Retention of Title under the PPSA
The commencement of the Personal Property Security Act 2009 (PPSA) on 30 January 2012 has significant implications on the business undertakings of many Australian industries, especially those who regularly supply goods on retention of title (ROT) terms.
An ROT clause, also referred to as a ‘Romalpa’ clause, is often used by suppliers to hold ownership of, or title to, goods until the buyer has paid for the goods in full.
Previously, ROT clauses were recognised at law and did not require registration – indeed registration was not possible. Suppliers of goods supplied under an effective ROT clause were able to recover goods not yet paid for upon the insolvency of the party in possession of the ROT goods.
However, under new PPSA laws things are different. Suppliers and other beneficiaries of ROT clauses will need to register their interest, known as their security interest, in goods supplied to ensure that their ROT clause remains enforceable against, and continues to have priority over, other interests as intended.
The security interest arising from an ROT arrangement is referred to, in PPSA terminology, as a ‘purchase money security interest’ (PMSI). The importance of this type of security interest is that if duly registered within the legislated timeframes, it generally has a ‘super priority’ against other interests in a variety of circumstances. For instance, a supplier who has a duly registered PMSI can potentially have priority over even previously registered security interests.
A failure to register an ROT arrangement as a PMSI does not render it ineffective, but it means it will not enjoy super priority against other interests.
That is not to say that all ROT suppliers should necessarily try to register all of their ROT arrangements as PMSIs. Instead, ROT suppliers will need to consider carefully the benefits of registration against the nature and magnitude of the risk that the ROT arrangement is intended to address and their relationship with their customers, as well as the burden, and cost of registration. In the meantime, ROT arrangements that were on foot as at 30 January 2012 enjoy limited transitional protection while suppliers work out their registration approach.
Our PPSA team is here to help you to understand the new regime, its impact on your business and the things you need to consider in determining your registration approach and strategy.