Is your small business protected? The PPSR and the pitfalls of relying on contractual title retention clauses

By Elira Midson and Lorraine Madden

Australian small businesses are doing it tough. Too often, businesses lose out when a third party goes into liquidation or a customer goes bankrupt. The modern market demands flexible payment structures and now more than ever it is important you take steps to protect your business when you are on-selling goods to third parties on credit.

Here is what you need to know to stay protected.

What is the PPSR?

The Personal Property Securities Register (PPSR) is a register available online at www.ppsr.gov.au where both businesses and individuals can record their legal interest in property like stock, vehicles or machinery that they have supplied, leased or loaned to another party.

The PPSR shows who has a claim over a particular good and if your interest is registered, the PPSR helps your business stand in line ahead of other unsecured creditors.

What is a PMSI?

A PMSI is a Purchase Money Security Interest (PMSI) is a particular type of PPSR interest that will give your small business a super-priority status over other secured and unsecured creditors. Provided you register your interest correctly and on time, you will get priority even if other secured PPSR creditors are registered first in time.

Your business should consider registering a PMSI if:

(a)        you supply goods on credit in a buy-now-pay-later model; or

(b)        if your business leases or rents goods to third parties.

If you have a registered PMSI, your business is far more likely to get its goods (or their value) back if your buyer becomes insolvent prior to payment.

You can register a PMSI yourself online or contact us for assistance.

Title Retention Clauses

If you’re thinking that this article is not relevant because you already have a title retention clause in your contracts – think again.

Under the Personal Property Securities Act 2012 (Cth), a retention of title clause is treated as an unsecured interest. This means you will not have priority over other creditors if your buyer later becomes insolvent.

Your business must register its security created through that title retention clause on the PPSR to be adequately protected. A failure to register your interest will mean you run the risk of losing your goods if other creditors have registered their interest before you.

Example

Your business, Best Footwear Co sells 150 pairs of heavy-duty boots to a retailer called Outback Gear Pty Ltd for $15,000 on a buy-now-pay-later arrangement.

The contract of sale has a title retention clause that states ownership of the boots will not be lawfully transferred until the final payment is made.

After you have delivered the boots, but before final payment is made, you find out Outback Gear Pty Ltd is insolvent.

Scenario 1: No PMSI Registration

You write to the liquidator requesting to reclaim the 150 pairs of boots on the basis of your contractual title retention clause.

The liquidator responds, telling you that while the contract clause does create a security interest, it is an unsecured debt because it is not registered on the PPSR, and there are unfortunately too many other creditors with registered interests to return the goods or pay your company their liquidation value.

Outcome: the boots are sold off by the liquidator. Best Footwear Co receives nothing.

Scenario 2: PMSI Registration

After entering into the contract, but before delivery of the boots, you pay $6 to register a PMSI on the PPSR for a period of 7-years, describing the goods and noting the buy-now-pay-later contract terms.

You find out Outback Gear Pty Ltd  has gone into liquidation 5 days later. You write to the liquidator and provide your PMSI registration confirmation. The liquidator confirms you have super-priority over other creditors of the company.

Outcome: you reclaim the 150 boots, or your business receives priority payment for the liquidation value of the boots, even if other creditors registered their interests earlier.

Cost of Registration

The PPSR registration fee depends on the duration you select, but as at the date of writing it is:

·                $6 for a registration valid for up to 7 years

·                $25 for registrations lasting 7 to 25 years

·                $115 if you choose no end date (i.e. indefinite)

This is a small fee to secure your company’s legal priority and protection.

Recommendations

If you think your business could utilise the PMSI or PPSR, take steps to ensure your contracts allow for your interest to be registered before delivery of the goods, or within 15 days of leasing equipment.  

Here at Hale Legal, we know small business, and we understand that trade relies on trust, but if you want real legal protection in a volatile market – a contractual retention alone is simply not enough. A PMSI registered on the PPSR is your best line of defence if your customer goes into liquidation.

If your credit agreements contain retention of title clauses, they are now effectively worthless. Hale Legal can assist you in amending your documents to provide your business with maximum protection.

This article is the first in a series that we will be posting regarding protecting your interests. 

If you want advice, or help registering an interest, speak with our Lorraine Madden on (08) 6144 4470.