Hah – my PMSI trumps your GSA!

Commercial | Print Article

[Winter 2010]

It is an all too familiar scenario – you are a supplier; you have been supplying equipment, goods or materials to a customer on your usual credit terms for quite some time; in the past it has been a good relationship but recently they have become tardy with payments; you have had to chase them and now there is a substantial amount outstanding; you start to hear rumours ‘they have been put on a banking deadline’ and then suddenly you read that the business is in receivership.

So, what can you do now? Will your equipment, goods or materials get sold off by the receiver? Can you retrieve your equipment or goods now before the receiver takes any action? What priority do you have in this situation?

The answer to these questions will be affected to a large degree, by what steps you have taken to protect your position, in particular, in your terms of trade and under the Personal Property Securities Act 1999 (‘PPSA’).

Usually if a bank appoints a receiver, it does so as a secured creditor under the terms of a General Security Agreement (‘GSA’). The GSA provides security to the bank over all the assets of the company in question. The bank will register notice of the GSA on the Personal Property Securities Register (‘the PPSR’). Under the terms of the PPSA, this register gives public notice of the bank’s security over the company’s assets. The timing of registration on the PPSR will be important in determining the priority of competing secured creditors’ claims to the assets.

A common misconception, when considering what assets are affected by a company being in receivership, is that assets which are not ‘owned’ by the company will not be covered by the GSA (for example, assets which have been leased to the company in question or assets which have been supplied to the company on credit). Under the PPSA, the question of whether a company has title to or owns the assets in question is not strictly determinative of whether the assets will be covered by the terms of the security. For this reason, parties who lease goods and equipment or, as in your case, suppliers of goods on credit, cannot presume that their position is protected simply because the insolvent company does not have title to the assets in question.

So, the risk that you now face as supplier is that the goods which you supplied on credit to your customer may fall into the pool of the company’s assets and therefore be subject to the bank’s GSA and available to the receiver.

This is the point however, at which a prudent supplier will be able to brandish their PMSI. A PMSI (‘Purchase Money Security Interest’) is recognised under the PPSA. Simply put, it covers a seller’s security interest in assets which have been supplied to another party but for which the full purchase price has not yet been paid. The significance of being able to claim a PMSI is that, subject to various technical qualifications, generally the holder of a valid PMSI will be able to claim priority over other secured creditors (such as the bank under the GSA in the example we are considering) in the assets supplied.

But beware, for a PMSI to be effective and provide the necessary protection for a supplier, there are several critical steps that must have been taken. Many suppliers fall into the trap of wrongly assuming that having supplied goods on credit, they retain an ownership interest in those goods until they are paid for and that this alone will allow them to reclaim those goods in the event of receivership of the company. This is not correct.

So, what are the critical steps which you, as supplier, must take?

First, the supplier must have a retention of title (‘ROMALPA’) clause in its terms of trade. These written terms of trade must be provided to the customer, before the goods are supplied.

Secondly, the terms of trade need to clearly indicate that a security interest will arise in the goods being supplied on credit and critically, the customer must assent in writing to those terms of trade.

Thirdly, having obtained the customer’s written agreement to the terms of trade and the creation of a security interest, the supplier must then take the further step of registering notice of their PMSI on the PPSR. This is done by registering a financing statement on the PPSR. This gives public notice of the supplier’s interest in the goods in question against the company to which they have been supplied. This final step in the process is sometimes overlooked by suppliers and will be fatal to success in claiming priority for their PMSI against a third party receiver in the scenario under consideration.

The PPSA is a technical, and at times, complicated Act. However, as a supplier, if you take these few basic steps, you can significantly increase your chance of recovery in the case of the insolvency of your customers. You need to review your terms of trade to ensure that they contain:

  • a retention of title clause;
  • an acknowledgement of the security interest arising in the goods being supplied;
  • a written acceptance by the customer.

You must also ensure that your standard business procedure includes registration of your PMSI on the PPSR.

Talk to your lawyer to ensure that you are doing everything reasonably necessary to put your business in the best possible position for recovery if your customers find themselves in financial difficulty.