You may know that if your business supplies goods to a customer under a contract or terms and conditions which include a retention of title provision (ROT), you need to have a valid registration on the Commonwealth personal property securities register (PPSR) to ensure the ROT will be enforceable against the customer if it becomes insolvent.  However, from a credit risk management perspective, it needs to be recognised that even a valid PPSR registration of a supplier’s ROT has its limitations.

Types of ROTs

A classic ROT stipulates that ownership of goods sold by the supplier to its customer does not pass to the customer until the customer has paid for the goods.  Many ROTs are drafted as ‘all moneys’ ROTs.  That is, they provide that the customer does not acquire ownership of goods from the supplier until the customer pays all amounts owing by the customer to the supplier (whether it be for the price payable for those goods, or any other goods bought by the customer from the supplier at any time).  ROTs typically give the supplier the right to re-take goods supplied to the customer if the customer fails to pay the supplier on time.

Benefits of registering an ROT as a purchase money security interest on the PPSR

The inclusion of an ROT in a supply contract or terms and conditions will usually give rise to a security interest which is registrable on the PPSR as a purchase money security interest (or PMSI).  A PMSI includes a security interest taken in goods supplied to a customer, to the extent that it secures all or part of the purchase price of those goods.  An ROT which is properly registered as a PMSI confers a ‘super priority’ on the supplier in respect of the goods supplied to the customer, as well as the ‘proceeds’ of those goods (such as money received by the customer when it sells the goods to its own customers, and receivables owing to the customer arising from such sales).  For example, a properly registered ROT PMSI will give the supplier a priority over security taken by a bank over ‘all present and after-acquired property’ (All PAP) of the customer under a general security agreement, even if the bank registered its All PAP security on the PPSR before the supplier registered its ROT PMSI.

To ensure a valid registration of an ROT as a PMSI, certain requirements need to be met, including (where the goods form part of the inventory of the supplier’s customer) registering on the PPSR before the customer takes possession of the goods.

Limitations of registered ROTs

Despite the above benefits of a valid ROT PMSI registration, there are some limitations which suppliers of goods should be aware of, including the following:

• An ‘all moneys’ ROT may not always have priority as a PMSI over a competing security interest (such as an All PAP registration held by the customer’s bank).  For instance, if the supplier has sold goods to the customer under multiple orders, and the customer has paid for the goods the subject of some of those orders but not for others, the supplier may not have a PMSI super priority in respect of the goods which have been paid for (or their proceeds).  This is because, as mentioned above, a PMSI subsists in goods only to the extent that it secures all or part of the purchase price of those goods.  If the goods have been paid for in full, the supplier may be unable to assert a PMSI super priority over those goods in respect of outstanding price payable by the customer for other goods which the supplier has supplied. In that case, a prior-registered All PAP security interest (e.g., one held by a bank) may defeat the supplier’s registered ROT in respect of the goods which have been fully paid for (or their ‘proceeds’, if the customer has on-sold them).

• Although a PMSI is thought to confer a super priority, the reality is that a bank’s security interest over the customer’s accounts held with the bank give the bank an even better priority.  This means that if the customer has sold goods which are the subject of a ROT PMSI registered by the supplier, and the proceeds of sale have been paid into the customer’s bank account, the bank’s security interest over the account will trump the supplier’s PMSI in a competing claim between the bank and the supplier in relation to those proceeds.

Alternative credit risk management strategies for suppliers

Therefore, a supplier may not wish to rely on ROT PMSI registrations alone to protect itself against customers that default or become insolvent.  Other credit risk management strategies which a supplier may wish to consider include:

• requiring customers to pay for goods on or before delivery; and/or

• taking out debtor or trade credit insurance.

It is important to note that there is no ‘one size fits all’ approach to managing credit risk.  For instance, a supplier with many customers with low value transactions may manage credit risk differently from a supplier which engages in high value transactions with a small number of customers.

Conclusion

While it’s important that you properly register an ROT on the PPSR against your customer if you wish to ensure that it will be enforceable on the customer becoming insolvent (and that the ROT will have the appropriate priority against competing registered security interests), registration will not give you complete protection.  You should be aware of the limitations of registering on the PPSR and, if necessary, adopt appropriate additional risk management strategies.  

If you need advice on registering your ROT on the PPSR, or the benefits and limitations of registration, please contact Sierra Legal.

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