Retention of Title (RoT) clauses are a common method by which suppliers of goods seek to protect their interests in the event that a customer is subject to an insolvency event.
RoT clauses may fall into one of the following categories:
- Simple RoT clauses – the supplier is entitled to recover specific unpaid goods.
- All Monies RoT clauses – same as for Simple RoT clauses, however, the supplier may also recover any goods (including goods already paid for) which it has supplied, up to the value of the outstanding debt owed to the supplier.
Until the implementation of the Personal Property Securities Act 2009 (PPSA), All Monies RoT clauses were the most effective at securing the supplier’s interest in the goods supplied.
Since the PPSA came into effect, RoT clauses have now been defined as a security interest and are subject to the requirements relating to security interests in the PPSA and the Corporations Act 2001 (Act)Act. The inclusion of the PPSA also brought with it new terms including:
Purchase Money Security Interest (PMSI)
A PMSI security interest relates to an interest where the money (or credit) has been advanced to a customer for the purchase of a specific item. The provision of a PMSI security interest, generally provides a “super priority” over any other competing security interests against the item supplied.
All Present and After-Acquired Property (All PAP).
An All PAP generally relates to a General Security Interest (GSI) or as it was formerly known as a “Fixed and Floating Charge”. Priority for All PAP and other non-PMSI security registrations are generally assessed based on a first in time registration. (Read more about ALL PAP here & here)
Case study
Our Adelaide office recently encountered circumstances where a supplier’s All Monies RoT clause did not provide the supplier the protection they thought they had.
The situation involved a pharmacy which had entered Voluntary Administration. The key timeline of events were as follows:
- 2017 – The pharmacy received finance from a bank and entered into a GSI with the bank at that time. The quantum of finance totalled approximately $800,000. The bank registered an All PAP on the PPSR against the pharmacy at this time.
- 2018 – The pharmacy commenced being supplied by Supplier A. Supplier A’s agreement with the pharmacy included an effective All Monies RoT clause and a GSI. Supplier A registered a PMSI registration along with an All PAP on the PPSR against the pharmacy at this time.
- 2020 – Supplier A registered a further PMSI and non-PMSI registration against the pharmacy on the PPSR. As at the date of the administration, the debt owed to Supplier A totalled approximately $600,000.
- Stock on hand at appointment totalled approximately $700,000, of which Supplier A had supplied the majority, however, unpaid stock of Supplier A was only $125,000.
The Administrators determined that Supplier A and the bank both had effective security interests against the pharmacy, however they were required to resolve the competing security interests between the bank and Supplier A in respect of the stock supplied to the pharmacy by Supplier A.
If this matter was dealt with prior to the PPSA, it is likely that Supplier A would have had the right to the stock it supplied (up to the value of its debt) in priority to the bank.
However, due to the operation of the PPSA and the definition of the PMSI (super priority) security interest, the position was:
- Supplier A had the first right to the specific stock it had supplied where the pharmacy had not paid for that stock.
- The stock which Supplier A provided and had been paid for by the pharmacy was subject to the order of priority based on first in time of registration. Accordingly, the bank had the first priority to this stock despite the “All Monies” aspect of the RoT clause.
A further issue arose for Supplier A in relation to the stock that the bank had priority over. Pursuant to section 561 of the Act, employee entitlements had a priority over this stock due to the fact that the bank’s security interest was an All PAP and attached to the stock via a circulating security interest.
In summary, Supplier A only had a super priority claim to $125,000 of stock it had supplied and ranked behind the bank and employees for the balance.
Whilst the supplier had the second ranking ALL PAP and may still recover its full debt in this case due to the pharmacy not going into liquidation, it is an example of the risks that should be considered by suppliers pursuant to the PPSA.
Key Take Aways
Since the commencement of the PPSA, the effectiveness of All Monies RoT clauses has been diminished where there are competing security interests, especially financiers with GSI security interests which are often first registered in time. Suppliers should consider reviewing the security position for each customer prior to entering into supply agreements (with an All Monies clause) unless suitable arrangements can be made with prior ranking security holders.
Whilst the PPSA has been in effect for some 8.5 years, it continues to be an ongoing area of challenge and complexity. Accordingly, legal advice from a suitably qualified solicitor with experience in the PPSA is usually recommended.
Given the anticipated “insolvency cliff”, advisors to suppliers should be considering their clients’ position and ensuring that they are adequately protected as soon as possible.
SV Partners are experienced in dealing with insolvency issues involving the PPSA and would be happy to discuss any general concerns with you and if necessary, refer your client to solicitors who are experienced in PPSA law.
Article written by Travis Olsen (Associate Director) & Stuart Otway (Director) – SV Partners Adelaide