Reminder to Manufacturers and Suppliers
The recent insolvency of Arrium and OneSteel entities has sparked enquiry from many about their rights after supplying goods to the entities that have entered Voluntary Administration.
This is an important reminder for all parties that supply goods on credit or lease/hire goods to other parties. They must understand the Personal Property Securities Act (PPSA) and how to properly register a security interest to protect themselves in the event of insolvency of their customers.
The PPSA came into effect on 30 January 2012.
Many manufacturers and suppliers sell their product on retention of title (RoT) terms, which dictates that ownership does not pass until payment is received. The PPSA completely overturns past practice and the principle of ownership in these dealings.
Under the PPSA, RoT arrangements are treated as security interests that must be registered on the Personal Property Securities Register (PPSR) to be valid. In short, the buyer of the goods is treated for PPSA purposes as if it were the owner once it takes possession of the goods, and the seller’s rights are reduced to those of a secured lender.
Without registration on the PPSR, no security interest will exist in the event of insolvency and goods supplied on credit that are yet to be paid for will not be recoverable. In this case, the manufacturer or supplier has to claim as an unsecured creditor in the insolvency and risk receiving no return at all.
Correct registration of a security interest under the PPSA provides an RoT supplier a preferred priority position known as a “purchase money security interest” or PMSI.
Despite the PPSA coming into effect more than four years ago, the change to the way ownership is treated and the need for registration of security interests has come as something of a shock to much of Australia’s business community. There are many examples of small and large manufacturers and suppliers who have failed to protect themselves and have lost property they considered was still owned by them due to insolvency.
For further information on how to navigate the PPSA and to ensure you are not found wanting in the event of insolvency of a customer, please contact PKF’s Business Recovery and Insolvency team.