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DC Article

Retention of Title

Radical Changes on the Horizon

Does your business have a ‘retention of title’ clause in its trading terms?

The days when a supplier could invoke a retention of title clause in an attempt the recover unpaid goods from a company in liquidation will soon be over.

In early 2012, the Personal Property Securities Act 2009 (Cth) (the “Act”) will activate a new Personal Property Securities Register (the “PPSR”). The rationale underlying the Act and the PPSR was the perceived need for the unification of a number of disparate State and Commonwealth securities registers (among them the ASIC Register of Charges and the Register of Encumbered Vehicles (REVs)) into a single, national register. The reasoning behind the reforms appears logical – having one national securities register is conducive to efficiency and should generate cost savings for business.

However, under this new system the fundamental, intuitive and well recognised concept of title to goods is, What matters under the new regime is whether or not a ‘security interest’ (as defined by the Act) is created by the substance of a transaction between the parties, not necessarily by documents which record that transaction. If a ‘security interest’ is deemed to be created, it must be registered on the PPSR. If the ‘security interest’ is not registered and one party is bankrupt or wound-up, the trustee in bankruptcy or the liquidator can deal with the property which is the subject of the security interest and disregard the actual owner.

Retention of Title Clauses

There are a number of ‘security interests’ which are required to be registered. Critically, the supply of goods on credit pursuant to a retention of title clause is classified as a ‘security interest’ which must be registered on the PPSR.

What should affected businesses do?

New Trade Accounts

Your terms of trade must be amended to include a reference to the fact that the retention of title constitutes a ‘security interest’ pursuant to the Act, together with a clause under which the recipient of goods irrevocably agrees to assist with the prompt registration of the security interest, including an undertaking to sign all PPSR registration forms and acknowledgements. Make it clear in your terms that the customer agrees that you will take a security interest over all goods being sold.

Existing Trade Accounts

Where possible, new terms of trade which deal with the PPSR (as above) should be submitted to your customers. The intention is for these terms of trade to replace the existing terms of trade.

Systems and Procedures

Establish a register of ‘security interests’ held by your business. This should include a folder containing copies of PPSR registrations. This will ensure that once your business is notified that a liquidator has been appointed to a trade customer, you can quickly and efficiently forward a copy of your security registration to the liquidator, thereby protecting your goods from being sold and the proceeds distributed amongst creditors.

Staff and Training

Educate credit managers about the PPSR and the concept of ‘security interests’, registration procedures and registration deadlines to ensure that all eligible ‘security interests’ are validly registered.

What happens if you don’t register?

If your customer goes into insolvency and your retention of title is not registered as a security interest, you will lose the right to recover your unpaid goods from a liquidator because the Act will gives priority to other competing parties who have registered their security interests.

What you can do to protect your business?

If you have a concern that your commercial trading terms may not be compliant with the requirements of the PPSR, contact Phillip Meisner or Michael Tzirtzilakis from the Commercial Team at Diamond Conway who can assist you by reviewing of your documentation and advising you on what needs to be done to ensure that your security interests are properly documented and registered.

Michael Tzirtzilakis | Senior Associate

Download (PDF) For more information, contact us:
Level 7, 9 Hunter Street Sydney NSW 2000
T: 02 9222 8000 F: 02 9222 8008 DX: 707 SYDNEY

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