This article was first published in the LexisNexis Australian Banking & Finance Law Bulletin, Volume 38 No 7 (September 2022) at p. 91.
Section 64 of the Australian Personal Property Securities Act 2009 (Cth)(PPSA) reflects the importance of receivables financing to the Australian economy. Amongst other things, section 64 gives a receivables financier a mechanism to obtain priority over a supplier’s prior or later-registered purchase money security interest (PMSI) over goods. Absent activation of the section 64 mechanism, that supplier’s PMSI would otherwise extend to the proceeds of sale of those goods in priority to the receivable financier’s own security over those proceeds. Seven years ago, Bruce Whittaker made 394 recommendations to the Federal Government to improve the operation of the PPSA (PPSA Review), including a handful of recommendations in relation to section 64 of the PPSA. It is unclear why the recommendations of the PPSA Review have not yet been implemented. We hope that the new Attorney-General appointed after the change in the Federal Government in May 2022 will implement those recommendations, including those relating to section 64, which will in our view improve the operation of the PPSA.
This article outlines:
- the section 64 mechanism and how it can be used by a receivables financier;
- what a supplier of goods subject to retention of title can do to avoid a receivables financier from taking priority over the supplier – as regards receivables that are the proceeds of inventory – by issuing a section 64 notice; and
- changes to section 64 proposed in the PPSA Review.
The commercial context
A supplier of goods on a retention of title basis has a security interest against the recipient of those goods. The supplier would usually perfect its PPSA security interest by making a registration on the personal property securities register (PPSR) against the recipient. The supplier’s registration would usually cover the goods supplied by it to the recipient. Further, by the operation of the PPSA and the registration processes under the PPSA, the supplier’s registration would almost invariably extend to the “proceeds” of those goods. “Proceeds” includes any receivable arising from the recipient’s on-sale of the goods to a third party.
Section 64 sets out a mechanism for a receivables financier providing finance to the recipient of inventory (goods) in reliance on holding security over the receivable generated by the recipient’s sale of those goods to gain priority over a purchase money security interest (PMSIs) perfected by the supplier of those goods against the recipient. This would be the case regardless of whether the PMSI was perfected by registration before or after the receivables financier registered its own security interest over the proceeds of sale of inventory supplied to the recipient by the supplier. A receivables financier can use that mechanism so that – as against a supplier of goods to a recipient – the receivables financier obtains a priority security interest over the receivable arising from a recipient’s on-sale of those goods if they are inventory.
A receivables financiers’ perspective
If the procedures under sections 64(1)(a) or 61(1)(b) of the PPSA are followed:
- a non-PMSI;
- taken for new value;
- in an account as original collateral; and
- that is perfected by registration,
is able to take priority over:
- a perfected PMSI;
- granted by the same grantor;
- over the account as proceeds of inventory.
We will consider each of these concepts in turn.
- A non-PMSI: To take the benefit of section 64, the security interest taken by the receivables financier must not be a PMSI. This means that the security interest taken it must not come within the definition of any type of security interest that is a PMSI under section 14 of the PPSA. The main types of security interest that are PMSIs are:
- a security interest taken in collateral, to the extent it secures all or part of its purchase price;
- a security interest taken in collateral by a person who gives value for the purpose of enabling the grantor to acquire rights in the collateral, to the extent that the value is applied to acquire those rights;
- the interest of a lessor or bailor of goods under a PPS lease; or
- the interest of a consignor who delivers goods to a consignee under a commercial consignment.
However, a security interest falling within one of the 4 categories specified above will not be a PMSI in certain circumstances. For example, such a security interest will not be a PMSI if it is an interest acquired under a transaction of sale and lease back to the seller, or a security interest in collateral that (at the time the interest attaches to the collateral) the grantor intends to use predominantly for personal, domestic or household purposes (but a security interest in the latter category will be a PMSI if the collateral is of a kind that is required or permitted by the PPSA regulations to be described by serial number – e.g. motor vehicles and watercraft).
- Taken for new value: “New value” means “value other than value provided to reduce or discharge an earlier debt or liability owed to the person providing the value.” This would for example mean that the receivables financier must purchase the receivable – i.e. the “account” – for a purchase price under an arrangement which is not subject to set-off on account of prior obligations. This is because any entitlement of a receivables financier to set-off its obligation to pay the purchase price for a receivable against prior obligations of the recipient of the goods would mean that the receivables financier’s security interest is not “taken for new value” for the purposes of section 64.
- In an account as original collateral: the security must be over the “account” itself. That is, the security interest should not be over some other collateral (e.g. goods) and extend to the account by the operation of sections 31 and 32 of the PPSA. The definition of “account” will cover the monetary obligation of a buyer to pay goods sold to the buyer. As a result, it will cover the receivable arising when a recipient of goods from a PMSI supplier on-sells those goods to a third party. A receivables financier who purchases the receivable referenced above will have a “deemed” security interest as the transferee under the transfer of an account, whether or not its security interest, in substance, secures the payment or performance of an obligation. In addition, the recipient will typically grant the receivables financier a security interest over other personal property of the recipient, including “accounts” owned by the recipient which have not been purchased by the receivables financier. That security interest will be taken by the receivables financier to secure the payment or performance of the recipient’s obligations to the receivables financier.
- Perfected by registration: To take the benefit of section 64, a receivables financier’s security interest must be perfected by registration. That is, it cannot be perfected by some other method such as taking control or possession of the collateral.
If the four requirements set out above are met in relation to a receivables financier’s security interest over an account, it can use the section 64 mechanisms (explained below) to take priority over:
- a perfected PMSI (this means that the receivables financier cannot use section 64 to take priority over a supplier’s security interest that is not a PMSI);
- granted by the same grantor (this means that the grantor who granted the security interest to the supplier of the goods must be one and the same as the grantor who granted the security interest over the receivable to the receivables financier – this may be problematic in some instances where goods are procured by one member of a company group but, following an intra-group transfer, are sold by another member of that company group); and
- the account as proceeds of inventory. This means that the section 64 procedure won’t regulate any priority contest where the recipient has purchased something other than inventory from the supplier. There is a specific definition of “inventory” in the PPSA that is relevant here. Broadly, it covers any personal property that is held by the recipient in the course or furtherance, to any degree, of an enterprise for which it has been allocated an ABN, where the personal property is held by the recipient for sale or lease, or to be provided under a contract for services, or as raw materials or as work in progress, or to be held, used or consumed as materials.
Obtaining section 64 priority
There are two ways in which a receivables financier can obtain priority under section 64.
First, it will obtain priority over a PMSI that is registered after the receivables financier has registered its security interest over the account that is the proceeds of the inventory supplied by the supplier. This is a significant benefit to the receivables financier. Absent section 64, so long as the supplier had registered its PMSI within the time limits specified in section 62 of the PPSA, the supplier’s PMSI would generally have priority over the receivables financier’s security interest over the account despite the fact that the security interest over the account was registered first.
Secondly, if it issues a valid notice under section 64, a receivables financier will obtain priority over a PMSI that is registered before the receivables financier has registered its security interest over the account that is the proceeds of the inventory supplied by the supplier. Broadly:
- the receivables financier must give notice to the supplier holding the PMSI;
- the notice must be given at least 15 business days before the earlier of the receivable financier’s registration of its security interest in the account and the day the interest attaches to the account;
- the notice must contain a description of the inventory to which the notice relates (that description may simply identify the class to which the personal property belongs); and
- the notice must set out the effect of section 64.
A supplier’s perspective
A supplier who has the benefit of a PMSI over inventory can do little to counter its lack of priority to an account as the proceeds of that inventory vis-à-vis a receivables financier who:
- has a registered security interest that covers that account, at the time when the supplier registers its PMSI; or
- issues a section 64 notice to the supplier in anticipation of registering a security interest that covers that account.
Does this matter? We suspect that in many instances a supplier’s primary intent in registering its PMSI would be to protect its right to repossess the physical inventory as opposed to asserting rights to the proceeds of that inventory (such as an account arising from the sale of that inventory). In other words, a supplier’s PMSI over inventory is not “flimsy” just because it cannot be asserted against the proceeds of that inventory. Asserting the rights to proceeds is often a difficult exercise for a variety of practical reasons, including the inability to identify those proceeds.
If priority vis-à-vis a receivables financier matters to a supplier with a PMSI over inventory, the supplier may:
- rely on a perfected security interest that is not a PMSI over the relevant inventory (a receivables financier would not have the benefit of section 64 to obtain priority over the supplier’s perfected security interest); or
- take an express security interest over the proceeds of sale of the inventory as original collateral, and make a separate (and timely) registration against the recipient of goods in the “accounts” collateral class.
A non-PMSI over inventory would typically take the form of an “all moneys” retention of title clause in the inventory supplier’s terms of trade. While an “all moneys” retention of title clause would address the section 64 issues mentioned in this article, they raise additional considerations that a supplier would need to address very carefully.
The PPSA Review made important comments and recommendations in relation to section 64 of the PPSA. Set out below are our comments on a few key recommendations.
||Maintain the collateral class of “accounts”.
||Recommendation 92 of the PPSA Review is to reduce the number of collateral classes on the Register down to 7 categories, including “accounts”. The collateral class of “accounts” is preserved because of its use in section 64 of the PPSA. This appears to us to be appropriate.
||Maintain the ability of receivables financiers to defeat prior-registered PMSI holders.
||Recommendation 242 of the PPSA Review is that section 64 be retained, on the basis that the overall policy setting of section 64 is appropriate. In this regard, the PPSA Review noted that “a number of Canadian PPSAs [as well as the New Zealand PPSA] include a provision [broadly similar to section 64]. Australia is unique, however, in allowing a non-PMSI to defeat PMSIs with an earlier priority time as well…I am advised that this additional concession was granted because of the importance of the receivables finance industry to Australian businesses.”
||Expand section 64 protection afforded to receivables financiers by permitting them to use the provision to take priority over both a PMSI held by an inventory supplier over proceeds of inventory as well as a non-PMSI held by that supplier over those proceeds.
||This is Recommendation 244 of the PPSA Review.
||Presently, to obtain priority against a prior-registered PMSI, a receivables financier must give the PMSI holder a notice complying with section 64 at least 15 business days before the earlier of:
- the day on which the receivables financier registers its financing statement; and
- the day on which the receivables financier’s security interest attaches.
Recommendations 248 and 249 of the PPSA Review have the effect that the receivables financier will be permitted to register its security interest “before or when it gives [its section 64] notice (rather than wait 15 business days), but on the basis that the section 64 priority will only apply to accounts to which its security interest attaches after the 15 business days have expired.”
|The PPSA Review noted that the intent behind the present drafting is to “give an existing PMSI holder the opportunity to respond to the prospect of losing its priority, for example by shortening its credit terms or moving to a cash on delivery basis. That opportunity may be more theoretical than real.”
Presently, there is a defect in the drafting of section 64(1)(b), because it states that a receivables financier must hold the security interest when the notice is given but also requires that the security interest may not attach until the notice period has expired. This defect is addressed by Recommendation 249.
 Commonwealth of Australia, Review of the Personal Property Securities Act 2009: Final Report (February 2015), available at https://www.ag.gov.au/legal-system/publications/review-personal-property-securities-act-2009-final-report (accessed on 8 August 2022).
 For the significance of the term “inventory” see n 13 below and the associated text.
 PPSA section 14(1).
 PPSA section 14(2)(a).
 PPSA section 14(2)(c).
 PPSA section 14(2A)(c).
 PPSA section 10, dictionary, definition of “new value”.
 In broad terms, those sections provide for a security interest over collateral to extent to “proceeds” of that collateral (in general, identifiable or traceable personal property that is derived from dealings with that collateral).
 The PPSA section 10, dictionary, definition of “account” is as follows: “a monetary obligation (whether or not earned by performance, and, if payable in Australia, whether or not the person who owes the money is located in Australia) that arises from: (a) disposing of property (whether by sale, transfer, assignment, lease, licence or in any other way); or (b) granting a right, or providing services, in the ordinary course of a business of granting rights or providing services of that kind (whether or not the account debtor is the person to whom the right is granted or the services are provided);but does not include any of the following: (c) an ADI account; (d) chattel paper; (e) an intermediated security; (f) an investment instrument; (g) a negotiable instrument.”
 PPSA section 12(3)(a).
 PPSA section 12(1).
 PPSA section 21(2)(b) and (c) outline the options of perfection by control and by possession.
 PPSA section 10, definition of “inventory”.
 PPSA section 64(1)(b) and section 64(2).
 Other than the steps outlined in the text associated with n 24 below which are in theory available to a supplier.
 Note that this option will cease to be available if PPSA Review Recommendation 244 is adopted. See n 19 below and associated text.
 For a discussion of the issues arising in relation to “all moneys” retention of title clauses, particularly if the PPSA Review recommendations are implemented, see D Kreltszheim, “The Treatment of Retention of Title Claims Under the PPSA Review: A Silver Bullet or a Bitter Pill for Suppliers?” (Cornwalls Banking & Finance Bulletin, 25 March 2019, available at https://www.cornwalls.com.au/the-treatment-of-retention-of-title-claims-under-the-ppsa-review-a-silver-bullet-or-a-bitter-pill-for-suppliers/ (accessed on 8 August 2022). Also see D Kreltszheim, Sellers’ Retention of Title Under the PPSA Review: Will PMSI “Cross-Collateralisation” Level the Playing Field or Skew the Balance? (2019) 35 Australian Banking & Finance Law Bulletin 183.
 Above n 1, p 173.
 Above n 1, p 171.
 Above n 1, pp 330-331.
 Above n 1, pp 332-333.
 PPSA section 64(1)(b).
 Above n 1, pp 335-336.
 Above n 1, p 336.
For more information, contact any member of our Banking and Finance Team.
This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.