Importance of retention of title clauses in commercial contracts

What is a retention of title clause?

A retention of title (RoT) clause is typically contained within a sale agreement or a company’s standard terms of business (TOB), whereby another business has possession of certain goods (Collateral), but does not acquire the legal title until the purchase price is paid in full.

How does a RoT clause help businesses regardless of their size?

A RoT clause is significant as it can create a purchase money security interest (PMSI) over the Collateral pursuant to sections 14(1)(a) of the Personal Property Securities Act 2009 (Cth) (PPS Act).  The effect of a PMSI is that it has the potential of gaining super priority status over other creditors.

What is super priority status?

Section 62 of the PPS Act states that a PMSI gains super priority status and takes priority over other secured interests when the security interest is perfected (Perfected PMSI).

A company with a Perfected PMSI will benefit from the super priority status as it will defeat most other security interests in the Collateral.  This means that if another supplier or creditor does not have a Perfected PMSI they will be further down the list in priority when it comes time to collect the funds or to seek the return of the unpaid Collateral if the receiving company (Grantor) goes into liquidation.

What needs to be done to create a Perfected PMSI ?

To create a Perfected PMSI, a company that supplies Collateral under a RoT clause in their TOB must register their security interest on the Personal Properties Securities Register (PPSR) pursuant to the requirements contained in the PPS Act which are:

Collateral that is   tangible and intangible and it’s treatment where that Collateral is inventory or not inventory
	Where the Collateral is tangible property	Where the Collateral is intangible property
Where the Collateral is inventory:	The security interest must be registered before the time the grantor obtains possession of the Collateral.	The security interest must be registered before the time the PMSI attaches, or is created, over the inventory.
Where the Collateral is not inventory:	The security interest must be registered within fifteen 15 business days of the grantor obtaining   possession of the Collateral	The security interest must be registered within fifteen 15 business days of the grantor obtaining possession of the time of attachment, or creation, of the PMSI.

What if the registration deadline is missed?

Not registering a security interest on the PPSR within the required timeframe will only affect priority and NOT the existence of a security interest.  This means that registration on the PPSR is valid as a PMSI but will not be a Perfected PMSI with super priority status.

What if supplied goods become comingled?

Often companies will supply tangible or intangible goods to other companies who later use those goods in a manufacturing process to produce a finished product (Comingled Goods).  However, if a company has a Perfected PMSI, then they may still be able to make a claim over the Commingled Goods for the value of the registered interest.

Does there need to be consent register an interest on the PPSR?

A Grantor does not need to consent to the registration of a security interest on the PPSR in a commercial transaction.  The only requirement pursuant to section 157 of the PPS Act, involves the sending of a copy of the verification statement to the Grantor, if they have not waived their right to be notified pursuant to a company’s TOB.

What should companies do if they supply inventory on credit terms?

• Review their TOB and make sure that there is an adequate RoT clause; and
• Register any security interests on the PPSR according to the timeframe requirements of the PPS Act.

What are the advantages of registration on the PPSR?

Firstly, the PPSR can be viewed by the public and all registered interests may be viewed.   This means that any company either as a supplier or a credit provider will be able to view the interests and the priority status afforded to those interests.   This may affect the way that a company conducts any future transactions with the Grantor.

Secondly, registration on the PPSR establishes priority over other parties that supply Collateral and or credit suppliers who register their claim at a later time or not at all.  This may affect the way that a liquidator will transact liquidation and claims to Collateral should the Grantor go into liquidation.

What are the disadvantages of not registering on the PPSR?

The main disadvantage for a company if it chooses not to register the security interest on the PPSR is that the security interest will vest in the company pursuant to section 51F of the Corporations Act 2001 (Cth).  This effectively means that a company could not seize the collateral that is the subject of the security interest if the Grantor goes into liquidation.  The company would then have to prove to a liquidator that the debt existed and make a claim as an unsecured creditor.

Further information

If you need advice on your company’s terms of business and registrations that may need to be placed on the PPSR, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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