan Services for those goods.
- In May 2013 Swan Services went into administration and subsequently into liquidation. Central Cleaning claimed the return of the cleaning equipment supplied to Swan Services on the basis that it had a perfected transitional security interest in those goods. The liquidators rejected that claim on the basis that the cleaning equipment had vested in Swan Services.
- The main method of perfecting a security interest is to register the interest on the PPSR. However, transitional provisions of the Act provided an automatic perfection of transitional security interests for two years. The question for the Court's determination in this case was whether Central Cleaning had a transitional security interest in the goods it supplied to Swan Services.
- A 'transitional security interest' is defined9 to mean a security interest provided for by a 'transitional security agreement' if, in the case of a security interest arising at or after 30 January 2012:
- the transitional security agreement as in force immediately before 30 January 2012 provides for the granting of the security interest; and
- the Act applies in relation to the security interest.
- A 'transitional security agreement' is defined10 as a security agreement that is in force immediately before 30 January 2012, and that continues in force at and after that time.
- A 'security agreement' is defined11 to mean:
- an agreement or act by which a security interest is created, arises or is provided for; or
- writing evidencing such an agreement or act.
- The Court referred to the Replacement Explanatory Memorandum to the Personal Property Securities Bill 2009 (Memorandum) which stated that the legislation would apply to security interests existing before the legislation came into operation with the transitional provisions generally allowing security holders to maintain their existing priority and preserve their rights for 24 months from the time the Act commenced.
- The Memorandum also provided that "A security agreement would be able to expressly provide for ongoing supplies and therefore result in a series of security interests...Where there is no formal agreement providing for ongoing supplies, generally each supply would be considered to be a separate contract or security agreement..."
- The court found that a transitional security agreement between the supplier and its customer had come into effect when the first supply (purchase order and acceptance) was made pursuant to the signed credit application. The court's conclusion is in the final paragraph of the judgment as follows [emphasis added]:
'On this view, an agreement came into force — at the time of the first supply of equipment — which did 'provide for the grant of' a security interest in relation to all future supplies of equipment. That agreement was a 'transitional security agreement', and each of the security interests granted in respect of equipment supplied subsequently was a 'transitional security interest'. Central is therefore able to enforce the ROT clauses notwithstanding the absence of registration.'
- The decision of the Court of Appeal is in effect that a signed pre-PPSA credit application and attached terms become a transitional security agreement when the first supply is made under them, thereby creating an ongoing and 'over-arching' agreement that can 'provide for' all future supplies that are subsequently made. This contract can be said to be 'in force' before the commencement of PPSA.
- In the early days of PPSA, and before the decision in Central Cleaning, some hire businesses and retention of title suppliers took the precautionary approach of making both a transitional and a non-transitional registration out of abundant caution even if they had pre-PPSA overarching terms and conditions agreed already. However, the sting in that approach was that a non-transitional registration attracted a registration fee and the amount could be significant for a business with a large customer base. Some businesses therefore decided only to make transitional registrations. In doing do they ran the gauntlet of section 337A of the Act. In simple terms this provides that a registration that states that the interest is transitional is ineffective to protect an interest that is in fact not-transitional.
- Certainly the Central Cleaning decision has been a good thing for those relying solely on transitional agreements and corresponding registrations to protect post-PPSA hires and other supplies. We think the Court of Appeal's reasoning is most tenable and properly reflects the legislation and the Memorandum. The Memorandum contains examples which are most supportive of the analysis and these are extracted and referred to in the decision.
- But how long will it be safe to rely on those (free) registrations? It is inevitable that suppliers will be amending their standard terms from time to time – for example to take account of changes to the law such as the new restrictions on unfair small business contracts. What happens if the standard terms have been amended postPPSA? We have encountered challenges by liquidators who assert that if there is a change to the standard terms then the security interest loses its transitional status because there is a 'new agreement'.
- If the agreement in place pre-PPSA provides for amendment (as typically it does – for example by notice to the customer) it is difficult to see how the analysis in the Central Cleaning case supports an attack. The Court in our view accepted the idea that the 'over-arching' contract could cover future supplies as long as it was activated by the first pre-PPSA supply.
- The case suggests to us that the contract can be varied whilst remaining on foot. The concept of an agreement 'providing for' hires does not seem to us to require that every contractual term of supply is known at the time of contract. If it did then the outcome in Central Cleaning would have been different. That in turn suggests to us that amendment does not negate the over-arching agreement.
- Certainly this is an area where care is needed. It is easy to imagine that over time some businesses may unwittingly 'ungrandfather' their interests – for example by writing to customers in a way that implies a whole new agreement is being entered into, rather than that an existing agreement is being entered into.
Transitional time bomb for migrated registrations – 31 January 2017
- PPSA commenced its substantive operation from 30 January 2012. To support implementation of the new system, the Act contains some complex transitional provisions. These provided for two key dates:
- 31 January 2014
- Unregistered transitional security interests were deemed perfected. Secured parties (like Central Cleaning in the case above) were able to take advantage of 'temporary perfection' and preserve the priority status of their transitional security interest by registering the interest on the PPS Register before the end of January 2014. Transitional security interests registered after that time lost the benefit of temporary perfection and risked losing priority of their security interest to another party with a higher priority ranking. As we have seen above in the Central Cleaning decision, the retention of title supplier there was able to point to a transitional security interest deemed effective and operative at the critical time when the insolvency occurred within the 24 months after PPSA commenced.
- 31 January 2017
- Security interests registered on certain Commonwealth, State and Territory registers were migrated to the PPS Register and did not (necessarily) need to be re-registered or rely on deemed perfection.
- However some of the registrations migrated to the PPSR are defective because they do not contain the information required by the Act at the time of their migration. The Personal Property Securities (Migrated Security Interest and Effective Registration) Determination 2011 (Determination) helps migrated registrations to remain effective, despite these defects. Migrated registrations were deemed effective despite defects.
- However the curative effect of the Determination was only until the migrated end time of the registration, or if the original registration does not have a migrated end time, until 31 January 2017. For registrations without a stated migrated end time the Determination will not assist secured parties after 31 January 2017 and any defects will not be able to be disregarded. The period allowed by the Determination was intended to give secured parties sufficient time (five years) to make an effective registration.
- The potential consequence of having a defective registration not remedied within that time is that the registration may be ineffective. The question that will then need to be answered is whether the defects are such that they make the registration ineffective. This is a case by case analysis. The defects may include that there is a missing or incorrect serial number where the registration is for serial number registrable goods such as a motor vehicle.
- One possible area of concern with migrated registrations which has been raised is that they do not comply with the PPSA grantor identification rules. For example, if a company gave a fixed and floating charge in 2009 in its capacity as trustee of a trust with an ABN, the migrated registration would not be linked to the ABN as the ASIC charges register only used the ACN identifier and took no account of any trust capacity. Whilst such a registration (ie only against ACN) would in our view clearly be ineffective if made now by a secured party, we do not see that it is a fatal flaw to a migrated registration. This follows from the grantor identification rules in the PPSA regulation12 . For a trustee whose details are included on a transitional register (eg the ASIC charges register) the first appropriate trustee details for PPSA identification purposes are the trustee details included on the transitional register.
- The problem of defective migration is generally speaking of no application to retention of title suppliers, consignment sellers and bailors and hire businesses as in the main, title-based deemed security forms such as hire, retention of title and bailments were not previously registrable and didn't migrate.
Doing the deal – searching and registering – what is acceptable practice?
How to register
- The questions of registering and searching are two sides of the same coin. Effectively, an intending secured party or purchaser/lessee needs to search the identifiers against which a valid registration can be made. The topic is in fact quite complex because the rules about how to identify the grantor for PPSA purposes are complex. For a full treatment see our article referenced above. As can be seen, it is not enough just to know how the registration would now be made, but how it could have been validly made or migrated.
- For example:
- a migrated PPSA registration coming from the ASIC charges register and made against a company ACN will be effective even if the grantor company is a trustee of a trust with an ABN as we have seen.
- a purchaser of a scissor lift needs to search against the collateral class 'motor vehicle' as well as 'other goods' because a valid registration of a security over that kind of equipment could have been made pre-PPSA in the motor vehicle class up until the change to the Regulation discussed above.
When is it OK to register?
- Section 161 of the Act provides that a security interest in personal property may be registered before or after:
- a security agreement is made covering that personal property; or
- a security interest attaches to the personal property.
- However, despite the ability of a person to make an advance registration in respect of personal property, section 151(1) of the Act limits the circumstances in which it is proper for them to do so. That section provides as follows:
"(1) A person must not apply to register a financing statement, or a financing change statement, that describes collateral, unless the person believes on reasonable grounds that the person described in the statement as the secured party is, or will13 become, a secured party in relation to the collateral (otherwise than by virtue of the registration itself)."
- The section goes on to impose penalties on individuals and corporations that make registrations in contravention of the section. There is a possibility of a claim for loss from the grantor14.
- Sections 151(2) and (3) provide some protection for a grantor against the possible adverse consequences of a party making an advance registration against them, by requiring the registrant of the financing statement to remove the registration within five business days if the nominated secured party does not in fact have a security interest from the grantor in respect of the collateral described in the registration, and there are no longer any reasonable grounds for the belief referred to in section 151(1). If a secured party refuses to remove the registration, a grantor may utilise the amendment demand process set out in Part 5.6 of the Act.
Statutory and general law liens – how are they affected by PPSA?
- Liens can entitle a creditor to hold goods 'hostage' until payment has been received for those goods. Many Australian jurisdictions have their own legislation regarding liens and many of those Acts continue in force following introduction of the PPSA. Liens are useful and valuable in terms of the rights and priority that they confer. In certain circumstances, holders of a statutory or general law lien can assert their lien in priority to secured creditors who hold a perfected security interest under the PPSA.
- Examples of a statutory lien include:
- an unpaid seller's lien under the Sale of Goods Act 1923 (NSW); and
- a warehouseman's lien under the Warehousemens' Liens Act 1935 (NSW).
- Examples of a general law lien include:
- a possessory lien claimed by, for example, a mechanic who carries out repairs to a motor vehicle and is entitled to maintain possession of that vehicle until full payment for the repairs have been made;
- a solicitor's lien which allows a solicitor to retain a client's documents until payment of all debts owed to the solicitor by the client;
- an equitable lien in favour of a purchaser who has paid instalments but not obtained title to property, or a vendor who has conveyed title but not been paid.
- Section 8(1)(b) and (c) of the PPSA expressly exclude statutory and general law liens respectively from the operation of the Act except in relation to section 73 of the PPSA15 (discussed in further detail below). However it is important to note that the exclusion of statutory liens under section 8(1)(b) does not apply if:
'the person who owns the property in which the interest is granted agrees to the interest'.
- Accordingly, it seems that if an owner expressly agrees to a statutory lien, the PPSA can apply to it. This however raises the question as to the status of a statutory lien under the PPSA if the parties have agreed to its creation. If the parties agree to the creation of a statutory lien over the relevant goods, and the PPSA thus applies to that statutory lien this means the interest may need to be perfected and have priority under the normal rules to be relied on.
- Although section 8(1) of the Act generally excludes liens from the operation of the Act, section 73 of the Act will apply to liens (provided certain requirements are met). Section 73(1) provides that a statutory or general law lien over goods has priority over all security interests in the same collateral if:
- the goods or services provided which gave rise to the lien were provided in the ordinary course of business; and
- the person who holds the lien provided those goods or services; and
- no other law provides for the priority of the lien and the security interest; and
- the holder of the lien did not know that the creation of the lien constitutes a breach of the security agreement that provides for the security interest.
- In the context of a statutory lien,16 if the State law giving rise to the lien:
- specifically declares that section 73(2) of the Act applies to statutory interests of that kind; and
- the statutory interest arises after the declaration comes into effect,
then priority is determined by the State law. By way of example, section 4A of the Storage Lien Act 1973 (Qld) expressly provides that the storer's lien on goods is a statutory interest to which section 73(2) of the PPSA applies and that has priority over all security interests in relation to the goods. Section 3(3) of the Warehousemen's Liens Act 1935 (NSW) similarly provides that section 73(2) of the PPSA applies to a warehousemen's lien.
- Section 73 could operate as follows on a general law lien:
Sam's Semis Transport Co finances its trucks through a facility provided by a finance company. The finance company has registered its security interest in the vehicles. The finance agreement states that Sam may not allow any other interests to arise in the trucks. Sam delivers one of the vehicles to Bill's Motors for some repairs but does not pay the repair cost. Bill is vaguely aware that some of Sam's vehicles could be 'on finance', but is not aware of the terms of any securities. Bill's repairer's lien over the trucks will have priority over the finance company's interest.
- Similarly, in the context of a statutory lien, section 73(2) could operate in conjunction with State law as follows:
ABC Pharmaceuticals acquires goods from Manufacturing Co. Those goods are subject to retention of title terms. Manufacturing Co registers its security interest in the stock and its terms of trade prohibit ABC Pharmaceuticals from creating, or permitting to be created, other interests in the goods. ABC Pharmaceuticals does not have sufficient storage facilities and so stores those goods with Joe's Storage Co for a fee. ABC Pharmaceuticals goes into liquidation. It has not paid for the goods acquired from Manufacturing Co, and has not paid the storage fees owing to Joe's Storage Co. Joe has a warehouseman's lien in respect of the goods arising under the Warehousemen's Liens Act.
- The provisions of the Warehousemens' Liens Act relevantly provide as follows:
Warehouseman shall mean a person lawfully engaged in the business of storing goods as a bailee for hire.
3 Declaration of warehousman's lien
- every warehouseman shall have a lien on goods deposited with him or her for storage...
- A warehouseman's lien over property has priority over any other interest in the property and may be enforced accordingly.
- Section 73(2) of the Personal Property Securities Act 2009 of the Commonwealth is declared to apply to a warehouseman's lien.
- Joe's warehouseman's lien will it seems have priority over Manufacturing Co's security interest. The state of Joe's knowledge does not seem to matter.
Accessions, processed or commingled goods and proceeds – does the security attach?
- This is an area where the PPSA has brought about a considerable strengthening in the rights of owners, sellers and lenders.
- Security interests in accessions to personal property are dealt with in Part 3.3 of the Act. Under the Act, an 'accession' means goods that are installed in, or affixed to, other goods, unless both the accession and the other goods are required or permitted by the regulations to be described by a serial number. The general rule is that a security interest in goods that become an accession to other goods continues in the accession17.
- The Act provides detailed provisions governing priority interests in accessions and obligations on a secured party as to their removal. The default priority rule is that a security interest in goods at the time when the goods become an accession has priority over a claim to the goods as an accession made by a person with an interest in the whole.
- However, there are exceptions relating to interests in the whole created after the accession is affixed and before the security interest in the accession is perfected. For example, a security interest arising in an accession after it is affixed will ordinarily be subordinate:
- to an existing interest in the other goods (unless, for example, the holder of the existing interest agrees otherwise); and
- to a later interest in the other goods that arises before the interest in the accession is perfected.
Processed or commingled goods
- Security interests in processed or commingled goods are dealt with in Part 3.4 of the Act. The Act also allows for the continuation or tracing of a security interest into a product or mass.
- The general rule is that a security interest in goods that subsequently become part of a product or mass continues in the product or mass if the goods are so manufactured, processed, assembled or commingled that their identity is lost in the product or mass. The identity of goods that are manufactured, processed, assembled or commingled is considered lost if a product or mass if it is not commercially practical to restore the goods to their original state.
- For the purposes of section 55 of the Act (default priority rules), perfection of a security interest in goods that subsequently become part of a product or mass is to be treated as perfection of the security interest in the product or mass.
- Any priority that a security interest continuing in the product or mass has over another security interest in the same product or mass is limited to the value of the goods on the day on which they became part of the product or mass.
- The default priority rules in relation to processed or commingled goods are set out in section 102 which generally provides as follows:
- a perfected security interest continuing in a product or mass has priority over an unperfected security interest continuing in the same product or mass;
- if there is more than one perfected security interest continuing in the same product or mass, each perfected security interest is entitled to share in the product or mass according to the ratio that the obligation secured by the perfected security interest bears to the sum of the obligations secured by all perfected security interests in that product or mass;
- if there is more than one unperfected security interest continuing in the same product or mass, each unperfected security interest is entitled to share in the product or mass according to the ratio that the obligation secured by the unperfected security interest bears to the sum of the obligations secured by all unperfected security interests in the same product or mass.
- Notwithstanding the default priority rules noted above, a perfected purchase money security interest (PMSI) in goods that continues in the product or mass has priority over:
- a non-PMSI in the goods that continues in the product or mass; and
- a non-PMSI in the product or mass given by the same grantor.
- If collateral gives rise to 'proceeds' (whether arising from a dealing with the collateral or otherwise), the security interest will attach to the proceeds of that collateral unless the security agreement provides otherwise18 . The security interest also continues in the collateral (although subject to the extinguishment rules).
- 'Proceeds' is extensively defined in section 31 of the Act, and means identifiable or traceable personal property of the types that include:
- personal property derived directly or indirectly from a dealing with the collateral;
- a right to an insurance payment or other payment as indemnity or compensation for loss of, or damage to, the collateral;
- if the collateral is intellectual property, in addition to any other proceeds, the right of a licensor of the property to receive payments under any licence agreement in relation to the collateral.
- Under section 32(5) for the purpose of the priority rules, the time of perfection of the original security interest is also the time that the interest in the proceeds is deemed perfected. This means that the security interest in proceeds should have the same priority as the original security interest.
- However one common exception to this is if the grantor has given security over its accounts (for example to a factoring company) and that other secured party has given a notice under section 64, it will have priority over the accounts and proceeds of them. Section 64 was necessary as otherwise the supplier of goods on retention of title could use the proceeds provisions in the PPSA to trump receivables financiers in respect of receivables arising from the sale of inventory.
- The Act's rights to proceeds, accessions and processed and commingled goods enhance the return to financiers and retention of title suppliers and hire businesses, in particular in customer insolvencies as tracing into proceeds, other goods or a product or mass was problematic to varying degrees under the previous law. That is not to say that the issues are straightforward. For example, the problem typically encountered by a secured party will be that it needs to identify that its collateral gave rise to given proceeds. It then needs to demonstrate that the proceeds are still traceable, usually meaning still in the hands of the insolvent customer. There will often be difficult factual issues of identification and forensic accounting. Insolvency practitioners, who often look to available cash, debtors and stock to fund their administrations are often not exactly falling over themselves to assist secured parties in these circumstances!
- The general law has developed a substantial body of case law regarding the extent to which a person can trace an interest in their property into proceeds, or into other property that is substituted for their property. Tracing at general law is principally an equitable remedy. The law is generally understood to require a fiduciary relationship as a pre-condition to tracing. The PPSA does not require a fiduciary relationship19 , and proceeds are traceable whether or not there is a fiduciary relationship between the person who has a security interest in proceeds and the person who has rights in or has dealt with them. It remains to be seen how the Courts will apply tracing principles to proceeds under the PPSA.
Update on the reforms recommended by the Whittaker Report
- The Government is still considering the report of the Whittaker review into the PPSA. The Report was tabled in March 2015 and contained 394 recommendations - so an account of those is obviously well beyond this paper. Some of the ones we think are worth noting here are as follows:
- the register itself would be greatly simplified as the Report acknowledges that many of the questions it asks are unnecessary and confusing.
- the PMSI box would no longer be part of the register.
- section 588FL of the Corporations Act and its associated provisions would be repealed.
- registrations would no longer be made against trust ABNs.
- indefinite leases would no longer be PPS leases from inception.
- that the definition of 'PPS lease' would no longer refer to 'bailments'.
- the vesting rule in section 267 would no longer apply to PPS lease security interests. However the Report does not propose to remove the priority rules from PPS leases. Accordingly owners will still be exposed to loss of their property to banks and other general security holders where there happens to be a security with better priority.
1 The word used by Sifris J in
Carrafa & Others v Doka Formwork Pty
Ltd  VSC 570 mentioned below.
2 Personal Property Securities Amendment (Deregulatory Measures) Act 2015
3 For example, say, a hire purchase agreement over an 11 month term.
4 Serial number registration is mandatory for certain consumer property
5 Personal Property Securities Regulations 2010 – regulation 1.7
6 Review of the Personal Property Securities Act 2009 – Final Report. Being the report of the appointed reviewer Mr Bruce Whittaker. It is available on the Attorney-General's website. See further below.
7 In the matter of Accolade Wines Australia Limited and other companies  NSWSC 1023
8 See s 164(1)(b) and s 165(c)
9 s 308
10 s 307
11 s 10
12 Refer to the hierarchy of grantor identifiers in Schedule 1 to the Personal Property Securities Regulation 2010
13 The Whittaker Report recommends this threshold be reduced essentially so that it is enough if the secured party may have the interest.
14 s271 for example could be one source of this.
16 see s73(2)
17 s 88
18 s 32
19 s 31(2)
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.