Avoid problems with s64 of the PPSA
Retention of title clauses (ROT clauses) are common in many contracts governing the sale of goods- whether online or otherwise. However business owners frequently misunderstand how they can be affected by the Personal Property Securities Act.
Whilst they appreciate that their ROT clauses creates a “purchase money security interest” (PMSI) under section 14, which requires “perfection” under section 21, they frequently find that section 64 can destroy their efforts to gain a leg-up in circumstances where their customer goes into liquidation.
Leigh Adams Business Lawyers drafts provisions that can help overcome the impact of section 64. We have helped many small/medium business owners retain their inventory where their own customers have gone bust.
By virtue of section 32 of the PPSA, on the subsequent sale of the supplier’s goods by the supplier’s customer, the security interest that the supplier has in the goods attaches to the proceeds of sale of the goods, unless the security agreement provides otherwise.
Section 64 deals with a situation which can occur after a business has been trading for some time. Say a customer has been acquiring its stock from its supplier on an ROT basis and the customer finds itself strapped for cash due to a delay in payment by its own creditors.
The customer may want to factor its debts to assist in cash flow. Section 64 says that providing 15 business days’ notice (a s64 notice) is given by the factor (the debt financier) to the ROT supplier, the debt financier’s perfected security interest in the account (i.e. book debts) where the account relates to proceeds of inventory, will prevail against the perfected security interest of the ROT supplier.
Section 64 recognises that as far as the PMSI holder/ROT supplier is concerned, the debt financier has stepped into the shoes of the supplier’s customer with respect to payment of the account by the ultimate purchaser of the goods.
This concept is reflected in the fact that the debt financier takes the assignment of the book debts as original collateral whereas the ROT supplier (PMSI security holder) only has a security interest in the account as proceeds of sale of inventory.
One of the problems with section 64 of the PPSA is that it does not affect the priority position between the customer’s debt financier and the customer’s general financier (the customer’s banker), which typically holds a security interest over all the assets of the customer.
So the customer’s general financier takes priority over the customer’s factor/debt financier who takes priority over the ROT supplier.
Just diverting for a moment: the ROT supplier will also take priority over the customer’s general financier. Confused? Give Leigh Adams a call on 02 9964 0022 for an explanation.
Moving back on track: the priority enjoyed by the customer’s general financier as against the customer’s factor/debt financier means that the debt financier will typically require a priority deed or subordination agreement to make its security interest take priority over the general financier.
What is happening in the marketplace is that lenders of last resort are purporting to serve s64 notices in a misguided effort to put pressure on general financiers to execute subordination agreements. In some cases, the general financiers have taken the bait and inadvertently executed documents adversely affecting their priority position.
How can an ROT financier ensure that their position is not adversely affected by their customer later factoring the customer’s debts?
The simple answer is for the ROT financier to state in their terms and conditions of sale that the security interest extends to the customers present and after acquired accounts as original collateral. Providing the ROT supplier registers first in time, section 55(4) PPSA will apply to give him priority over the debt financier.
Many debt financiers are alert to the need to get priority over their customer’s general financier, but very few think of looking at the ROT financier’s terms and conditions to consider whether they should also obtain a subordination agreement with regard to the ROT supplier’s security interest. They just rely on s64 not realising that it can be circumvented with good drafting.
Failure to deal with section 64 of the PPSA in a business’s terms of trade can have devastating financial consequences for the business. It is when no section 64 problems are on the horizon, that the terms of trade should be reviewed and revised where necessary.
It is far better to avoid the problem than have to manage it. However, if you are reading this article and your business already has a section 64 problem, then it may be not too late to adopt an appropriate “damage control” policy.
Leigh Adams is an Accredited Specialist in Business Law and his practice has a particular focus in this area. Call him for assistance today on 02 9964 0022 or email firstname.lastname@example.org.