March 5, 2012

Retention of Title clauses: the effect of the new PPSA Legislation

Under the new Personal Property Securities Act 2009 (Cth) (“the Act”) a security interest is an interest in personal property and in substance secures payment of a debt or other obligation.   A security interest incorporates the previous forms of security such as mortgages and charges over assets; however, it also incorporates transactions such as:

  • traditional retention of title (“ROT”) clauses in contracts (where a purchaser has possession of the property but does not acquire title from the seller until the full purchase price is paid); and
  • financing or operational leases of personal property for a term exceeding twelve months (or 90 days in the case of a motor vehicle, boat or aircraft).

Under the Act, suppliers and lessor’s who utilised ROT clauses will become secured parties with a security interest in the property supplied.  In order to protect themselves, suppliers and lessor will need to register their security interest in the property supplied or leased.

Provided the security interest is registered,  suppliers and lessor utilising ROT clauses will receive a purchase money security interest which entitles them to take priority over all other, including earlier, security interests in the collateral where the requirements of the Act have been complied with.

The Act also provides protection against a trustee in bankruptcy or a liquidator as the property subject to the security interest will not be available to a trustee in bankruptcy or a liquidator.

It is important to note that the Act does not require a registration to be made in respect of all supplies or leases to the same buyer or lessee.   A single registration may cover subsequent security interests in property that is supplied under later agreements. 

Given the above, it is highly recommend that all businesses review not only their client arrangements but also their business practices to determine when they should register a security interest.   Some key considerations include:

  1. The history of the supplier/client relationship and the degree of trust;
  2. The likelihood the supply or lease will be dishonoured;
  3. How often you enter into transactions with a client;
  4. The value of the collateral;
  5. The frequency of supply and if more than one supply, the value of the combined supply; and
  6. the likely depreciated value of the collateral.

To discuss whether your business should look at updating their practices, or to discuss these changes to the law generally, please do not hesitate to contact our offices.