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How effective are your Retention of Title clauses?

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How effective are your Retention of Title clauses?

Posted 21 Jan 15 by Allan Farrar

Retention of Title ('RoT') or 'Romalpa' clauses generally form part of a suppliers' terms of their credit application and are often replicated on invoices and statements. In their basic form, these clauses are intended to provide the supplier with RoT to the goods until payment has been received in full.

But how effective are your RoT clauses, particularly in the case where your customer becomes insolvent?

The introduction of the Personal Property Securities Act (PPSA) in January 2012 significantly changed the rules regarding how security is taken over personal property interests (non-land assets), including interests covered by RoT clauses.

The PPSA resulted in the creation of the national Personal Property Securities Register (PPSR) which replaced and consolidated various registers such as ASIC's Register of Charges and the NSW Register of Encumbered Vehicles.

The PPSA also replaces the concept of 'fixed' verses 'floating' charges with the terms 'non-circulating assets' and 'circulating assets'. Both will simply be referred to as general security agreements ('GSA') under the PPSA, making it important for parties to agree the extent to which the grantor can deal with the collateral. While there is some overlap, current fixed and floating charge documents may not align well with the PPSA and users should seek a review of such documentation.

In a situation where a customer becomes insolvent, the priority of a creditor utilising an RoT clause will depend on whether or not it is registered with the PPSR. A 'super priority' interest, known as a Purchase Money Security Interest (PMSI), which secures all or part of the purchase price of the relevant collateral, may also be registered with the PPSR. To take advantage of the PMSI, it must be registered within very strict time limits (i.e. in the case of inventory, prior to the purchaser taking possession, and within 15 days of the purchaser taking possession for all other items).

The regime is complex and despite the legislation being in place for over 18 months, suppliers' RoT clauses are often not effective in protecting their interests. Unfortunately this only typically comes to light once a customer becomes insolvent.

In a simple example, the effects of registering or not registering an RoT with the PPSR are summarised below:

* If the RoT is not registered with the PPSR then the collateral (i.e. the items supplied) will vest with the customer upon insolvency and will form part of the assets to be dealt with under the insolvency administration;

*If the RoT is not registered with the PPSR within the PMSI timeframes then it is subject to the usual priority rules and may therefore be subordinated in priority to an earlier registered interest in the same collateral; and

*If the RoT is registered with the PPSR within the PMSI timeframe then the RoT clause will have the same effect as intended prior to the operation of the PPSA.

To ensure that an RoT is enforceable it must be registered on the PPSR. This is an online process, incurring fees, and must be undertaken within strict time frames (e.g. prior to delivery of assets). The registration process and the information required can be very complex and in some circumstances may require multiple registrations. Accordingly, it is important for suppliers to obtain advice regarding the proper implementation of PPSR registration systems and procedures.

For advice in relation to the PPSR and protecting your interests, please contact Allan Farrar or any of our Corporate Finance specialists around Australia.


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