Are your terms of trade worth the paper they are written on?

The following article provides our clients with a common example of what can happen in the post PPSA era and provides some fundamental tips for small- to mid-sized business owners to ensure their secured debts can be recovered.

A common example of what can happen if you don’t register your security interests

Mr Smith is a small business owner who, through his company Creditor Pty Ltd (Creditor), provides goods and services to a company called Debtor Pty Ltd (Debtor) – a retail company. Creditor and Debtor have signed terms and conditions, but the security interest was never registered on the PPSR.

Debtor struggled to pay its debts over an 18-month period and although Creditor only received small part-payments, it continued to supply stock. Creditor was not aware that Debtor was insolvent. Suddenly, Creditor was notified that the Debtor had been wound up and a liquidator had asserted its claim over the Creditor’s stock.

Creditor soon discovered that there were another 15 creditors who had not been paid. Creditor was unable to claim the unsecured stock from the Debtor; the liquidator sold the Creditor’s stock. Creditor not only lost the stock but had low prospects of recovery due to the overwhelming liabilities of Debtor.

Considering the low cost to register the secured interest and to obtain legal advice, it would be careless and reckless for any small business owner or lender to fail to do this.

Not registering your agreement or loan with the PPSR exposes business owners unnecessarily.

Small to mid-sized business owners need to stay on top of PPSR developments as it can significantly affect their ability as creditors to recover debts. The failure to register a secured charge or to ensure that Terms of Trade are adequately drafted will have a significant impact on companies that, in this current financial environment, certainly cannot afford to lose money, stock or significant aged debts. Considering the low cost to register the secured interest and to obtain legal advice, it would be careless and reckless for any small business owner or lender to fail to do this.

Key lessons to be learned from a failure to register business interests on the PPSR

Australian Case Law in relation to the PPSA has been relatively thin, yet the key lessons learnt from those cases confirmed the legal community’s suspicions that a failure to register an interest would have a devastating effect on recovery.

Lesson 1: Legal title interest will be trumped by security interest

In the case of Maiden Civil v Qes [2013] [NSWSC852][1] in the NSW Supreme Court, the decision emphasised the importance of registering the secured interest.

1. It was found that the security interests registered first in time with the PPSR had priority over the non-registered interests. Even though the Court was satisfied that legal title to the vehicles may have been present, the fact that the title-holder had failed to register their interest in the vehicles with the PPRS was the overriding factor.
2. Had the title holder applied the rule “first in, best dressed “or rather “first registered, best dressed” and had registered their secured interest prior to the insolvency event and before any other secured party, they would have been entitled to recover the vehicle.

Lesson 2: Transfer of goods to a related entity

In the recent decision Louis & Templeton as Liquidators of Warehouse Sales Pty Ltd (in Liquidation) (“WS”) [2014] [DCS644] in the Supreme Court of Victoria, the judgment explored the issues surrounding businesses which sold on retention of title terms.

1. A transfer of goods by a debtor to a related entity of the debtor overrode the retention of title, security interest of certain suppliers over goods.
2. The creditor’s retention of title security interest over certain stock had priority over a claim by a debtor’s customer under layby. For example, a customer who goes to a store and purchases goods on layby that are subject to the creditor’s security interests, when the debtor company experiences an insolvency event and a liquidator is appointed, in this situation the customer with a claim under layby for having paid a deposit or part payment of the product would have his claim overridden by the creditor with the secured retention of title security interest over that stock.
3. Part paid sales of a debtor would not be captured by the retention of title security interest by the creditor.

Lesson 3: Ensure your security documentation is done properly

Financiers should exercise caution to ensure that any security documentation (sometimes referred to as a General Security Agreement) has been adequately drafted to ensure that the interests are secured in relation to the relevant personal property.

Streeterlaw has extensive experience in PPSR cases involving deeds of loan, general security agreements, aeroplanes and vehicles. If you are unsure whether you are able to register a secured interest, please contact Streeterlaw  on 8197 0105 or email advice@streeterlaw.com.au

Written by Mark Streeter

The Director of Streeterlaw, Mark has been practicing Law since 1994. He has attained his Masters of Law in 1999 and in 2006 was awarded his Specialist Accreditation in Commercial Litigation. Mark is a member of ARITA, a graduate of the AICD and a member of AICM. A member of STEP, Mark enjoys working in the area of Wills and Estates. In 2020 Mark is the Chair of STEP NSW.

Call us on 02 8197 0105 to book an appointment with Mark Streeter!