Manufacturers and suppliers: Combat the risk of customer insolvency during COVID-19

• Many manufacturers and suppliers supply goods to customers on retention of title (ROT) terms
• ROT security interests must be registered on the Personal Property Securities Register (PPSR)
• If a registration is not made, and the customer enters insolvency or defaults, a supplier will have no claim to recover unpaid goods supplied on ROT terms
• The COVID-19 pandemic brings a heightened risk of insolvency
• Recent legislative changes give suppliers a longer window of opportunity for the registration of security interests in goods supplied on ROT terms

Goods supplied on ROT terms

It is common for manufacturers and suppliers in many Australian industries to supply goods to their customers on ROT terms. This means that while the customer takes possession of the goods, the supplier retains legal ownership of the goods until they are paid in full.

Since the introduction on the Personal Property Securities Act 2009 (Cth) (PPSA), a supplier can only enforce its rights to goods supplied on ROT terms if the supplier registers a security interest on the PPSR.

If the customer enters insolvency or otherwise defaults and the supplier does not have a valid registration, the supplier will have no claim for the return of any unpaid goods. In the case of insolvency, all of the unpaid goods will become available to the administrator or liquidator to meet other secured creditors’ claims.

Timing for registrations

There are two important timeframes under the PPSA and the Corporations Act 2001 (Cth) by which ROT security interest must be registered on the PPSR.

First, security interests must be registered within 20 business days of the security agreement which governs the supply (for example, trading terms and conditions) coming into force.

Where a security interest is registered outside that time frame, and an administrator or liquidator is appointed to the customer within six months of the actual date of registration, the security interest will vest in (become the property of) the customer. In these circumstances, the supplier will lose title to its unpaid goods. However, after six months, a security interest that is registered late will no longer vest and will be enforceable by the supplier, but it may lose priority to an earlier registered security interest in the same property.

Second, suppliers who sell on ROT terms have the benefit of what is known as a purchase money security interest (PMSI) if an ROT security interest is registered:

• within 15 business days of the customer obtaining possession of the goods; or
• if the goods are inventory, before possession is given.

The benefit of a PMSI security interest is that the supplier will receive a super priority right to recover the supplier’s goods in the circumstances of the customer’s insolvency, ahead of prior registered security interest holders who hold security in the same goods.

One registration can cover multiple supplies to the one customer under the same trading terms. We recommend manufacturers and suppliers register as early as possible to cover the entire trading relationship with a customer.

Impact of the COVID-19 pandemic

The COVID-19 pandemic is a challenging time for many businesses and there is a heightened risk of insolvency for customers and defaults under terms and conditions of trade.

In response to the current environment, the federal parliament recently passed the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (Coronavirus Response Act), which includes a range of measures which include extending the time for responding to a creditor’s statutory demand (a common trigger for the insolvency of an entity) from 21 days to 6 months.

Further details about the Coronavirus Response Act can be found here  www.rigbycooke.com.au/suspension-of-insolvency-laws.

It is not possible to overcome a late registration for the purposes of the PMSI super priority, but the effect of the Coronavirus Response Act for suppliers is that it may be less likely that their customer will enter into administration of liquidation within the next six months, meaning a security interests registered now may, if even if registered ‘out of time’, have a better chance of passing the six month vesting date and becoming enforceable by the supplier.

Recommendations

Notwithstanding the introduction of the PPSR some years ago, we are finding that many secured parties, including manufacturers and suppliers who sell on ROT terms, still neglect to register their security interests on the PPSR.

The passing of the Coronavirus Response Act represents an excellent opportunity for suppliers and manufacturers to obtain better protection against potentially insolvent customers.

All manufacturers and suppliers should review their current trading terms and conditions to ensure that they retain title to unpaid goods (where intended) and that any security interests are properly registered on the PPSR.

It is important that registrations are made properly. We recommend that AMTIL members speak to us to obtain advice about the strict PPSR registration requirements. We can assist for a fixed fee by either making the registrations for AMTIL members, or by providing registration training so that members can complete registrations “in house”.

Emma Simpson is Senior Associate, Rigby Cooke Lawyers.

Julia Cameron is Partner, Rigby Cooke Lawyers.

www.rigbycooke.com.au