The treatment of retention of title claims under the PPSA Review: A silver bullet or a bitter pill for suppliers?

Later this year we are likely to see the release of the PPSA Exposure Draft Bill implementing changes recommended by the PPSA Review in 2015. This will require insolvency practitioners to change the way they deal with retention of title (ROT) claims.

Introduction

ROT clauses may provide for a supplier’s title to particular goods to be retained:

• only for so long as those particular goods have not been paid for (Invoice-Specific ROT); or
• until those particular goods, as well as all other goods supplied by the supplier to the buyer, have been paid for (in addition, title may be retained until other debts owed by the buyer to the supplier – such as service and delivery charges – have been paid) (All Moneys ROT).

Before the Personal Property Securities Act 2009 (Cth) (PPSA) came into operation, a supplier could “cross collateralise” its ROT entitlements by binding its buyer to an All Moneys ROT clause. This meant that if the buyer became subject to an external administration after receiving 3 separately invoiced deliveries of the same type of goods from the supplier (A, B and C), and the buyer had paid invoices A and B but not C, the supplier could repossess goods delivered under invoices A and B to cover the amount owing under invoice C.  In this way, the All Moneys ROT device was used by a supplier to overcome the practical difficulties of the Invoice-Specific ROT device, in particular the need to substantiate its claim by identifying which particular goods were supplied under which particular invoice.  In addition, the All Moneys device also strengthened the supplier’s position by giving it more “security”: even if the goods supplied under invoices A, B and C were of three different types and therefore clearly distinguishable from each other, the supplier could repossess goods delivered under invoices A and B to cover the amount owing under invoice C.

This article summarises the position under the PPSA and the changes proposed under the PPSA Review. It then concludes that the most appropriate reform would give to give suppliers rights that are narrower than what they had pre-PPSA but broader than what is proposed under the PPSA Review. This may simplify the determination of ROT claims by an insolvency practitioner. That would be a good thing.

Current PPSA Position  

A supplier which retains title to particular goods supplied by it to a buyer until the buyer pays for those particular goods has a “purchase money security interest” (PMSI) over those particular goods if the supplier documents and registers its security in accordance with the PPSA.  Further, the supplier’s PMSI will in general have “super priority” over the rights of most other secured creditors who also have security over those goods (even if those other creditors perfected their security interests earlier) if the supplier registers its PMSI as a PMSI on the PPS register within the required periods.  The security interests that are subordinated to a supplier’s “super priority” PMSI might include, for example, a bank’s prior registered “all present and after acquired property” security interest over all of the personal property over which the buyer is capable of granting security, including the goods supplied by the supplier.

If a supplier with PMSI super priority supplies goods on retention of title terms in separately invoiced deliveries (A, B and C) and the buyer only pays for deliveries A and B before becoming insolvent, the supplier will generally be entitled to repossess goods it is able to identify as being referable to delivery C, even if the buyer had also granted a prior security interest over those goods. Since the supplier’s super priority is only exercisable against the goods referable to delivery C for payment of invoice C, the supplier’s super priority is effectively exercisable on an Invoice-Specific ROT basis only.

If the supplier had bound the buyer to an All Moneys ROT security interest that is properly registered under the PPSA, the supplier will have a perfected (non-PMSI) security interest over the (already paid for) goods supplied under invoices A and B to secure the debt owing under invoice C. So, in the unlikely event that there is no prior holder of a perfected security interest over the goods supplied under invoices A and B, the supplier will be able to repossess goods in deliveries A and B to cover the amount owing under invoice C.

PPSA Review Recommendation

The PPSA Review recommendation is that a supplier which retains title to inventory[1] sold by it to a buyer and satisfies the conditions for a valid PMSI under the PPSA will be able to claim PMSI super priority for its security over all items of inventory that the supplier supplied, not just the items of inventory for which the supplier has not been paid.  But this right of “PMSI cross collateralisation” will only be available where it is not possible to distinguish between items of inventory supplied by the supplier for which payment has, and has not, been made.   In other words, if a supplier supplies items of inventory in separately invoiced deliveries (A, B and C) and the buyer only pays for deliveries A and B, the supplier:

• will be able to repossess items of inventory from deliveries A and B to cover the purchase price owing for delivery C – so long as it is not possible to distinguish which items were actually delivered in each delivery – for example, each of the deliveries A, B and C was of the same type of inventory (such as 500 gram packages of raw sugar) held by the buyer for on-sale in circumstance where it is not practically possible to identify which packages were supplied under which invoice; and
• will not be able to repossess items of inventory from deliveries A and B to cover the purchase price owing for delivery C if the inventory supplied under each invoice is identifiable as having been supplied under that invoice – for example, invoices A, B and C all relate to the supply of generators to the buyer for on-sale but in circumstances where the generators supplied under each invoice are specified by serial number so that it is clear that all of the generators that remain in the possession of the buyer were supplied under invoice A or B but not invoice C.

This will be a piquant and curious role reversal for insolvency practitioners and suppliers’ credit managers: for decades, insolvency practitioners have routinely asked suppliers to identify their goods on an invoice-by-invoice basis and credit managers are used to being asked to do so. In contrast, in the examples provided above, it will be advantageous to a supplier with an All Moneys ROT security interest if the inventory supplied under invoices A, B and C is not able to be identified on an invoice-by-invoice basis.

The policy underlying the PPSA Review recommendation seems to be that it is legitimate for a supplier to be able to “cross collateralise” its PMSI to overcome identification difficulties only. Where identification is not an issue, the supplier should not be able to cross-collateralise its PMSI.

An Alternative View

I suggest that the underlying policy ought to be that a supplier’s PMSI may be cross collateralised to qualify the rights of a prior security holder (such as a bank with a prior registered “all present and after acquired property” security interest) if the supplier and the buyer are in a continuing relationship.  This continuing relationship would involve the supplier supplying goods to the buyer on a short-term credit basis and the buyer paying the supplier on a continuing basis – both to reduce or extinguish past liability and to ensure continuance of supply – under a running account. This is because that supplier is arguably providing value to the buyer by the operation of the trading arrangement as a whole, not just the individual deliveries.[2] The merits of this alternative view include the following:

• Simplicity – Reliance on the identification test proposed under the PPSA Review could give rise to difficult practical as well as legal issues. The practical issues are those that arise today in relation to identification on an invoice-by-invoice basis, except that it will be the supplier contending that the inventory cannot be identified on an invoice-by-invoice basis and the insolvency practitioner contending that it can. The legal issues will include that, to implement the PPSA Review recommendation, it will be necessary for the PPSA to provide whether the onus of proving that the inventory cannot be identified on an invoice-by-invoice falls on the supplier or conversely that the onus of proving that the inventory can be identified on an invoice-by-invoice basis falls on the insolvency practitioner. One can foresee some curious and anomalous scenarios arising.
• Closer to the pre-PPSA position – As noted above, the position under the PPSA today is that a supplier’s PMSI super priority is exercisable on an Invoice-Specific ROT basis only. This is narrower than the pre-PPSA position, where a supplier was in effect able to enjoy “super priority” over other creditors of the buyer on an All Moneys ROT basis. The alternative view would still be narrower than the pre-PPSA position but would give a supplier the benefits of PMSI cross-collateralisation (and super priority over prior-registered secured creditors) in a broader range of circumstances than is proposed under the PPSA Review.

Queries

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Disclaimer

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.

[1] 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 buyer 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 buyer 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.   .

[2] For a more detailed analysis, see David Kreltszheim, “Sellers’ Retention of Title Under the PPSA Review: Will PMSI ‘Cross-Collateralisation” Level the Playing Field or Skew the Balance?” (2019) 34 Banking Law Bulletin 183. Please contact the author if you would like a copy of this article.