Be Sure You Are Making The Most Of The PPSA
In the previous review we discussed hazards inherent in the Security of Payment Legislation for an already stressed building industry, and for companies with businesses associated with the industry.
The South Australian legislation is based essentially on law already in effect interstate, and while we reported problems with it, especially where they were related to misuse of the Act by some building contractors, it can also be said that over all it’s achieving what it’s meant to achieve.
The legislative concept of a pay-first-and-argue-about- it-later regime now operating interstate is helping to stabilise companies’ cash flows and provide better job security for their employees.
No longer will big contractors be able to ignore indefinitely small suppliers’ claims for payments in the almost certain knowledge that such creditors would find it uneconomic, even impossible, to fund protracted court battles.
Furthermore larger builders and contractors will now have to develop better cash flow control and relationships, not only with banks but with all business associates.
Obvious need for change
Existing industry practices in South Australia have placed severe financial pressures on small to medium building companies. For example Alpine Constructions Pty Ltd directors cited as a primary cause of the company’s financial collapse “a major unresolved dispute with a client”. Alas the interstate legislation adapted for use here and explained in our previous building industry Review, could, had it been law then, have brought Alpine’s problem to a head in no more than 15 days, and would likely have resolved it shortly thereafter by adjudication.
Now to the new PPSR
The new Personal Property Securities Register (PPSR) allows suppliers to record – under PPSA provisions – “financing statements” applicable to any customers they wish. An irksome administrative chore, it’s nonetheless not without an upside.
Traditionally suppliers have sold to customers on the understanding that they retain ownership of the goods until they’ve been paid for, this arrangement being specified in so-called Romalpa clauses (RoTs) included in a supplier’s conditions of sale.
Under law existing prior to 30 January 2012, if a customer received goods and failed to pay for them, a well-drafted RoT clause ensured the supplier could recover the goods.
Obsolete protection
But this traditional system of protection for suppliers has been rendered obsolete by new PPSA legislation that significantly modifies priority rights of creditors relying on RoT clauses, by introducing a new registration system for security interest.
In order to protect this interest, a supplier who once relied on RoTs alone, must now register goods and their conditions of sale on the newly created PPSR in order to acquire a super priority in these goods that’s called a “purchase money security interest (PMSI)”.
This, for example, means that if a purchaser grants security to a bank, and later acquires goods subject to a registered RoT, the supplier’s priority to those goods overrides the bank’s, even though the bank’s security of interest was registered before the supplier’s PROVIDED they register their Purchase Money Security interest!
Common law superseded
Common law has it that ownership stays with the seller, so that a third party has no entitlement to seek, let alone attain, security over goods that have been sold subject to RoTs.
PPSA envisages that RoT goods may be absorbed by a third party even if such a purchaser doesn’t actually own the goods.
If a creditor’s RoT security interest is not registered as a PMSI on the PPSR within a specified time frame and in writing, the creditor may never receive a cent from goods sold. Priority over the goods could be swept aside by other secured creditors of the purchaser.
In short, suppliers who now don’t properly register their interest, risk being treated as unsecured creditors.
Timing is vital
Procrastinate and there are circumstances where other creditors who register RoT goods ahead of you, will have a better chance of successfully claiming ownership. What’s more, super priority can apply only when suppliers register interest before purchasers receive goods, and such registration states the supplier’s interest is a PMSI. In long-standing relationships begun before introduction of the PPSA, it’s vital a supplier’s protective paperwork is completed before the customer receives that first delivery after the new registration legislation is gazetted.
It’s also important to understand that if a purchaser goes into administration or becomes bankrupt, a supplier’s unregistered goods will vest in the purchaser. The supplier’s security interest is then lost beyond recovery.
Procedure is critical
And finally: a seller may be able to seize goods sold on RoT terms when a buyer defaults on payment, but won’t be able to retain ownership unless required PPSA procedures are undertaken. These include notifying a purchaser and any other secured party with a higher priority security interest in the goods. A person or entity entitled to be notified might object to retention, in which case the seller must sell the goods and account for proceeds of the sale.
If you’re a RoT supplier your rights will change under PPSA reform. Indeed, you could find you’ve lost all rights to property you thought was yours.
If you’d like us to help you make the most of the new PPSA legislation, don’t hesitate to contact us.
