22 minute read
Data – it’s the new gold
fatal. Once you are satisfied that the registrations are correct, PPSR 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.
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.
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.
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 ie 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.
*Lynne Walton MICM Founder and CEO Accessii Group Pty Ltd T: 1300 831 331 www.accessii.com.au
DISCLAIMER Accessii 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. Accessii recommends that suitably qualified legal advisors be engaged before readers take or refrain from taking any action in relation to its contents.
PPSR Registration vs Credit Insurance
By Kirk Cheesman MICM*
Kirk Cheesman MICM
I’m finding myself increasingly being asked to address questions along the lines of:
If I have a PMSI registered on the
and, its alternative: If I have credit insurance in place, do I really need to worry about registering my PMSI?
In return for payment of premium, credit insurance can provide trade credit suppliers with protection of around 90% of any loss suffered should their buyer go insolvent, or otherwise default on their payment obligations.
However, if you have sold your goods subject to a Retention of Title clause and your customer collapses before they can make payment, a timely $6 registration on the PPSR of that ROT will ensure the return of your goods (or their cash equivalent).
If this is the case, do you really need to pay substantially more in credit insurance premiums for bad debt protection?
Unfortunately, registration of a ROT will NOT ensure the return of your goods (or their cash equivalent). Registration might result in the return of goods, and registration certainly won’t hurt recovery prospects, but it isn’t a miracle cure. Goods that remain unpaid may have been on-sold, consumed or ‘mislaid’ by the time a liquidator is appointed and what goods can be recovered may no longer be worth their original invoice value, either through use, damage, or merely by the passage of time.
Because the PPSA focuses on property being used as collateral in a security interest, its effectiveness is wholly dependent upon the continued presence of that particular property and the value of the property continuing to be sufficient to cover the value of the outstanding debt for which it acts as security.
Credit insurance, however, focuses on what is actually owed, what has been invoiced and what remains outstanding. It doesn’t concern itself with any fluctuating value relating to the goods supplied nor with their continued presence post-delivery, only with what is owed under the invoices issued. ➤
If someone goes bust owing you money, a credit insurance policy will, invariably, pay you the lion’s share of your loss, regardless of what happened to the goods you supplied.
Does this mean that credit insurance is the miracle cure and PPSR registration of ROT/PMSI rights is not necessary?
Well…
While I’m an enthusiastic advocate for trade credit insurance, it is nonsense to suggest that other risk mitigation strategies should be ignored merely because there’s an insurance policy in place.
You wouldn’t decide against having window locks in your house just because you have a home & contents insurance policy, nor would you be casual with your car’s security because it’s insured against theft. Not only do credit insurers require that the policyholder (the ‘supplier’ in our context) maintain a financial interest in the underlying transaction (the supplier will usually have to bear at least 10% of any loss), they also set their premium rates based (in some part) on the supplier’s history of bad debts and the claims they’ve already had to pay.
Just as a car insurer will take note of whether the insured vehicle is garaged overnight or parked on the street, so a credit insurer will look at the extent to which suppliers mitigate the potential for losses by including security rights in their trading terms and perfecting those rights by registration on the PPSR.
Who would a credit insurer be happier with as a policyholder? A supplier who suffers a loss but is able to recover half its value by exercising their PPSR registered security rights, or a supplier who is unable to offset any of their loss because they weren’t prepared to spend $6 on a PPSR registration?
While both suppliers will get their claims paid, one will likely find their premium rates ‘adjusted’ far more than the other.
So while a credit insurance policy is more likely to keep your business afloat when beset by bad debts, a PPSR registration will likely help keep the cost of that insurance policy as low as possible.
*Kirk Cheesman MICM Group Managing Director National Credit Insurance Brokers E: kirk.cheesman@nci.com.au T: 1300 654 500 www.nci.com.au
Personal property securities Register (PPSR)
What is Personal Property Securities Act
The Personal Property Securities Act 2009 came into effect from January 2012.
The purpose by the Commonwealth government was to achieve:
1. A national regime with a single register of personal property security interests to comprehensively record security interests granted over property owned by natural persons (individuals & sole traders), and nonnatural persons (companies, trusts). 2. To give legal certainty for those taking security over, or buying personal property by way of clear priority, enforcement and extinguishment rules. 3. A focus on transactions that secure payment or performance of an obligation, without regard to the form of the transaction (e.g. finance lease or ROT arrangement).
or
The asset offered as security (vehicle, aircraft, vessel, crops, wool, book debts for finance arrangements, contractual rights or intellectual property). 4. Allowing registration of arrangements where the security provider has use of an asset, for example by way of lease or commercial consignment, even though legal ownership remains with the secured party. 5. Protecting consumers who buy valuable assets such as cars or boats.
This act covers the secured credit arrangements where:
1. Retention of title arrangements where a purchaser has possession but does not have ownership from the seller (until the purchase price is paid). 2. Finance leases where an asset is leased for payments to cover its costs and the lessee may be able to acquire title to the asset at the end of the lease. 3. Interest of debtor financiers (Factors or Invoice
Discounters). 4. Consignment stock. 5. Leases for a term exceeding 2 years (for contracts after May 2017). Role of secured credit in our economy Consumer If the lender takes security over some of the borrowers’ property to secure the borrowers obligations, the lenders position is quite improved. To take security, the lender must register their ‘interest’ in the borrowers’ goods/property.
Commercial If you are leasing or selling goods on ‘retention of title’ or on consignment, you would secure your interest in these goods by obtaining a Purchase Money Security Interest (PMSI). This will enable you to have super priority over the goods in question thereby securing your position with the (grantor) debtor.
Is the PPSR relevant to my business? Every day you may be putting your business at risk when buying, selling, leasing or hiring out goods, or selling valuable goods on consignment. Ask yourself … l do the goods you are buying have money owing on them? l will you get your goods or money back if your customer goes broke? l you can’t avoid these common transactions, but you can protect yourself.
Want to learn more?
Undertake a personal properties security trainer led group session with AICM where we cover off on the vital points of PPS.
Topics covered include:
l Why use and register PPSA/PPSR l What is the language of PPS l Does my paperwork allow me to use the register l How to obtain perfection of your registration l When should I release my registration.
Takeaways:
l Complete a registration document to perfection l Searching the register l How to release a registration l How to renew registrations.
Common mistakes in PPSR registrations
By Simon Read*
Simon Read
Having performed over a thousand PPS Assurance Reviews for our clients, we’ve seen just about every PPS registration error that can be made. In fact, over 95% of the reviews we’ve performed have uncovered some level of administrative errors.
Finding out your PPS registration fails to comply with the rigid requirements of the PPSA can be an expensive experience. A rejection of your claim will see you relegated to the ranks of an unsecured creditor, and we know what that means – little, if any, debt recovery.
If you’re still using the Government’s PPSR registration platform, you’ll be aware of its complexity. The former Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, recently released her research citing the need for a major overhaul of the PPSR process. It’s certainly not just the fault of the Government’s PPS Registry portal. The PPSA is a tough piece of legislation using a language that is foreign to many.
Knowing the common registration errors will help you understand how best to register a security interest on the PPSR. The following guide is just that, a guide, and will assist your understanding of the process when performing PPSR registrations.
What to consider when registering on the PPSR
So, how hard can it be? Well, it turns out there are at least 11 variables involved in each registration. Keep reading, we’ll explain all 11 variables and how they relate to your security interest.
Secured Party Group
Have you included the Trust and Trustee if you’re a trading trust? For example, if a service provider performing PPSR registrations for their client uses their own name as the secured party group and their client’s names as the grantors, all their registrations will be invalid.
Collateral Class
Make sure you select the appropriate collateral class. There are 28 of them but only a handful are used regularly. We often see motor vehicles incorrectly registered as Other Goods with their serial numbers recorded in the Collateral Description.
Collateral Type
Have you selected the correct collateral type? Consumer registrations are of no help if you have a commercial relationship with your customer.
Collateral Description
How’s your collateral description? The broader the better, with at least some reference to the nature of your collateral. Whilst a collateral description is not necessarily mandatory, it makes a lot of sense to provide a description. Just make sure it’s correct and broad enough to cover any future changes in the nature of the goods you supply.
Purchase Money Security Interest (PMSI)
Is your security a Purchase Money Security Interest? Failing to elect PMSI is one of the most common registration errors. This can undermine the effectiveness of your registration and potentially render it useless. In rare circumstances, a Secured Party won’t have PMSI, however, the vast majority do. This is a critical election and care is required.
Inventory
Will your goods/equipment be treated by your customer as inventory? Essentially, if your customer consumes, on-sells or on-hires your goods or equipment, they will treat it as inventory. Most of the businesses we speak with have no idea what this question means.
Proceeds
Are you going to claim proceeds? It is a default election in the PPSR Financing Statement, so changing this election makes little sense and amending the standard proceeds description reduces its effectiveness.
Subordinated
If you haven’t subordinated your security, why elect subordinated? Don’t give insolvency practitioners any opening to argue the validity of your registration. ➤
The same goes for the control election, if you don’t control your collateral (it’s unlikely you will), don’t make the election.
Transitional
It is common to find old Transitional registrations still being relied upon to protect security. Transitional registrations are only appropriate where your current security agreement with your Grantor (for example, your signed terms of trade) existed at 30 January 2012 (the commencement of the PPSA). If you’ve reissued or amended your terms of trade since February 2012 (which is highly likely), a transitional PPS registration is unlikely to be appropriate.
Grantor Identification
Identifying your customer is critical but doing so in accordance with the PPSA and its regulations is not so easy. Grantor identification errors are very common and will invalidate a PPSR registration.
Identifying a grantor by its ABN is still a common issue and is invalid if the grantor also has an ACN. Identifying a sole trader by its ABN is also an issue as they must be registered by their full name and date of birth.
There’s little point in only registering against the trustee if the grantor is a trust. The failure to adequately identify the grantor is also an indicator that users of the PPSR are not aware of the court’s decisions on many of these matters.
It’s clear that human error is the biggest contributor to registration mistakes, particularly when using the Government’s PPSR register. Having to perform repetitive registrations, answering the same questions over and over and going through page after page of the Financing Statement is a recipe for error.
In our experience, there is simply not enough support provided to those tasked with performing the PPSR registrations. The majority do not have sufficient training, support or knowledge to adequately carry out their role, yet they will be the ones in the ‘firing line’ if a PPSR registration fails.
If you want to ensure your registrations are compliant with the PPSA, seek the advice of a specialist, undertake an Assurance Review and use alternative PPSR registration software.
Managing over 400 Secured Party Groups has taught us a lot, particularly the benefit of PPSR registration and data management software. Our recent move to PPSR Cloud has been a great success.
PPSR Cloud software is available to anyone and allows you to perform registrations, amendments, renewals and searches. It’s simple, safe and accurate.
*Simon Read Founder and Director. PPSAdvisory E: Simon.read@ppsadvisory.com.au www.ppsadvisory.com.au
The information provided in this article is general in nature. We are not lawyers and this is not legal advice.
The High Court widens the permitted use of public examinations
Fiona Reynolds MICM
Lucy Tindal
By Fiona Reynolds MICM and Lucy Tindal*
TurkAlert Published 22.03.2022
On 16 February 2022 the HCA delivered a significant decision in Walton & Anor v ACN 004 410 833 Ltd (Formerly Arrium Limited) (In Liquidation) & Ors (HCA 2022) expanding the scope in which an examination summons can be issued to an officer of a corporation in external administration about its examinable affairs pursuant to s596A of the Corporations Act
2001 (the Act).
Key Takeaways
l By a 3:2 majority, the HCA held that shareholders seeking examination of a company officer to determine whether a claim
might be brought against the corporation in administration or its officers for the purpose of enforcing the law is a legitimate purpose, even if that claim is for the benefit of only some of a company’s shareholders. l The decision departs from a long line of authority which limited the purpose to examine to that which benefited the company, its creditors or contributories and is an important win for eligible applicants who may have a personal claim against the corporation, or its former officers and advisors. l The HCA’s broad interpretation of s596A opens the doors to ➤
“The HCA’s broad interpretation of s596A opens the doors to prospective litigants who intend to seek recourse for a personal right of recovery for corporate wrongdoings and want to use public examinations as a way to decide whether to pursue that proceeding.” “The Court concluded that the prevailing purpose of s596A was to address the administration of a corporation or the enforcement of the law concerning the corporation and its officers in public dealings, including the identification and prosecution of any corporate misfeasance.”
prospective litigants who intend to seek recourse for a personal right of recovery for corporate wrongdoings and want to use public examinations as a way to decide whether to pursue that proceeding.
Section 596A
Section 596A of the Act confers power on the Court to summon a person for examination about a corporation’s examinable affairs if: 1. an ‘eligible applicant’ applies for the issue of that summons (which includes a person authorised in writing by ASIC to make the relevant application); and 2. the proposed examinee is, or was, an officer or provisional liquidator of the corporation.
If these two criteria are met the Court must issue the summons. However, if it is found that the applicant has an improper purpose in seeking the order, or if the order otherwise amounts to an abuse of process, then the summons may be set aside.1
Brief Facts
Arrium Limited (Arrium) was a public listed mining company. In 2014 Arrium published an Information Memorandum, including information about its financial records, as part of a capital raising exercise. Subsequently, the value of Arrium’s mining operations decreased and in April 2016 Arrium was placed into administration. In June 2019 liquidators were appointed.
The appellants were a group of former shareholders whom had invested in Arrium as a result of the capital raising.
Following Arrium’s liquidation, the appellants sought from ASIC, and were granted, written authority to apply to the NSWSC for an order under s596A of the Act to examine a former director of Arrium and its auditor. The purpose of the examination was to investigate alleged misrepresentations contained in the Information Memorandum about Arrium’s financial status. The shareholders acknowledged that the result of those investigations could lead to them bringing a class-action against Arrium’s former director and auditors.
A Registrar of the NSWSC granted the summons. Arrium applied to a Judge of the NSWSC to have the summons stayed or set aside as an abuse of process and the summons was stayed on condition that Arrium file an application for leave to appeal. Arrium successfully appealed to the NSWCA who found that the predominant purpose of the summons for examination was not to confer a commercial benefit on Arrium, its creditors or contributories, but to investigate and pursue a private benefit for a limited group of shareholders. It was therefore issued for a purpose foreign to the statutory purpose conferred by s596A and the orders for examination were discharged.
The HCA overturned the NSWCA’s decision.
Judgment
The HCA’s decision rested on the statutory purposes of an examination under s596A and whether the applicants’ predominant purpose was inconsistent with the express or implied scope of the Court’s powers under s596A. If so, it was an abuse of process and should not be allowed.
The HCA considered the statutory context and the history of the provisions concerning the powers to examine and determined that past decisions made in relation to s596A’s predecessors were of limited assistance in determining the scope and purpose of the current s596A.
In their joint judgment, Edelman and Steward JJ held that the statutory purpose of s596A has widened from what was historically confined by reference to the benefit to the company, its creditors or its contributories. The purpose and concern of s596A has broadened over time and
‘that expanded concern is with the administration or enforcement of the law concerning public dealings of the corporation in external administration and its officers.
The only vestige that remains of the old approach to the purpose that might have confined the predecessors to s596A is the public aspect of the purpose of the power’ at [169].
The Court concluded that the prevailing purpose of s596A was to address the administration of a corporation or the enforcement of the law concerning the corporation and its officers in public dealings, including the identification and prosecution of any corporate misfeasance. Further, that issuing a summons for the purpose of enforcing or ensuring compliance with the Act and protecting shareholders and/or creditors from corporate misconduct is a means of enforcing the law and serves the public interest. The underlying purpose of the applicants’ summons was therefore legitimate.
Implications
l The scope to seek examination of a former officer of a company has substantially widened. l Eligible persons may undertake a public examination as a form of preliminary discovery to help with a personal claim so long as it serves the public interest of law enforcement and compliance with the law concerning the public dealings of the corporation and its officers. l Public examinations do not have to be directly beneficial to the company in administration, its creditors or contributories. A claim for the benefit of some shareholders is consistent with the public interest in the proper external administration of a company.
*Fiona Reynolds MICM Partner, Turks T: 02 8257 5751 M: 0417 215 703 E: Fiona.Reynolds@turkslegal.com.au
*Lucy Tindal Senior Associate, Turks T: 02 8257 5714 M: 0424 136 361 E: Lucy.Tindal@turkslegal.com.au
FOOTNOTES: 1 Kimberley Diamonds Ltd v
Arnautovic (FCAFC 2017); (2017) 252 FCR 244 at [30]
