Retention of Title Suppliers | Equipment Renters and Lessors | The Construction Industry | Equipment and Motor Financiers
RETENTION OF TITLE SUPPLIERS
Retention of title (or Romalpa) clauses have been part of the commercial landscape for over 35 years. At its simplest, a clause will say that title does not pass until the goods have been paid for. This means that if the customer becomes insolvent, the supplier can get their goods back.
Some businesses then extended the concept. They created clauses to the effect that title did not pass in any goods until all money owed on any account had been paid. Many commentators felt this was tantamount to taking security over goods supplied. The PPSA puts it beyond all doubt – it is taking security, and it creates a security interest that must be registered on the PPSR to have any effect.
The Act has extended the benefits available to those suppliers of goods who include a retention of title clause, and provided them with a range of recovery options. Here is an abbreviated list:
- The right to your goods where they are still in the debtor’s possession.
- Security in manufactured product where your goods have been used in the manufacturing process.
- Security in product where your goods have been mixed or commingled with other goods.
- Security in proceeds (particularly book debts) where your goods have been dealt with or on-sold.
- Possible defence against an unfair preference claim from a liquidator.
- Reduced number of “shoot throughs” where debtors sell their businesses and disappear.
The PPSA singles out suppliers of goods for special treatment and gives them a special type of security interest called a Purchased Money Security Interest or PMSI. Providing the supplier has complied with all of the PPSA requirements, they will have a first ranking security ahead of all other creditors – including preferential creditors and the bank.
Unsurprisingly, receivers and liquidators are taking a robust approach and making suppliers “jump through hoops” to establish their claims. A successful claim can drastically affect an insolvent administration.
A successful claim relies on getting everything right from the outset. As former insolvency practitioners, we know how the game is played. The EDX mantra is, “Do it once, do it right”, so that when you need to claim you can be confident of success.
EQUIPMENT RENTERS AND LESSORS
In the pre-PPSA world, the worst risk facing an equipment renter or lessor was a bad debt for outstanding rentals. If the customer became insolvent, the renter or lessor could repossess the equipment, since their ownership rights trumped everyone else.
The Act turns this on its head and confronts our traditional beliefs about ownership. There are certain circumstances where an equipment owner can lose equipment following the insolvency of a customer, even if that customer was simply renting the equipment and had no ownership rights.
The situation gets even more complex when the customer on-hires the equipment to someone else. This potentially creates a chain of competing interests in the equipment.
This is one of the most controversial areas of the PPSA, attracting calls for review from trade bodies such as the Hire and Rental Industry Association. At the time of going to press, there is a statutory review of the PPSA in progress, and there have already been measures announced to lessen the Act’s impact on the hire industry.
But for the moment “it is what it is”. This makes it imperative for equipment owners to protect their position.
Here are the key facts to consider. If the hire or lease agreement creates what is called a PPS Lease, this creates a security interest in the equipment. If this interest is not registered on the PPSR, and the customer becomes insolvent, the equipment owner risks losing their equipment.
Even if the equipment owner has been financed by a bank that has properly registered its interests, this may not be enough to save the day, and the equipment may still be lost.
In the worst-case scenario, the equipment owner loses the equipment and has personally guaranteed the bank. This could be a catastrophe for the business.
The good news is that if the equipment owner fully complies with the requirements of the PPSA and registers correctly, within time limits, then their equipment will be safe.
If you rent, hire or lease equipment to your customers, you need the expertise of the EDX team to make sure you get it right.
THE CONSTRUCTION INDUSTRY
Before the PPSA came into force, a retention of title clause was not much use to suppliers in the construction industry. Their goods were frequently affixed to land and the right to repossess was lost. This has led many suppliers to discount the
commercial benefit of PPSA, to their cost.
Nothing has changed where goods have been affixed to land, but this should be of little concern to a supplier, as they do not want their goods back but would prefer to be paid. We have previously outlined the benefits to retention of title suppliers. To show how the Act affects suppliers in the construction industry, here is a typical scenario.
Alco is a manufacturer of aluminium extrusions used in the manufacture of windows. It has supplied Windowcorp, which is a window manufacturer and installer.
In the pre-PPSA world, Alco would have lost rights in the aluminium as soon as Windowcorp cut it up to make a window. In the PPSA world, Alco has security in the manufactured windows up to the value of the aluminium component.
This would enable Alco to repossess manufactured windows in Windowcorp’s control, or negotiate a settlement with the insolvency practitioner.
If Windowcorp has installed the windows in a building, title passes to the building owner and Alco will not be able to get the windows back. However, the supply of windows creates “proceeds” from dealing with the windows, and Alco’s security continues in proceeds.
This means that if the building owner has not yet paid Windowcorp for the windows, Alco has security in the book debt arising.
The PPSA can be a tremendous benefit to suppliers in the construction industry, but it does not work for everyone. Before you embark on an expensive PPS project it is important to understand the commercial benefit you may expect.
The EDX team is expert in assessing this. We will build an understanding of your business and provide a clear and factual report that can empower you to make the best commercial decision.
EQUIPMENT AND MOTOR FINANCIERS
For many motor financiers, the PPSA is little more than business as usual since they have been used to a form of registration regime through the old Register of Encumbered Vehicles (REVS). Certainly there are different rules, and those pertaining to the PPSR are very precise; but the idea of registration is not new.
But this is only a small segment of the equipment finance market. We need to consider everything else, including technology finance, capital equipment and office equipment down to photocopiers and the like.
We have already talked of hire and rental, where the particular arrangement may create a PPS Lease. Similarly, any lease to buy or hire purchase arrangement, where the debtor acquires ownership at the end of the term, will probably create a PPS Lease.
If you do not register your interest in the equipment on the PPSR, you will probably lose it if your customer becomes insolvent.
A number of things may happen if you have not registered:
- If your customer fraudulently sells your assets, a purchaser for value will normally take possession free of your security interest.
- A receiver will win on a priority contest.
- If a liquidator or administrator is appointed your security interest (unregistered) will vest in the company.
The bottom line is simple – you will lose your goods.
||Any equipment under a lease to buy or hire purchase arrangement may be at risk if it isn’t registered.